Mr. Joe Healy:

I thank the committee for inviting the IFA to today's meeting to discuss the sale of bank loans to private equity firms, otherwise known as vulture funds, and the impact this is having on the farming community. I am joined by Mr. Martin Stapleton, chairman of the IFA farm business committee, and Mr. Damian McDonald, the IFA director general.

Ten years after the global financial crisis, the failure of banking institutions in Ireland and abroad has led to significant changes in the sale and restructuring of loans to third parties. For the past three years, this restructuring and selling of loans to private equity firms or so-called vulture funds has been having a significant impact on borrowers. Many of these sales have farm debt in the portfolio. The IFA has been contacted directly by farmers in such cases and, since July 2017, we have had a dedicated debt support services team. We have approximately 150 cases active on our system and we receive new inquiries every week. We represent these farmers in negotiations, with the aim of finding a workable resolution for all parties.

I will outline the issues faced by farmers and the negotiating environment they face, as borrowers in financial difficulty. The agricultural portfolio in Irish banking institutions is one of the best performing portfolios given the rate at which farmers repay their borrowings. Central Bank figures indicate that the overall level of outstanding borrowings in the primary sector has fallen over the past eight years. In 2010, outstanding credit was estimated to be €5.1 billion and in June of this year it was estimated to be €3.6 billion, which is a reduction of 30%.

In a wider context, agriculture as part of the small and medium-sized enterprise, SME, sector, and accounts for 22% of all new lending. These figures reflect the importance of the agricultural portfolio to the wider economy, with particular significance in rural economies. Farmers generally borrow from the pillar banks. These are financial institutions that have built up long-standing relationships with families over generations. These were relationships where farmers sought advice from banks and trusted them to act in their mutual best interest. On this basis, farmers borrowed money in good faith from established and reputable banks. They did so in the knowledge that they would have to repay the money but also with the security of knowing that the bank had a restructuring unit to provide options should their business plan struggle.

As stated, in recent years these institutions have sold farm debt to third party vulture funds. These funds take a short-term debt recovery approach to the loans acquired. They are not interested in working out a long-term debt resolution with the customer. This short-term debt recovery approach through the sale of assets damages the underlying viability of family farms as the repayment capacity of the business is not considered. As the ratio of the security value to debt level tends to be significantly higher in farming, this issue is a particular problem for the farming sector.

Regardless of the repayment capacity of the farm, the fund views these debts as having high recovery potential. Funds are in a position to liquidate the assets against which the loans are secured at whatever value and in whatever timeframe they wish to maximise recovery on the debt. This means the vulture funds consider it possible to recover the full value of loans, plus their costs, immediately by appointing a receiver and forcing a farm sale. In many other sectors where there is significantly less security, deals are being done based on the repayment capacity of the business and businesses are refinanced accordingly. It is the IFA's policy to prevent vulture funds from killing off farm businesses that have the potential to repay their debts over time and, by doing so, return to viability.

The issues I have outlined are not confined solely to vulture fund engagements. In the case of the banks that are not selling loan books, there is some potential to discuss longer term repayment arrangements as they seek to protect reputation and ensure a viable farm can return to being a profitable customer in the future. Farmers view banks which sell their loan books as abdicating their responsibility to see through their dealings with their customers. The farming community has lost confidence in the banks. It is now necessary for the banks to recognise this and provide all possible solutions to borrowers before the sale of loans, in particular, an opportunity for farmers to repay loans in line with their repayment capacity, with longer-term options established to ensure the sustainability of the business. The four major issues that must be addressed for current and future lending are the regulation of loan owners, engagement by lenders, accountability and rebalancing in negotiations.

The IFA acknowledges the Consumer Protection (Regulation of Credit Servicing Firms) Bill 2018, the purpose of which is to regulate credit agreement owners of mortgage loans and SME loans. Provision must be made in the regulation of funds for enforcement by the Financial Regulator and oversight post sale. This means that the Financial Regulator must have information on loan owners, the number of loans they own and the profile of borrowers. Borrowers must have the option to engage directly with the loan owners and not only through third party agencies. The current system of employing asset managers as intermediaries is not working.

Banks should be conscious that to sell loans is to crystallise a serious failure on the part of a bank. Such action leaves an irremovable stain on the legacy of the bank. Lenders must realise that to commit to a long-term repayment plan is an enormous challenge and may lead to a generation of a particular family devoting their entire working lives to retaining the family farm. In doing so, they accept that the alternative is to sell. A partial sale is often viewed as a more practical solution but each family should have the opportunity to negotiate an option. The risk of moral hazard is often quoted as a reason for using funds to sort our non-performing loans. However, we need to acknowledge that moral hazard dies when there is a partial asset sale. Loan owners must be forced to provide long-term repayment options as demand loans are totally unsuitable for farm businesses.

There must be accountability of these funds to the Minister for Finance and the Houses of the Oireachtas. There must be a mechanism whereby information on the actions of these funds can be made publicly available through Oireachtas scrutiny. The current secrecy around sale values leaves the door wide open for sweetheart deals at the expense of the borrower and the taxpayer. It is unforgivable that loans are being sold to foreign hedge funds for less than could be recovered from the borrower. This leads to a loss of capital from the State which could and should be available for investment here in future projects. Furthermore, profits from these transactions are leaving this country tax free.

A balance must be struck in supporting farmers who are in a difficult position. In doing this, we must maintain the integrity of the wider agriculture sector in which the majority of parties are paying off debts in full and for whom the ability to give assets as security as part of their loan application is very important. Steps must be taken by the Government to provide a greater balance in the negotiating strengths of the parties in these cases. Where the farm family is willing to agree to commit to a reasonable, credible long-term repayment plan in accordance with the repayment capacity of the farm, the following steps should occur. First, there should be no forced sale of farming assets which undermines the viability of the family farm and, where the farmer has meaningfully engaged, a workable solution should be found. Second, a full and final agreement should be reached between the borrower and loan owner prior to the disposal of any assets. Third, there should be no forced collection of debt that is not yet due and assets must be sold for their full market value and with proper advertising. Fourth, no interest or penalty should accumulate on the outstanding debt where delays occur in arriving at a decision.

Insolvency legislation should be adapted so that farmland is treated in a similar manner to a principal private dwelling house. In effect, a farm is both a home and a means to make a living, as is provided for in insolvency under the term "tools of the trade". This option would give court protection to borrowers and ensure that a fair repayment plan is implemented, giving security to both borrower and lender. Interest should be based on the cost of funds for the loan owner rather than the money owed. A fixed minimum percentage of total debt plus a margin on cost of funds paid annually should offer protection against a repossession order.

In conclusion, the sale of loan books is not a necessary or suitable way for banks to deal with debt secured on farmland. Greater protection is required to protect borrowers and better engagement by banks is needed to achieve sustainable solutions. The Government has recognised that farmland and business assets should be treated differently from other asset classes. This was most recently recognised in the proposed new fair deal scheme. It is vital that similar recognition is applied here.