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Submission on Public Consultation of Credit Servicers Directive 

Recent reports on 90% write downs for 1,900 selected AIB mortgage customers have again raised public concerns for those in long term mortgage arrears. The Oireachtas Finance Committee last week heard about the difficulties faced by borrowers whose loans were sold to ‘vulture funds’, and how one fund had obtained a possession order where the borrower had only €6,000 left to pay on their mortgage. A manager at MABS, who assist those in mortgage debt, described the sense of distress and hopelessness experienced by such borrowers, and the pressure on MABS advisers. 

Some 113,000 mortgages in Ireland have been sold to ‘vulture funds, with over 20,000 in long term arrears. Recent large increases in interest rates ld by these funds featured in a RTE Primetime Report. 

The Credit Servicers Directive (2021) will transform the sale of non-performing loans (NPLs) in secondary markets across the EU and globally, to ‘credit purchasers’ who will engage ‘credit servicers’ to deal with the borrower whose loan has been sold. From 2024, these ‘credit servicers’ can be authorised in any EU Member State and passported to operate across the EU, so that sold Irish NPLs could be administered from any EU Member State. Irish legislation in 2018 already requires the Central Bank to register vulture funds who purchase NPLs as ‘credit servicers’, but only Irish office addresses are publicly listed, and it is proposed to continue this approach. In the new Directive the ‘credit servicer’ can outsource their debt collection work, so the potential for “rogue” players to operate in this secondary market is a major worry for consumer organisations. 

Templates have been prepared by EU institutions, so that tranches of NPLs can be sold in online auctions. The Directive must be transposed into Irish law by December 2023, but it will not be discussed in the Oireachtas, as transposition will take place though a statutory instrument. 

This Directive follows the range of measures to deal with NPLs across Europe ordered by the ECB. The EU justification is that efficient management of NPLs reduces risks in banks’ balance sheets, enabling them to focus on lending to businesses and individuals. The Directive states that it seeks to ensure that the sale of such loans does not undermine borrowers’ rights, and in some EU States this could lead to improved standards, as it seeks to develop an EU-wide harmonised approach. However, the complex arrangements for cross border authorisation and regulation, in the context of the 24 official languages in the EU, and the different approaches to debt collection and extra judicial enforcement of the security on loans, raises fears of “a race to the bottom”  in terms of consumer protection.

This Submission to the Public Consultation on the Directive of the Department of Finance by Professor Padraic Kenna, School of Law at University of Galway outlines the provisions of the Directive, which allows States to apply stricter protection for borrowers, if they so wish. It explains the complex cross-border procedures for authorisation and supervision of credit servicers – which in Ireland will be carried out by the Central Bank. The impact of the Directive on poor households and on human rights raises questions about the potential of the EU Charter of Fundamental Rights to protect against a ‘race to the bottom’ across Europe in relation to protection from evictions. Indeed, Charter rights on respect for home must be applied by Member States when implementing the EU law. Indeed, in the context that two-thirds of all homes repossessed in Ireland since the financial crisis have taken place without any court order there is a need for added protections once this secondary markets opens. 

Advisers to secondary mortgage market players should ensure that reforms since 2012 in Irish law and policy are fully respected in all documentation. These include Central Bank Codes of Conduct for lenders, court protection (including a requirement for a proportionality assessment) against eviction from homes, personal insolvency systems (which protect a debtor’s ability to remain in their home), and legal obligations on lenders to apply a range of forbearance measures. 

Recent Central Bank research shows over 8,000 by-to-let mortgages in long term arrears. There is no protection for tenants in those homes where a new owner of the mortgage wants to sell the dwelling to realize the security of the loan. None of the Central Bank consumer protections are available to these households, who may well be at risk of homelessness. Potentially, these 8,000 mortgages and another 63,000 homeloan mortgages, where the Central Bank recently assessed borrowers as having a low, moderate or uncertain ability to fully repay, could be sold in tranches through online auctions. Indeed, any loan which is more than 90 days in arrears can be sold in this secondary market.

The Department of Finance Public Consultation is limited to questions on some discretions available to Member States in adopting the Directive, such as whether to exclude notaries, bailiffs and lawyers from the Directive, whether to allow individuals to carry out credit servicing, and whether the full range of forbearance measures set out in the Directive should be adopted in Irish law. 

Major concerns exist about the lack of regulation of international ‘vulture funds’ buying Irish mortgages through this new secondary market. While the Directive sets out a range of measures and procedures which could regulate the players in this secondary market, how the Central Bank and Department of Finance intends to ensure effective and timely protection for Irish consumers is not yet clear.

Submission on Public Consultation of Credit Servicers Directive

Contact for more information: padraic.kenna@universityofgalway.ie