Dr. Amie Lajoie:

The Money Advice and Budgeting Service, MABS, very much welcomes the opportunity to contribute to the committee’s deliberations on this important topic. I am joined by my colleagues, Mr Dermot Sreenan, business manager of MABS Support CLG, and Mr. Gerard O’Brien, national development officer of MABS Support CLG.

Nonbanking entities, also called vulture funds or shadow banks, play an increasingly prominent role in Ireland’s financial services sector in direct lending to individuals. Our reflections in this opening statement are based on the practical experience of MABS providing casework support to borrowers of all debt types. For this discussion, we focus on the particular activities of nonbanks in the areas of mortgage lending and the servicing of non-performing loans, NPLs, to individuals. We further support the contributions from our colleagues from FLAC who are also speaking about the rise of these firms in the space of new lending and unsecured debts.

In Ireland, there are two categories of nonbanking entities regulated by the Central Bank that lend to individuals, retail credit firms and credit servicing firms. These firms include both those entities which own the in-scope loans and those who manage or administer these loans. It is important to note that credit servicing firms have been subject to regulation since 2015. This was in direct response to the sale of distressed loan books by regulated banks to nonbanks that were, at the time, unregulated. Today, the borrower has rights to consumer protections from the onset of a lending agreement and these protections continue in the event that the loans are sold to nonbanking lenders. On this topic, MABS has made a formal response to the Department of Finance’s consultation on the transposition of the EU credit servicers and credit purchasers directive and we base our opening statement on this submission.

The deadline for that was today; we made our submission last night.

According to the Central Bank, nonbank lenders have increased their share of new mortgage lending from 3% in 2018 to 13% in 2021. They are responsible for a third of new lending in the re-financing and buy-to-let segments of the market. As of September 2022, nonbanking entities own over 56% of all domestic mortgages in arrears. This is up from 43% in March 2021 and 37% in March 2019. Nonbanking entities also hold higher proportions of those mortgages that display the highest level of arrears. In total, nonbanking entities held a significant 74% of all domestic mortgage accounts in arrears for more than one year in September 2022, up from 54% in March 2021.

There are several important points of note regarding the rise of nonbanks in this sector. First, the choice to sell these portfolios en masseis a concerning activity of banks, in our view, as it would appear that these creditors "lose patience" with the process of engaging with borrowers through alternative restructuring arrangements and would rather "cut their losses and sell". We cite the work of FLAC in that part of our opening statement.

MABS would question what such behaviours say about banks, their appetite to support customers in distress, and their policies and procedures in terms of credit assessment in the first instance. EU Directive 2021/2167 on credit servicers and purchasers cites the need for these entities in the case when "institutions face a large build-up of NPLs [non-performing loans] and lack the staff or expertise to properly service them".

There are also ongoing concerns over the consequences of banks severing the relationship with borrowers through loan sales, in particular for how these borrowers will bank and access credit in the future. These nonbanking entities also purchase mortgages and other non-performing loans, including SME loans, at discounted rates. Accordingly, any classification of their market share as growth has to be compared with the equal decline in the market share of the selling banks.

Since 2017, MABS and Banking and Payments Federation Ireland, BPFI, have had an agreed protocol in place to ensure that all lenders - banks and nonbanking firms - work together with MABS to help resolve mortgage debt problems practically and sustainably, ensuring borrowers that their rights to consumer protection are safeguarded throughout this process. MABS can report that we have had a number of positive dealings with nonbanking entities in cases of mortgage arrears, in particular through the Abhaile scheme. Some of these funds have agreed to arrangements that are more favourable for borrowers facing mortgage arrears than a traditional bank.

However, nonbanking entities can also act in a manner that further penalises consumers. MABS staff have observed that the overall behaviour of nonbanking entities towards clients, such as the decision to enter into insolvency arrangements, depends on the entity and its own internal protocols, as well as the amount of documentation received from the original mortgagee bank. We would like to highlight four points of contention that can arise from working with these lenders.

The first is loan transparency and communication. In cases where their loan books are sold, clients receive the details of these sales via post, and have no legal basis to appeal the sale. This is true of all loans, regardless of whether they are in arrears. In MABS's experience, relevant loan documents and statements are often lost during the loan sale process, and this makes it difficult to validate the accurate accrual of debt and arrears balance.

The second is a chain of loan ownership. In supporting borrowers, MABS does much more than budgeting and rescheduling of debts. It uses, as relevant, legislation and regulation in a model which reflects both client responsibilities and their rights as consumers. Therefore, it is very important for MABS to be able to locate responsibility and accountability within the credit "supply chain", and draw on related regulation and legislation to support its clients to uphold their rights.

The third is recent interest rate hikes. Over the past six months, MABS clients servicing mortgage debts with some retail credit firms have faced an interest rate spike to over 6% - well over, in some cases - more than twice the European Central Bank, ECB tracker average of 3%. This includes those clients with voluntary alternative repayment arrangements, ARAs, and with statutory insolvency arrangements sanctioned under the current Personal Insolvency Act 2012, options which serve as a lifeline for MABS clients in mortgage arrears. The interest rate hikes serve as a particularly alarming trend during a cost-of-living crisis and are having disastrous effects. With another 0.5% rise in mortgage interest rates indicated by the ECB, we are wary that the situation will continue to worsen.

The fourth and final point we would like to raise is the lack of public accountability. From our 30 years’ experience working with borrowers facing the stressful situation of arrears, we assert that the more direct engagement between purchaser and credit service providers, the better the outcome for all parties. Traditional, mainstream banks have, notwithstanding their responsibility for regulatory compliance, a level of cultural or public accountability in Ireland and a history of engagement with MABS. Moreover, they offer a suite of supports for clients in financial distress. In many cases, nonbanking entities do not have these traits and in our experience, this can indicate a lack of willingness to accommodate clients and their needs.

At MABS, we recognise the importance of regulatory frameworks that best serve the needs and rights of our clients. Some argue that this new secondary market for non-performing loans provides a valuable service and increases competition within the Irish financial industry. MABS supports competition, in particular where it broadens access to necessary and affordable credit, including for mortgage lending. However, it must be accompanied by appropriate regulation to ensure, first of all, that all consumers are informed in plain language about all aspects of the finance from the outset. Creditors should also readily communicate with borrowers that they have rights and can exercise their rights when things go wrong.

We maintain that nonbanking entities must work towards a demonstrable, affordable and sustainable solution for borrowers that reflects the fact that the loan has been purchased at a discount from the original loan provider. MABS and other supportive debt and client advocacy organisations play a crucial role in ensuring the realisation of this goal. Therefore, credit servicers must engage with MABS meaningfully and regularly in our work on behalf of clients. We enjoy a positive working relationship, built over years of mutual trust and respect, with mainstream Irish retail banks. It is imperative that this relationship continues in our engagement with nonbanking entities.

I thank the committee, and we very much look forward to our discussion.