The problem in dealing with the issue of residential mortgage loans possibly being sold to vulture funds is that it is not clear what the exact problem is, never mind the solution. What this sale would mean for borrowers in arrears whose loans are sold is not clear, and will vary from one loan to another.
But politically the issue is toxic.The proposed sales of the loans has also raised wider issues about how borrowers are treated and the potential profits for the vulture funds. This one will run and run.
There are a significant number of residential loans involved in the batch being sold by Permanent TSB – around 14,000 in total. More could follow, with AIB also lining up a sale, so this issue is important ,as it could affect a lot of people.
Further contacts between Fianna Fail finance spokesman Michael McGrath and Minister for Finance, Paschal Donohoe on the issue are to take place in the days ahead – following a meeting on Wednesday– to see if further safeguards will be extended to borrowers. Fianna Fail has put forward draft legislation. But there is no easy solution here.
In terms of consumer protection, the existing contracts held by mortgage borrowers will remain in place, no matter who buys the loans. So will the protections of the code of conduct on mortgage arrears (CCMA), the rules overseen by the Central Bank to protect consumers. In 2015, these rules were extended by legislation to credit servicing firms, who manage loans here on behalf of unregulated funds.
One of the issues is whether there is a gap created by the fact that the Central Bank regulates the credit servicing firm, rather than the owner of the fund who makes the key decisions. At the time of the 2015 Act, the Central Bank had sought to regulate the fund owners and this is now proposed in the draft legislation put forward by Fianna Fail, which is being discussed between its finance spokesman, Michael McGrath and Minister for Finance Paschal Donohoe.
Among the key questions is whether extending regulation to the funds themselves this would offer any greater level of protection to borrowers. The Central Bank is thought to be broadly happy with the way the current rules operate; it is not clear whether it would now want to take on regulation of the funds, or on what terms. Issues likely to be discussed are whether the change of ownership will have implications for those who currently have so-called “ forbearance” arrangements with PTSB, where - for example– they are only making repayments on a portion of their debt. Fears have also been expressed that the funds could increase the interest rate charged to borrowers.
Discussions between the two parties and with the Central Bank will try to bottom out whether extending regulation to the funds will actually increase consumer protection in any meaningful way. Another question is how the Central Bank would regulate an overseas funds player and whether they might, for example, have to set up some kind of Irish branch which could then be overseen by the Central Bank.
The Department will also be seeking a more general Central Bank view on the level of protection of consumers since the CCMA was introduced in 2013 and extended in 2015. Various rules are in place in terms of how borrowers are dealt with, the steps that must be taken before legal action is entered into and how borrowers are judged to be non-compliant. If more loans are to be sold of in the years ahead, these would need to be as watertight as possible.
In reality, the greater political fear is likely to be that the vulture funds may take a more active approach to dealing with loans in arrears –acting within the law – and that in some cases this could cause difficulties for borrowers. There may be little public sympathy for people who have not engaged with the bank for years and made no attempt to repay – and the PTSB says that in some cases borrowers have had no contact for up to seven years. But in other cases there will be borrowers who have done their best to repay their loans ,or at least to repay under some kind of restructured arrangement.
The issue is that the funds will want to push some of these cases to a conclusion, rather than left them drag on as the Irish banks have done, and in some cases this will involve pressure on borrowers and repossessions. There are also signs that the issue is building traction politically, with fears of the impact on mortgage borrowers, farmers and SMEs.
There is no quick-fix here. The Government could put pressure on PTSB not to fell the loans, but this would bring other problems for the bank. It could also try to ensure that the loans were only sold to another fully regulated entity.But the fuss over the last few days shows just how difficult it will be to pick a way through the issue of the remaining non-performing loans in the banks, many of which are harder cases in deep arrears, or those who have somehow dodged and avoided engaging for prolonged periods. There are no signs yet that the Government will seek to block the sale. But there is a way to go on this one yet.
