Key Post Central Bank announces pilot scheme for multi-debt lending

[Brendan Burgess]

[broken link removed]

Press release 8 May 2013

The Central Bank of Ireland today announced its intention to operate a pilot scheme for the restructuring of secured and unsecured distressed consumer debt across multiple lenders. The aim of the pilot framework is to achieve sustainable and fair outcomes without the need for the borrower to enter the full insolvency process. It is focused on enhancing cooperation between lenders of secured and unsecured debt in order to resolve distressed debt at an early stage.


The framework will be implemented on a pilot basis by participating lenders to a representative sample of borrowers who are experiencing significant financial difficulty repaying the mortgage on the family home and who have other unsecured debt. The pilot scheme will run for three months and will conclude with a thorough review of all results to evaluate the effectiveness of the framework in dealing with such cases and to determine next steps.


The framework is designed to produce fair, reasonable and consistent outcomes for dealing with secured and unsecured debt from multiple lenders. It establishes a series of principles to be applied in debt restructuring solutions for borrowers. In particular it outlines a ‘Resolution Waterfall’ which sets out a series of debt affordability scenarios. Treatments will be applied to the borrower’s debts in order to establish the most appropriate, affordable modification that sets the borrower on a sustainable footing for the remaining period of the loans..




Director of Credit Institutions and Insurance Supervision, Fiona Muldoon, said, ‘The decision to enter into this pilot is a constructive step by the lenders involved to help their own customers. The aim of the scheme is to test the viability of the proposed negotiated approach and to determine its effectiveness in achieving workable sustainable outcomes for borrowers and lenders. Participation in the pilot scheme is open to secured and unsecured lenders. We actively encourage the involvement of all lenders to ensure maximum effectiveness of this learning and information gathering pilot stage. I expect that the lenders participating in the pilot scheme will include all the main retail banks and many credit unions as well as other unsecured lenders. The Central Bank of Ireland will be closely engaged throughout the process and will oversee the pilot.’




A copy of the Framework and proposed approach is available [broken link removed].

 

[Brendan Burgess]

This is an excellent approach. Here is my summary, which is primarily an extract from the document, with some of the waffle removed.

The aim of the pilot is to enhance co-operation between lenders of secured and unsecured debt in order to fairly resolve distressed debt for the borrower.
The pilot scheme will run for three months

many borrowers experience financial difficulties but are not insolvent. These borrowers will not be eligible to avail of the new insolvency regime and it will be necessary for lenders to co-operate to provide appropriate solutions for such cases

a borrower must must give consent to a third party independent SP ( Service Provider) to liaise with all other lenders.

The Framework will be implemented by all participating lenders and will apply to a borrower who is experiencing significant financial difficulty with regard to the repayment of the mortgage on his/her principal private residence and other debt.

In order that the Principles are applied in a consistent manner, the Framework establishes a Restructuring Waterfall. This sets out the sequence and type of modifications to be applied to distressed debt in order to establish affordable repayment arrangements for the borrower.

The Framework is voluntary ( for the lenders ?)

[FONT=&quot]Exclusions[/FONT]
· [FONT=&quot]Buy to lets[/FONT]
· [FONT=&quot]Business related debts[/FONT]
· [FONT=&quot]Borrowers “non-cooperating” with the MARP

[/FONT] Operating Principles

• A third party independent SP will facilitate the implementation of the resolution waterfall by dealing with the borrower on behalf of the participating lenders.
• The assessment of the borrower’s repayment capability will be based on a Standard Financial Statement
• The SP will obtain borrower confirmation that there has been a full and transparent disclosure of the borrower’s financial affairs and documentary evidence may be sought by the lender to support this. Any participating lender with material information that suggests the SFS is not accurate will revert to the SP
• The SP will utilise agreed living expenditure guidelines established by the participating lenders.
• The SP will propose a restructuring arrangement based upon a resolution waterfall.

Debt Resolution Principles

• Application of a standard Framework is designed to produce fair, reasonable and consistent outcomes for dealing with both secured and unsecured debt where there are multiple loans or debts across multiple institution
• Lenders should endeavour to form arrangements which allow borrowers to remain in their homes where appropriate to their means and needs
• Participating lenders will extend the terms of the loans through term extension and interest rate reduction
• The agreement should reflect the individual circumstances of each borrower and must be based on affordability and must be sustainable for the borrower
• All credit institutions involved must consent to the agreement and must act in good faith
• There should be disclosure to the borrower of any consequences of an agreement such as a longer term for repayment or non-agreement such as putting the home at risk
• All unsecured debt is treated equally

The waterfall is a bit complicated but the idea is good.
I don't like the metaphor.

The third party assesses the extent of the borrower's problems and identifies how drastic the solution needs to be. These are categorised from A - no intervention necessary to H - Significant Mortgage Restructuring


A – if the borrowers debt is affordable using standard expenditure level – no intervention.
B – if the problem is short-term ie. less than 6 months – reduce the mortgage repayments to facilitate repayment of unsecured creditors
C – If restructuring is needed, reduce the interest on unsecured loans to 9% and pay as much as possible over 5 years (After that, I presume unsecured creditors are written off)
D – F – more of the same
G – Reduce mortgage rate to 4.5% then extend term and reduce rates on all debts.
H – Affordable with significant mortgage restructure, then do so. Significant Mortgage Restructure options including split mortgage, negative equity trade down and other solutions

I – Insolvency



Modification H – in more detail - Significant Mortgage Restructure

22. On a case by case basis and in the context of affordability and the reasonable living arrangements of the borrower, the secured lender will consider a range of significant mortgage restructure options. These arrangements are for the most challenging cases and the reduced payments provided are intended for the benefit of the distressed customer and not for the benefit of any other lender. However on a case by case basis, the secured lender, for a period of two years, may accommodate the servicing of other loans alongside the mortgage on a proportional basis to the remaining sums outstanding. After the two year period, the available cashflow will be used to service the repayments on an appropriate family home. All unsecured debt will be eligible for such treatment

Borrowers Obligations
Must not apply for new credit, full disclosure, cut expenditure, etc

 

[Brendan Burgess]

I am very impressed with this. Hats off to the Central Bank.

The interaction between mortgages and unsecured debt is by far the most tricky bit to solve. I don't know if this will work, but they deserve great credit for trying.

The biggest sticking point is that it is voluntary. The government should just tell the Credit Unions who don't sign up for it, to do so, or else they will lose their guarantee on the savings. The CUs can't have it both ways.

Every creditor must realise that they will get far more from this arrangement than from a Personal Insolvency Arrangement.

I imagine that the main banks will sign up for it.

I don't know who the "Independent Service Provider" will be and who wil pay them? MABS?

 

[Brendan Burgess]

Why did the Central Bank not wait until they had formal agreement from the lenders who have agreed to participate. In their Press release they say they EXPECT participation in the scheme will include such lenders including Credit Unions. Yet media reports suggest Credit Unions are opposed to the proposed scheme

I think that they have taken the right approach. It's a pilot scheme. So it's a draft protocol.

According to Charlie Weston

Head of banking supervision in the Central Bank, Fiona Muldoon, has headed up talks between banks and credit unions in the past few months in a bid to work out what is called a "burden-sharing" deal.
The talks have been deadlocked, with credit unions refusing to accept they should face having to write down most of loans they advance to those in mortgage distress.

So if the CUs are blocking the deal, the CB were right to just publish it and expose them. From the wording, I assume that some Credit Unions support this and others oppose it. It's likely that the League is against it and the other group supports it.

From memory, I think that there is about €110 billion of mortgage debt, €10 billion of unsecured banking and credit card debt and €5 billion of Credit Union debt.

Brendan

 

[ClaireM]

I don't know who the "Independent Service Provider" will be and who wil pay them? MABS?

From Fridays Independent

Now it has emerged that the Central Bank is considering by-passing the state-funded Money Advice and Budgeting Service (MABS) in favour of getting organisations from outside the State to negotiate with lenders on behalf of consumers.




It is understood one of the organisations being considered is Britain's StepChange debt charity. Previously known as Consumer Credit Counselling Service, this body says it has 20 years' experience helping people become debt free.


However, who would pay the likes of StepChange to act as a go-between in debt negotiations has yet to be worked out.

 

[Brendan Burgess]

The Waterfall metaphor comes from the American HAMP mortgage arrears system.

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