Oireachtas Joint and Select Committees
Thursday, 18 October 2018
Joint Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach
Sale of Loans to Unregulated Private Investment Funds: Discussion
We will now discuss the sale of loans to unregulated private investment funds. I welcome Mr. Joe Healy, president of the Irish Farmers Association, Mr. Neil McDonnell, chief executive officer of the Irish Small and Medium Enterprises Association, ISME, and Mr. Padraic Kissane, financial adviser.
I advise the witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, they are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by the committee to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to a qualified privilege in respect of your evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official either by name or in such a way as to make him or her identifiable.
I invite Mr. Healy to make his opening statement.
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.
Mr. Neil McDonnell:
ISME thanks the committee for the invitation to address the issue of debt transfer to so-called vulture funds. I was to have been accompanied here today by a member company which is going through a debt restructuring, but it was made very clear to its representatives that the offer being negotiated currently would not be honoured if the company appeared before the committee.
ISME members are not ignorant of the fact that some borrowers are unable to repay their debts and that lenders must have recourse to debt resolution mechanisms. We are also aware that many of the funds to which SME debt is sold are willing to come to negotiated settlement arrangements with borrowers. What is incomprehensible to many SMEs, however, is that these banks seem incapable of coming to what are, in many cases, straightforward arrangements without having recourse to selling debt to third parties. These debt sales are cost additive in terms of professional and legal fees. They are also highly complex and impose on borrowers a stress and workload they would never normally encounter as part of their normal business lending. Added to the fact that debt sales are normally confined to distressed borrowers, these factors place a major strain on the customer. These sales typically take place at a substantial discount to the book value of the debt and one wonders why those taking the business decision to sell that debt cannot come to an agreement with their customers at, or close to, the written-down value at which they are selling that debt. We know of one member company which was recently informed that its overdraft of some €20,000 had been sold by a pillar bank to a fund.
The most common complaint we encounter about the sale of debt to funds concerns the unreasonable exercise of personal guarantees. We understand that lenders need some degree of security for the funds they extend, and personal guarantees can form part of that. However, personal guarantees are never extended by borrowers on the basis that they can be suddenly or peremptorily exercised. Borrowers view them as a last resort, not something to be used to exert heavy, short-term leverage. Some institutions maintain personal guarantees after the debt raised against them has been discharged. This is immoral. Settlement agreements also typically involve confidentiality and gagging clauses. Included in the written submission provided to the committee are the testimonies of two ISME companies involved in debt sale and restructure, one of which has been promised some debt forgiveness, while the other has repaid 100% of its debts sold. I do not propose to read them out but I note that the debt forgiveness arrangement set out involved the sale of a family home, while in the other case the business was liquidated at the cost of redundancies for all the employees working therein.
The ISME bank survey will be published later today. We ask our members regularly now how many have had their debts sold. The figure that will appear in the press release today indicates that 10% of our members have had their debt sold by their lenders to third parties.
Mr. Padraic Kissane:
I wish the Chairman, members and fellow witnesses a good morning.
The committee invited me to appear to reflect on my experience of the customers whom I know are affected by the ongoing sale of mortgages, notwithstanding what was said previously. They are collectively known as domestic loans, although they are for both homes and investment. I know that it spreads across to other businesses and areas, as we have heard. I listened to the previous discussion on receivers, which is strongly connected to this issue.
This issue affects both homeowners and residential rental units. Discussions on this matter are complicated, with words such as "morals", "hazard", "NPLs" and "appropriate percentages" used often to confuse matters. There is no doubt that the percentage of loans in arrears in this country is higher than it is in the rest of Europe. The question is why that is the case. Why do Irish people have a greater level of arrears on their loans than other countries in Europe and is it all the fault of the customers? I suggest that in most cases it is not.
There are a number of reasons arrears are so high, examples of which include the price the property was bought at and the levels of lending to facilitate that purchase available at the time; interest rate levels for loans in Ireland, some of which are at 6% or greater; the economic circumstances that befell the country for the past nine years; the treatment by the Government of the residential lending market through, for example, non-principal private residence tax and reduction in interest relief; decreasing or depressed values versus the loan size; decreasing rental yields and, concurrently, a decreasing rental market; the property culture and the atmosphere that existed at the purchase time, where property was the primary topic of discussion in the country; and customers' economic, income and employment position.
All interested parties contributed at the time. For example, the stamp duty rates available for rental purchases and the contribution to the economy made by amateur investors involved in the rental market seem to have been forgotten. The question that should be defined is what, when one takes the issues as a whole into account, is a non-performing loan, NPL. Is a loan not performing because of external factors or is it the customer's fault? That is the question. When one looks at the position at purchase time, the position a few years later was the polar opposite of what the majority of customers and lenders expected at the time of purchase. All were caught in the tsunami of the crash and panic set in but responsibility was deflected. The initial solution offered by the banks was interest-only extensions to loans followed by further extensions and, finally, a sudden shift to demanding payment in full or sell or the banks would sell. In addition, the balance of the loan also had to be paid. An example of shortening the term, which interest-only extensions would have achieved, would be if one borrowed €1 million over 20 years at 0%, that is, €50,000 per year, that same €1 million repayable over ten years is €100,000 a year.
The short-sighted view of interest-only extensions as a solution is staggering. Each interest-only period was actually increasing the difficulty for customers to be able to recommence repaying capital and interest, but it was presented as a solution. It shortened the term of the loan. I cannot understand the reluctance to offer the most obvious solution, namely, term extension and interest reduction, to see how it all played out. It is arguable that it would not present any risk to the banks to retain many of these loans on an interest-only basis for the full term of the loan. All would then be classed as performing loans but with debt levels not reducing. This assumes the interest repayment would be made in full. I cannot understand that not one of the 12 lenders I encountered when dealing with the tracker mortgage issue took the view that it would assess a customer who had borrowed a great deal of money, propose to extend the term on the loan by ten years and reduce the interest rate by 1% to see how it would work out. Not one lender saw this as a solution for any of its customers. All, including our Government, fed from the trough of property in the Celtic tiger years, but when the feed, that is, credit, started running out, panic set in and the world changed, as it did in Ireland.
Properly thought through solutions were as scarce as the credit lines. Solutions that took a long-term view were non-existent and are still not considered in most rental cases. I cannot understand how a bank in the style of a domestic national asset management agency, for example, was not established. If properly established, such a bank could still have a role to play. As a country, we export the profit from the recovery to entities that have done little but wait in the wings until meltdown. They have come in and picked up the assets at the bottom of the market. This is an enormous industry which ironically recreates itself as a market every few years.
At a meeting of the United Nations in 2002, the then British Prime Minister, Mr. Gordon Brown, described vulture funds which make profit from purchasing distressed debts of a country at a reduced price to then make a profit from suing that country as "morally outrageous". The same is occurring here in some instances. If the value of a home, for example, is greater than the loan, full repayment by the sale of the home is the only option given in some cases. What is paid by these funds for the loans is a great mystery as nobody seems to know. If one reviews the websites of the main players in the Irish market, however, the answers are clear. They are queuing up to come here. It is a very profitable business. Is there not a way to control this given the fallout that will occur in the domestic market and, in particular, in regard to farms, both of which are connected, and given the property crisis that exists?
The need for property is clear around the whole country but that need was always there. It appears the market will become such that only the big players are involved in the rental of property. It has been stated that the whole area of moral hazard revolves around these issues and the repayment of debt, but that morality must extend to all. Are other options open to us as a State? If any of these affected customers or tenants is moved out, who picks up that tab? The discount on the loan must be priced to encourage the vulture to buy, but in Ireland it is certainly the case that if a bidding war ensues, there must be little, if any, risk to the vultures. Why is the risk so much greater to the bank for holding these loans?
The European Central Bank, ECB, issued many directions to this country early in this debacle. It seems as though it is involved again, but that may be just how it is being presented by the lenders. The ECB says we must reduce our NPLs and, therefore, it seems selling loans valued at billions of euro to eager vultures is the only solution. Why, for example, can the Government not create the vehicle and benefit from the upturn that the vultures expect to receive? After all, there is a queue of bidders willing to purchase these loans. The question must be why that is the case. What of the tax treatments and benefits that each of the vultures and the lenders receives with add-backs which will benefit the banks for many years to come, as has been confirmed?
The responsibilities for this lies on many desks and some are certainly running from those responsibilities. It should be noted that some of them are customers, but I do not believe the figures are as high as those presented by the banks. I quote one of the vulture funds from its website as an example: "We believe less efficient markets exist in which dispassionate application of skill and effort should pay off for our clients, and it is only in such markets that we will invest." An inefficient market is described as one in which an asset's market value does not always accurately reflect its true market value. That is the game for these funds. The fallout affects not only customers but tenants, the Government, lenders and Revenue, and it can collectively be called a big contributor to the housing crisis. There is certainly room for some more thought to be applied here and in most cases the short-term solutions actually present longer-term problems. A longer-term view needs to be taken, similar to the original granting and intention of the loan. Just because an injury occurred does not mean the idea should be dropped.
I wish to provide some final thoughts for consideration. The shortage of housing in 2010 was missed by most, including the Department of Finance. NPLs became the next subject matter for the ECB. Does this approach drive the sale of the loan book? Why are interest-only extensions not listed as a long-term solution? Repossession is hinted at and is a threat across all spheres of lending. Incentive to reduce NPLs by disposal is put forward as the only solution. Banks are forced to take provisions at the lowest part of the market but the add-backs are not considered. What is an NPL and, more important, who defines it? These questions have never been properly answered. What is the tax treatment for the private investment funds on the profits gained? Why is the market so buoyant in Ireland for vultures? What drives that market? Vultures are in this for profit and it is predominantly short term. Is the position the same in Spain, Portugal and Italy?
On warehousing loans, the question that is not being asked is what happens at the end. Most do not know what will happen with the three-year reviews. If there were more certainty in the answers to these questions, it might solve some of the mystery surrounding vulture funds. What protections are in place? Are those protections certain for investors as well as homeowners? As an example, I know of two homeowners whose loans are with vulture funds.
Both had performing loans, neither was ever in arrears and both were with PTSB. They now want to extend their homes and have approached the vulture funds in question, which have said they are not banks and so can do nothing. These are both tracker mortgages. The mortgagors' only option is to move their loans and pay three times what they were paying in interest.
I thank all our witnesses for their opening statements. If I may start on either the farm or the business end of matters - I do not mind which of the witnesses takes this question - can they characterise for us what their members report as to what these funds are like to deal with and what are the prospects of getting a deal? We sometimes hear from supporters and advocates of these funds that they are more likely to do a deal that would be put forward normally for mortgages. Can the witnesses give us a sense of what they are like to deal with? Are deals being done and, if so, what kinds of deals? Are long-term restructures being done, whether of farm debt or SME debt? Are the funds entering into long-term restructures that clearly go beyond their investment horizons in Ireland, which are for a short number of years?
Mr. Martin Stapleton:
I will take that question. When a farmer gets what we call a "hello" letter from the fund - and I presume it is the same for any other borrower whose loan is sold - engagement is then directed towards the asset management company the fund employs to do business on its behalf. More often than not, the instruction the asset management company has received is that par recovery of debt is the only option available. I think the asset management company was put in place as a regulated entity for engagement, but instead of this system working to the benefit of the borrower, it works to the benefit of the loan owner.
Mr. Martin Stapleton:
We make some contact, but the instruction that comes back to us most often in the correspondence is that the agent has been instructed by its client, namely, the fund, that it must recover all the debt. The agent's aim is to recover that debt as quickly as possible. Letters will be sent, which will lead determine how the case develops and usually involves the appointment of a receiver. Then the receiver will take over the communication and work towards selling the asset. There is, therefore, no possibility I can see of the funds being interested in long-term arrangements.
Mr. Martin Stapleton:
Generally, we have come to the conclusion that meetings are not worth the time we invest in them. It is a dysfunctional system in that we do not get real engagement. The asset management company will tell us it needs par recovery, a receiver will then eventually be appointed and we can often have an engagement with the receiver. Again, the attitudes and tactics the receivers employ are as varied as the number of receivers involved, but they are always focused on the maximum possible recovery in the shortest possible time.
What type of restructures, if any, is Mr. Stapleton seeing get done and get fully approved through the system that do not involve repossession and the loss of the asset? I put the same question to Mr. McDonnell. Are they seeing funds enter into loan restructures with farmers that may be extended debt or arrangements whereby some of the debt is parked or the interest rate reduced? Is that happening?
What is Mr. McDonnell's experience of ISME's member firms' dealings with funds and the prospect of getting a deal which involves the restructure of the debt over a period of years into the future?
Mr. Neil McDonnell:
That is quite opaque. We are not in the business of gathering much information on that. I tried to cover off the two bases in the case studies in my presentation. Both my colleagues either side of me have referred to the degree of opacity in the process. A lender sells a loan for 40% of face value and the fund has an asset worth 60% of the original borrowings. What is not evident to the borrower, who is dealing with a receiver acting on behalf of a fund, is how many cents on the euro the parties expect to receive and the bonusing arrangement working between those two parties. Effectively, a negotiation is taking place between the two, and this is not always evident. This arose in the earlier session. I was listening in to the Chairman's interaction earlier. This is as much an interaction with the receiver, which can force sales at a totally unrealistic pace, especially in a market in which assets are depressed in value. Now the dynamic is reversed and asset prices are rising, so there is a concern among some of our members that where there was forbearance before, it was tactical and due to asset values being depressed. Now that those asset values are at or above par-----
Mr. Neil McDonnell:
It is made clear - and borrowers are required to sign their way through all this - that the deal is private and confidential and may not be referred to again. One might ask, once the deal is done, what recourse is available. Given the fact that most of these borrowers are dealing with the pillar banks, there is a genuine fear of retribution. I have experienced this in recent years. Even where the behaviour of a pillar bank was disgraceful and the member went to the media, he or she did so on an anonymous basis and would not have the name of his or her company or its directors put in the media.
They are quite common. The first loans to be sold were sold, what, four or five years ago? How much experience is there now across the witnesses' organisations of dealing with this issue? I know it is building and growing all the time as more and more loans are sold, but there must be several years of experience now.
Mr. Martin Stapleton:
Yes. As we said in the presentation, we have give or take 150 active cases now, so the funds' absolute desire to recover the money in the fastest possible timeframe gets more and more frustrating for us as we deal with them.
We had a tradition in the past that when borrowers got into trouble - I am speaking specifically about farm owners - there was some sort of asset sale, generally non-core assets, and then a write-down to a level that would allow the bank to put in place a long-term sustainable debt. The write-down and the sustainable debt working together share the pain between the borrower and the lender. Eventually that borrower, through hard work and dedication in paying back the money, was given the opportunity to get his or her business back to viability and operating again, thus allowing the family to maintain ownership and continue to work the farm. That has changed completely. Once the loans are sold, that option is no longer on the table. It also impacts on the incentive for the banks to do the deal because they now have the option of selling on the loan as a way of getting the NPL off their books.
On owner-occupier mortgages and Mr. Kissane's experience of the types of arrangements the funds are willing to come to, will they do long-term mortgage restructures? Will organisations such as Lone Star, Cerberus, Oaktree and Tanager do basic restructures such as extending the term and interest only arrangements, which Mr. Kissane mentioned, or split mortgages? Although they do not have a long-term investment horizon, are they prepared to enter into new restructures?
Mr. Padraic Kissane:
The first thing they are prepared to do is enter the market. The one difficulty they have with a domestic mortgage is that the term of the original loan will dictate how long it can run. If some arrangement can be put in place it will relate to the original loan. As I mentioned, the difficulty with many of the owner-occupier mortgages that are being sold is that they might have had a forbearance arrangement directly with the bank heretofore which would have been interest only, or part capital and some interest. They are losing dramatic time in that, but now that it has been shoved out to the vulture fund, the original term of the contract stands and so all this time is lost. I gave the example of a 0% loan at €1 million, which is a repayment of €50,000 over 20 years and €100,000 over ten years. That is what is causing a huge issue here.
Concurrent with that are the increasing values in the properties. A good loan is being sold at approximately 50% in the better cases and below that in the worst cases. That is a generalisation because I do not know for certain. I know David Hall has done a significant amount of positive work here. I suppose the collective group is asking whether we can start to think outside the nine dots here.
These organisations are coming into the market to make profit. According to the websites, Goldman Sachs vulture funds collected €465 million in distressed Irish loans last year alone. The facts are there. They are not here for any benefit of the customer. The difficulty in all of it is the "don't know" factors relating to a home or a farm. I would connect farms to this because the shame, embarrassment and "don't know" factors of that are not being captured.
I hear many people talking about the moral hazard of people not paying their debts but I have not come across this. I do not know where all these strategic defaulters are. I raise these questions. Who would strategically default on their home? It would be the stupidest thing someone could do. Some people are in severe difficulty and will have to sell their homes, but that should be a finite percentage that a state should be able to carry. However, under the current proposals, thousands of homeowners will suffer repossessions, which no state will carry, yet these companies will fly off with the profits from this because they are just selling the property.
Mr. Kissane asked what happens in the end when loans are warehoused. I put that question back to him. There is approximately €1.5 billion of warehoused debt under split mortgages, with the average loan in the region of €50,000. If somebody enters into a restructure, her or she will pay the active part of the mortgage but ten or 15 years down the line when the mortgage comes to an end there is a debt sitting there. This is untested because these agreements have not come to an end yet. However, about €1.5 billion of mortgage debt has been parked. What does Mr. Kissane believe will happen to it? With the uncertainty over what might happen to it, do split mortgages and warehousing debt represent a good model?
Mr. Padraic Kissane:
The circle is not drawn in full. The banks are taking the view that they should move the distressed loans out to the vulture funds. As night follows day, the next area to be looked at will be warehoused loans because they are now the next non-performing loan and these will get moved out. I am raising the question to create the possibility that answers might come. Nobody is asking what happens to warehoused loans at the end. Will all these 70 year olds have to leave their homes because they have to sell? Some will definitely take the view that they should trade down and move to a smaller house and so forth, but nobody is asking the question.
It is even more serious than that, however. Most of the arrangements that were put in place have three-year reviews attached, which are currently in play with the vulture fund. They were told it would be reviewed in three years with a pillar bank. It is now being reviewed with a vulture fund and that is their opportunity to come in and take the short-term view they have. The Deputy is absolutely right. As a financial adviser, I do not know today what will happen with warehousing. I am being told in the surrounds that it is written off already so why not do it if the provisioning has already taken place that the taxpayer has taken the hit for?
The other aspect that is not considered is the rental market and the contributory effect of the sale to vulture funds. A large number of properties are empty because receivers have been appointed. I have been at meetings with clients and the bank cannot tell me who has the keys. The client knows they gave them back to the bank, but nobody knows who has the keys and the property is empty. It is astonishing.
I welcome the witnesses to the proceedings.
I have a question for the IFA. We are being told by many business customers that there is constructive non-engagement by the banks in terms of looking at restructuring loans because they have the backstop of selling to the funds. It is a form of moral hazard in its own right. I ask the representatives of the IFA to tell us about farmers' engagement with banks and whether that view of constructive non-engagement is a reality because they effectively have the default position of being able to sell to the vulture funds.
Mr. Martin Stapleton:
Yes. One sale has taken place and according to what we read in the media, another sale is being lined up. In dealing with the debt cases in that bank, it is painstakingly slow. Customers are entering into a process and are left continually wondering whether the process is working and whether the process itself is being used to deflect from the possibility of doing a deal.
Obviously, Cerberus would have taken many of the farm loans. How have IFA members got on when dealing with the funds? Mr. Stapleton indicated the IFA is not dealing directly with the funds. Have IFA members done deals?
Have they restructured loans for farmers, or appointed receivers? What level of engagement has taken place between the IFA and the funds?
Does Mr. Stapleton believe that the title "fund" is a misnomer and that effectively these institutions are asset disposal agencies as distinct from funds? In other words, they are borrowing the money to buy the loans and they have to get the money back.
We need to cut to the chase. In my experience the problem, in part, is that many of these so-called funds are not funds. Many of them are effectively asset disposal agencies that borrowed on the market, be it from vulture funds or whatever, and have to repay those loans quickly. Are these entities providing any long-term restructuring of loans?
Mr. Padraic Kissane:
There is certainly an issue arising for businesses, including farm businesses. A proper investigation of GRG, the global restructuring group, is required. Without a shadow of a doubt, assets have been sold by what is essentially a structured default. There is absolute certainty of this.
Mr. Padraic Kissane:
The point I am making is that the moral hazard remains with the customer. I do not see the examples that the banks are talking about. There are people who overextended. If that is where the moral hazard is, we are probably all overextended. However, nobody is addressing how to resolve the issue. The State is losing out, as much as anybody else. I have in my office a loan offer, the term of which was 12 years, the amount borrowed was €480,000 - which indicates the borrower was elderly at the time - and the interest only term was for ten years at €500 plus per month, following which the repayment was to be €7,500 per month for the remaining two years.
Mr. Padraic Kissane:
The bank will ask how any person could accept such a loan. This is the defence continually thrown at me. When they ask whether a solicitor's advice was obtained, I ask who underwrote the loan. As I said previously in this committee, in 2007 the branch manager told me that he was required to give out €7 million in loans every week and that the bank did not give a damn how he did it. With regard to the farmers, an issue that should be challenged with the pillar banks is the withdrawal of the discretion from local branch managers to put in place arrangements for families they have known for years. This is now the function of head office. This is a major issue. The discretion given to a local manager to take the chance he or she previously took with a farmer is gone. This is now a matter for the underwriting department - hidden people.
Mr. Martin Stapleton:
Yes. The sale was postponed and negotiations on the case are ongoing. Cerberus will argue that it does not know the detail of cases. We have no sight of what information is transferred from the bank to the fund and what information the fund is entitled to talk to us about. For example, I know of a case where a borrower asked a pillar bank for all of the information around his loan and when he got it, most of the details were redacted. It is difficult to understand how the pillar banks, which are partly or wholly owned by us as taxpayers, are behaving in such a manner.
Mr. Martin Stapleton:
We are asking for protection for the borrower and an environment in which a person who has a bad debt can have it restructured in a way that meets the repayment capacity of the farm. People must have an opportunity to work their way through their debt, in all cases. In our proposed solutions we suggest that the personal insolvency legislation be applicable to farm land in the same way as it is applicable to dwelling houses. We suggest that interest charged by the fund be on the basis of a return on its investment rather than on the amount borrowed. This is important. If the fund is buying loans at 30% and the bank was charging 6%, in effect the fund is charging 18%.
The final ask is that the AIB loan book sale be stopped. This would benefit the community at large. This bank, which is owned by the taxpayers, should be made to work through its debt in the best interests of borrowers as well as the bank. I reiterate the point made by Mr. Kissane, that large amounts of money are leaving this country as profit, tax free. This money could be made available to other borrowers for growth and sustaining this economy into the future.
In his submission Mr. O'Donnell said that a settlement would not be honoured if the person in question appeared before this committee. He gave the example of company A, which had a loan from Ulster Bank. That loan was sold to a fund, a receiver was appointed and it was also made clear that the appearance by the company owner at this committee would result in withdrawal of the offer. Are company A and the individual in question all in the same fund?
Mr. Neil McDonnell:
Yes, but it includes the sale of a family home. That is the issue. I gave the committee two examples, the second of which involves Irish Bank Resolution Corporation lending that went to another very well-known fund. It has been paid back in full at the effective cost of the liquidation of the business and the employees within it. There are different ways of looking at this.
A delegation from the committee visited the European Central Bank, ECB, in recent weeks. We met the ECB to discuss loan restructuring, particularly of home loans. It informed us that it did not issue any instruction on non-performing loans and did not define a time for reducing the number of NPLs. It wanted loans put in place that were sustainable. If a loan was €200,000 and the only element that was sustainable was €100,000, it wanted an arrangement for €100,000 and was not worried about how many years it would spread over, which would depend on the age of the person. This would involve parking or warehousing the €100,000 in unsustainable junior debt, and having the senior debt, which would be 100% sustainable, repaid. Does Mr. Kissane find that the banks do that or are they only willing to restructure loans to a certain percentage, such as 75%? The ECB was frustrated by the banks because it felt it was being blamed for the timeframe associated with reducing the NPLs. It wants to see sustainable mortgages. What is Mr. Kissane's experience of that with the banks?
Mr. Padraic Kissane:
The common answer in all the previous presentations by the banks is that they do not do debt forgiveness. It is the greatest joke of all time. Every one of them has said it in this room. I have listened to them all. They do not want to put it that they do debt forgiveness in case the other 90% of their customers will stop paying their mortgages, which is a complete fallacy. One of the difficulties with a vulture fund, which is now only becoming known, is that if all the loans are sold, the customer cannot borrow, build an extension or improve his home. This means the economy for all the small builders who would get those jobs is gone because he cannot borrow a cent extra until the mortgage is paid off in full, irrespective of the arrangement. Until he pays that mortgage off he is stuck, especially if it is on a tracker rate because then he cannot move at all. In the two examples I gave, these loans were put in to sweeten the deal for whoever was purchasing the loan because the people never missed a payment. I heard the same bank tell this committee that no performing home loans were sold to vulture funds. That is factually incorrect and I have two clear examples that can prove it.
The second issue in what the Senator says is that there is so much confusion put about that it is almost deliberately done to create confusion. The banks have decided, as they are about to embark on this new culture shift, to move the problem to somebody else. They say that if somebody is to be brought to court, let it not be the banks taking the case because their reputations are damaged to such an extent that they will not bring cases to court or seek repossession. It is the bad vulture fund that will do it because it does not care, having bought the loan for 20%, 30% or 40% of the original value. That is the vulture funds' game in any event. It is second nature to them to go before the courts because asset disposal is part of what they do. It is also extremely difficult to get repossessions and so forth. That contributes to the difficulty with getting repossession from actual strategic defaulters.
The lenders are the ones who describe what is a strategic defaulter. The fact, as David Hall will say, is that a strategic defaulter, according to the bank, is one who is not paying the full loan mortgage to his lender and may be paying something to his credit union or other personal loans or his overdraft facility. He is classified as a strategic defaulter by the domestic home loan banks. The definitions for everything we are discussing here are also coming from the same banks. We believed them before when it came to a banking bailout and here we are starting to believe them a second time.
Mr. McDonnell said approximately 10% of businesses have been sold to vulture funds. The farming organisations are helping in cases where vulture funds are trying to get control. We see farmers campaigning but we do not see the same type of campaigning by small businesses in difficulty. ISME is not seen helping out where loans and businesses are being sold to vulture funds. Does ISME carry out any campaigns to protect these businesses, similar to the campaign Mr. Kissane is running for mortgage holders with non-performing loans? Has ISME any plan to help these small businesses?
Mr. Neil McDonnell:
The problem for the small business sector is that among all the trade associations our penetration into the total small and medium sized enterprise, SME, market is a decimal point. If we represented 40,000 of a 250,000 businesses, we would be doing well and we tend to have the bigger companies. There is, therefore, a difficulty in getting anything like that suggested by the Senator to happen. There is also a difficulty in getting our members who have these debt issues to come forward at a time when we can do something about it. When we get into that long grass with a fund we will require the services of people like Mr. Kissane because we will be dealing with this on a case-by-case basis. It is very difficult to present a united front among many small businesses. Many of the matters I deal with involve complicated debt structures, for example, a small business that has a family home or farm land or outbuildings or mobile assets that are part of a deal in a cross-guarantee on another functioning business or another illiquid business. If people saw down the road to what would happen to them with some of the types of guarantees they entered into, they probably would not get into them in the first place. It can be extremely difficult to resolve those.
We have seen the desperation of many business people who had to sell their businesses and could not even draw social welfare. I find it hard to believe that ISME did not have some sort of a plan or that those people have not contacted it in desperation seeking help. The fact that ISME has no plan suggests it has not discussed this issue or perhaps it has discussed it and decided not to put a plan in place to help those people.
Mr. Neil McDonnell:
When we survey people in the bank survey I deliberately put in the example of an overdraft because that was the first case I had heard of. Debt comes in many forms. There is very long-term mortgage debt, short-term business debt of between five and seven years and one thinks of an overdraft as a very short facility, generally of less than 12 months and similar to credit card debt.
All of those are in scope if one's bank decides that it wants to liquidate an asset. We will come up with a policy on this if there is an upswell of demand or a persistent demand for one type of issue to be dealt with by the membership. The fact is, as an organisation, ISME is constrained in the presentation we were going to make to the committee. I am not sure what Senator Burke is after but we are doing our best.
Mr. Damian McDonald:
One of the challenges of what is happening is that a significant number of people are suffering in silence because it is a big decision for an individual to approach ISME, the IFA or any third party, reveal a problem and seek help. We have a clear plan in terms of how we help people but a major issue is the number of people who are suffering in silence and have not sought help. The IFA has a team structure and an individual can go to somebody in the region or outside the region if one does not want the information to be known publicly or locally. The suffering in silence is a factor for all representative bodies in matters such as this and it makes it harder to get a grip on just how big a problem this is.
We run campaigns daily and weekly on various issues and the reaction we get from our members on this type of issue is huge. We look at the hit rates for stories on our websites and monitor all of these issues. From looking at that, one must conclude there is a significant number of people who are worried about this issue, are on the radar, are in trouble and are not sure where they will end up.
Another concern is that when farmers eventually contact the IFA, it is sometimes too late. Many problems have arisen as a result. Some are afraid to contact us because they fear that if their case becomes high profile, the fund in question will be harder on them. That is a factor as well.
It is hard to get a grip on the extent of the issue but based on the reaction, we are worried that a large number of farmers are in trouble.
I apologise for interrupting Mr. McDonald, but a vote has been called in the Dáil, which means Deputy Michael McGrath and I must leave the meeting.
This morning the Departments of Business, Enterprise and Innovation and Justice and Equality commented on unregulated and unaccountable receivers and what was said has been borne out by what Mr. McDonald has told us. We have said time and again that vulture funds are aggressive and should be stopped in their tracks. We have raised the need for a political response from these Houses, but the response seems to be slow in coming. Legislation needs to be put in place, but it is almost as if the political system is in paralysis and in fear of bringing forward the type of legislation that is necessary and often spoken about by the Master of the High Court.
We have a number of players before us this morning. The IFA is a highly respected organisation and is one of the last men standing, as it were, that has a huge commitment from its members. It is well used to campaigning, as is ISME. It is an astonishing that Mr. McDonnell indicated in his opening statement that ISME had been prevented from making an appropriate presentation to the committee. That underlines how bad the vulture funds are. ISME is an organisation that is well rooted in the world of commerce in this country.
Mr. Kissane mentioned Mr. David Hall a number of times in his contribution. Mr. Hall could not be present for personal reasons.
Both Mr. Hall and Mr. Kissane are well respected throughout the country for the work they have been doing defending those who are in trouble. I admire the work of the IFA and ISME and Mr. Hall and Mr. Kissane. There is a problem, however. On 15 March last, a motion was tabled in the Dáil on the lack of engagement with this committee by vulture funds. We compared their engagement with their engagement with the Department of Finance in the period from 2013 to 2016. It transpired that they had 125 engagements with the Department in that period. They continue to have engagement with the Department of Housing, Planning and Local Government. The Government's amendment to the motion on the engagement of vulture funds with this committee was defeated. We spoke about the lack of engagement from the vulture funds and our unsuccessful attempts to have the agents that represent the funds appear before the committee and to be held to account. We also called on the unregulated investment funds and the regulator to attend the committee and that was supported by the Central Bank of Ireland. The Central Bank said that firms with a serious role in the economy had a social responsibility to account for themselves before the committee. We then asked the Government to cease all engagement with unregulated private investment funds and credit services firms until these entities were accountable to Parliament. We are talking specifically about vulture funds and their activities. We also asked for legislation to be introduced to regulate the unregulated entities.
The reason I am prompting the witnesses to consider the scope of their organisations and understand the level of respect they command is that they should take that motion, which was passed on a cross-party basis in an effort to bring focus to this issue, and lobby the Minister for Finance, as this committee does. I encourage them collectively to ask the Minister for Finance for a meeting to bring a stop to this practice, which is causing the destruction of family farms, businesses and homes. It has led to suicides and is continuing to have a major negative impact on our economy.
I do not want to leave the meeting without advocating some kind of step forward. The IFA, ISME and Mr. Kissane bring credibility to the story because they have heard the stories from their members and the people who interact with Mr Kissane. We must not leave this issue here. This committee will bring this information to the Minister for Finance but in the name of the people of Ireland whom we represent, I ask the witnesses to join in the campaign to stop these vulture funds. The political parties and political system have an unwillingness or fear of dealing openly with the issue. They have the capacity to deal with it but refuse to do so.
I am asking the witnesses to take this issue forward and put it on their agenda in their engagement with Government. Mr. Healy, as president of the IFA, has an important position in the country, as has ISME. They should not underestimate the respect and power they have.
Mr. Joe Healy:
I take on board the Chairman's recommendation. We have no intention of parking this issue. The IFA is becoming more deeply involved in what has become a long campaign. As Mr. Damian McDonald said, many of our members are too shy or too embarrassed to come forward. The Government could play a role, as Mr. Martin Stapleton stated. For example, it cannot wash its hands of the proposed sale of loans by AIB. The Government can prevent that sale from going ahead. We cannot state strongly enough that it needs to do that.
Mr. Padraic Kissane:
With regard to the four people who were brave enough to come forward with me on the tracker issue and the effect it had, as I said in one of my previous presentations to the committee, the difficulty with much of what is going on is that our Irishness is being used against us. What I mean by this is that people here feel a sense of shame if they miss a loan repayment or are unable to pay a debt. This is built into our make-up and the fabric of every one of us. The concern I have is that the vultures know this. They know damn well nobody will come forward. I have spoken with various television companies about having people appear in television programmes in silhouette and I have been told it would make them look like criminals. I stated they cannot show their faces on camera because they would be known forever more. This is a small country. My point is that perhaps it would be appropriate for the committee to get some examples from people who are brave enough to appear and get another four people to come in to discuss the issues, including ISME representatives and farmers. These should be people who will stand up and say they do not care what they have signed and they will tell their story and how it happened to them. It is difficult to do this. The example of the four people summarised how difficult it was but we must consider the effect it had when they did so. We need to pass on to the customers affected the message that there are people who will stand by them and go shoulder to shoulder with them. I say to every client on the day he or she comes into me that the problem may not have been solved but it has been shared.
-----because of the nature of the letters they had received from banks and vulture funds. This is why I argued that the broad message should be on the AIB sale and the broader message to the Government must be to step in and do something about this issue. That is what I am asking.
It should be placed on record that one person, Mr. Noel Howley, was willing to come forward. He sent in a statement and was supposed to appear today. That statement was circulated to members by the secretariat. Mr. Howley has lost his business. Despite never missing a bank payment, he has lost his property. It is an absolute disgrace to read through the submission he made to the committee. It is worth putting that on the record.
Having listened to all of the witnesses, the committee extends an invitation to people who have been badly treated by banks or vulture funds to appear and share their experience. This is a forum for doing so. I ask people to come forward because they will give some support to others who are in fear of coming forward. We might also get a greater and broader picture.
Mr. Martin Stapleton:
He will thank me in that case.
As I understand it, what a non-performing loan means when it comes to the sale of loans is that any loan that is 90 days in arrears or connected to a loan that is 90 days in arrears is a non-performing loan, as is any loan where a bank takes a view that it is unsustainable without a secured asset sale. This definition is much too broad.
To be honest, the banks define a non-performing loan as they wish. Before selling loans to vulture funds, the banks often restructure them. The clients feel comfortable with this but they overlook the fact that the structure or restructure is only for a three-month or six-month period, which leaves it open to the vulture fund in question to review their loans three or six months after completion of the sale. The clients can then find themselves in a very uncomfortable position.
Mr. Padraic Kissane:
Mention was made of the fees paid among the agencies handling the debt. In the life assurance and financial services industry, commission disclosure is in statute and must be done for the customer. Here, there is the hidden issue of bonuses. Nobody knows about them and the fees in this area are astronomical. When we add in the main players on the accountancy side, there are more Chinese walls in Ireland than there will ever be in China from what I can see. They are now external and internal and the firm handling all of this is also involved in all aspects of the tracker investigations. Everything is connected.