knowledge 16 April 2019 |

Loan Sales: No Consent, No Sale Bill Faces Stiff Opposition

Background

The No Consent, No Sale Bill is a private member’s Bill that is strongly opposed by the government on the basis that it would create material risks for the Irish economy.  While it received majority support in the parliament on a first reading, it is currently unclear whether such support will continue to be available to progress the Bill and, ultimately, to enact it (at least not without significant amendment). 

What does the Bill seek to do?

The Bill is essentially a direct copy of an old Central Bank of Ireland (“CBI”) voluntary Code of Practice on the Transfer of Mortgages (the “Code”), which does not seem to have been generally applied in practice.  As currently drafted the Bill:

• applies to a loan secured by a mortgage on residential property (whether owner-occupied or buy-to-let);
• prohibits the transfer of such a loan without the written consent of the borrower.  To obtain such consent, the lender is required to provide the borrower with a statement (approved in advance by the CBI) setting out prescribed information, including the name and address of a proposed transferee.  As such, it seems that a contractual consent included in an underlying loan agreement would not generally be capable of being relied upon;
• requires the lender, notwithstanding any previous consent, to seek a further borrower consent where “…the lender in the ordinary course of business would no longer have control in relation to:
  • the setting of interest rates; and/or
  • determining the conduct of relations with borrowers whose mortgage payments are seriously in arrears…”;
• provides for some exemptions from the consent requirement, including for intra-group transfers and for transfers where the lender is in “serious business difficulties” (subject to CBI approval); and
• provides that any lender in breach of the Bill would be subject to the CBI’s administrative sanctions regime.

What did the CBI Say?

In his introductory statement in an appearance before the parliamentary committee considering the Bill, Philip Lane (current governor of the CBI) noted that a core element of the CBI’s strategic plan is to ensure that the financial system is resilient.   Addressing non-performing loans (“NPLs”) while providing strong protections for borrowers remains a priority in this regard.  Among the broad variety of tools used to reduce NPLs (including extensive forbearance and restructuring) is the sale of loan portfolios to non-bank investment funds. 

Turning to the Bill, Governor Lane went on to note that the CBI’s:

“…twin focus on resilience and consumer protection explains why we have grave concerns about the “No Consent, No Sale” bill.  Given that the consumer protection framework is identical whether a loan is held by a bank or a non-bank, the bill would not add any extra degree of regulatory protection for consumers.  At the same time, it would severely damage resilience, since the transferability of loans is a central feature in a modern financial system.  In addition to its impact on loan sales, the bill would limit the ability of banks to securitise loans or provide collateral to obtain liquidity from the inter-bank market or from the eurosystem. 

While these restrictions would be costly even under normal conditions and thereby raise interest rates charged to householders, their impact would be especially de-stabilising in a crisis environment.”

In discussions following on from Governor Lane’s opening statement, the CBI (via Governor Lane and Derville Rowland, Director General, Financial Conduct) made some additional interesting points, in response to a query as to how the CBI could have such concerns about the contents of its own Code:

• there is a basic and obvious difference between a voluntary code of conduct (such as the Code) and a binding law (such as the proposed Bill);
• the Code was produced in 1989 in a very different context.  In particular, the Code arose from the CBI taking over responsibility for the supervision of building societies.  A person who entered into a mortgage loan with a building society had voting and other rights in relation to the society.  There was a concern that a sale of loans by the building society might prejudice a mortgagor’s ability to vote on a conversion of the building society to a public limited company (with a consequent windfall); and
• the securitisation market, which is now a key aspect of the financial system, did not exist in the same way at the time when the Code was introduced.

What did the Department of Finance Say?

Appearing a fortnight later before the same parliamentary committee, the Department noted that it shared the grave concerns already expressed by Governor Lane on behalf of the CBI.  The Department explained that its concerns came under two principal headings:

• Unintended Consequences:  while the Department understood the laudable consumer-protective intention behind the Bill, it was concerned that unintended consequences of the Bill might lead to significant consumer detriment.  Some of the concerns mentioned included:  higher mortgage interest rates; an increase in repossessions by banks (as their ability to reduce NPLs through sales would be severely reduced); and less competition in the mortgage market. 
• Timing:  the Department also expressed concern about the impact of the Bill for the financial stability of the banking sector and wider economy, particularly given its proximity to a potential no-deal Brexit.

The Department also noted that its understanding, based on written advice from the Attorney General, was that the Bill, as drafted could be unconstitutional on the basis that it would constitute a disproportionate interference with constitutionally protected private property rights, particularly regarding existing mortgage agreements.  Finally, the Department noted that given the government’s strong opposition to the Bill, it would not be in a position to provide technical support for the drafting of the Bill.

What did the European Central Bank Say?

At the request of the chairman of the parliamentary committee considering the Bill, the ECB issued an opinion.  The opinion reinforces the concerns raised by the CBI and the Department.  Making its observations on the Bill, the ECB noted that the proposed Bill would:

• make the use of Irish residential mortgages as collateral for bank funding techniques, which are essential for the functioning of the Irish banking sector, “…difficult, if not impossible”;
• restrict the transfer of NPLs off the balance sheets of Irish banks, with a consequent reduction in the ability of Irish banks to fulfil their function as providers of credit to the real economy;
• taking into account the above points: make it likely that increased bank costs would be passed on to borrowers; significantly impact mortgage pricing and availability; and risk an increase in NPLs, all of which “…are likely to impact financial stability, Irish taxpayers, and ultimately the Irish economy”;
• not appear to provide additional protection to borrowers, as the existing consumer protection framework applies regardless of whether the mortgage is held and serviced by the original lender, or is transferred to a purchaser and serviced through a credit servicing firm.

The ECB also noted that, to the extent that the Bill is intended to apply retrospectively (so as to capture existing residential mortgage loans), that would raise “issues of legal certainty in respect of the validity of such transfers”.   

Comment

The government’s concerns about the consequences of the Bill, if enacted, have been echoed and in part amplified by each of the CBI, the ECB and the Department of Finance.  Their responses indicate that, while the Bill is intended to offer further protection to certain categories of borrower, it is not clear that it will do so in practice.  The Bill is also considered likely to have a series of unintended consequences, including harming consumers by increasing the cost of financial products (including mortgages) and also by increasing the level of risk in the financial system.  More generally, the Bill appears to be running counter to developing policy at European Union level which aims to facilitate (rather than inhibit) the ability of lenders to mitigate risk by transferring NPLs.