Michael McGrath (Cork South Central, Fianna Fail) | Oireachtas source

I understand. Nonetheless, I am glad this debate is getting under way.

We have called for this a Bill for a considerable period. Many thousands of mortgages have been sold by existing financial institutions to private equity funds, in the main, and because of the operation of the code of conduct on mortgage arrears, those mortgage holders now find themselves outside of the statutory protection of the code of conduct on mortgage arrears and, indeed, other statutory protections. That exposes them to very significant risks because the code of conduct on mortgage arrears, which has been developed over the last number of years, offers vital protections to mortgage holders. It offers protection in particular to mortgage holders who find themselves in some level of financial difficulty because of the requirements the code places on lenders. Example of these include the requirement to go through a series of steps to work with borrowers in arrears in order to try, insofar as possible, to rescue a mortgage or to put in place forbearance measures and the requirement on mortgage holders to complete standard financial statement forms, for example, so that the lender must assess the capacity of a borrower to repay a mortgage to see if it can be restructured and made sustainable and to put a stay on any possible legal proceedings being taken by lenders. The code of conduct was diluted in the last couple of years and many of the key protections that borrowers hold were also diluted.

This balance of power between the lender and the borrower has shifted firmly in favour of the latter.

Notwithstanding its limitations, the code of conduct on mortgage arrears, CCMA, is an essential tool for mortgage holders. Under the current two-tier system, the vast majority of mortgage holders benefit from statutory protections, while another group of borrowers do not enjoy such protections. I refer to those whose mortgages have been sold on by their lenders by virtue of the liquidation of the Irish Bank Resolution Company and the exit from the Irish market of a number of institutions which sold their mortgage books, mainly to private equity funds from the United States, in an effort to wind down their operations here. While almost all of the private equity funds have committed to voluntary compliance with the code of conduct, this is not a substitute for a binding code that enjoys full legal force. In the event of a dispute between the borrower and the new owner of the mortgage, there is no policeman in place. The borrower will not be able to approach the Department of Finance or the Central Bank which is responsible for the application of the code of conduct on mortgage arrears because the new holder of the mortgage will not be a regulated entity and, therefore, will fall outside the scope of the CCMA. As such, the borrower is essentially left to his or her own devices.

It is clear from certain cases that have been brought to my attention that equity or vulture funds, as they have been described, sometimes operate outside the code. While this practice may not be widespread, problems have emerged in individual cases. We simply do not know the extent of problem because many borrowers in arrears are in a vulnerable position and not all of them are fully apprised of their statutory rights or the protections afforded by the code of conduct on mortgage arrears. The extent of non-compliance with the CCMA among vulture funds is difficult to determine. For this reason, its protections should be extended to all mortgage holders.

The Joint Committee on Finance, Public Expenditure and Reform scrutinised the heads of the Bill in December. Members had a good engagement with officials from the Department and a number of advocacy groups. One key concern emerged from our deliberations. While everybody welcomes the broad scope of the provision bringing mortgages that have been sold on to private equity funds under the umbrella of regulation, the original intention in the Bill in respect of oversight of the sale of mortgages was to make the ownership of credit a regulated activity, but the Minister appears to have moved away from this proposal in the published Bill. It is my duty to seek to change his mind on this issue because he appears to have backed away from the original proposal, presumably under pressure from financial institutions, of which we know a number made submissions to the Department on the Bill.

As proposed, the Bill will leave us with a half-baked system under which the servicing agent for the mortgage will need to be regulated, but the same requirement will not apply to the owner of the mortgage. In essence, the Minister is proposing to replace the current two-tier system with a different type of two-tier system. My fundamental concern is that an opportunity to provide for the effective regulation of the sale of mortgages has been lost. While my party will support the Bill in principle on Second Stage, we will engage with the Minister in a detailed debate on Committee Stage and seek to have the new owners of mortgages, namely, the private equity funds that have become the legal owners having stepped into the shoes of the original lenders in a legal sense, fully subject to the regulation of the Central Bank. The full statutory protections provided by the code of conduct on mortgage arrears should apply to the mortgage holder.

The system proposed will mean that companies such as Pepper which administers mortgages on behalf of private equity funds will be subject to regulation and come within the ambit of the code of conduct on mortgage arrears, while statutory protection will not apply in the case of loans held by Lone Star and Oaktree. This two-tier system will create practical difficulties which need to be teased out with the Minister. For example, vulture funds which outsource the administration of loans and will continue to control key decisions such as on initiating action for repossession or raising the interest rate that applies to loans will not be subject to regulation. This leaves a potentially dangerous gap in the regulatory system.

There is also a legitimate concern that loans may be sold more than once, with each subsequent transaction resulting in a deterioration of the conditions applying to the borrower in respect of interest rates, penalty charges and the status of any restructuring agreement. The possibility of changes being made to servicing agreements is a key concern. The owners of mortgages, most likely a private equity fund, may seek to change from one service provider to another. The Bill provides that the service provider will be regulated, whereas the owner of the mortgage will not be so regulated. Having examined the Bill, I am concerned that this will create potential legal uncertainty. It became clear at the joint committee's meeting with officials in December that they were moving in this direction. The Free Legal Advice Centres and other organisations raised important concerns about the issue of legal uncertainty. If the arrangement between the owner of the mortgage - the equity fund - and the service provider ends and a new arrangement needs to be put in place, it is possible that uncertainty will arise about who is accountable for the application of the CCMA and on whom the code is legally binding should a problem arise in the period before the new arrangement is implemented. We need straight, honest responses to address this concern and ensure mortgage holders are fully protected. We do not want people whose mortgage has been sold on to a US private equity fund, through no fault of their own, to discover while following up a dispute that they are subject to a different tier of regulation than those who hold mortgages with one of the main banks that are regulated in Ireland.

The Minister should amend the legislation to ensure borrowers who stick to the terms of restructuring arrangements cannot have the payment structure cancelled by the acquirer of a loan or an agent acting on the acquirer's behalf. He must also review the adequacy of the code of conduct on mortgage arrears. He has acknowledged that none of the banks or financial institutions has been subject to sanction for a failure to abide by the code. It is welcome that the Central Bank is carrying out inspections on this issue. Despite its previous finding that the code of conduct had been breached by regulated entities, the Central Bank has not imposed sanctions on the institutions in question. This is a cause of grave concern. A deterrent is needed as the regulated entities must know that there will be consequences for non-compliance. Given that we are bringing additional entities within the ambit of the code of conduct, it must be made clear that enforcement action, including sanctions, will be taken if the code's provisions are not fully adhered to.

For some time, the Fianna Fáil Party has been calling for the sale of loan books to unregulated third parties to be regulated for a specific period. It is estimated that the loans of between 10,000 and 15,000 mortgage holders have been sold to unregulated third parties and that the number is increasing as the sale of the remainder of the IBRC mortgage book proceeds. As practising politicians, we all regularly meet people at our advice clinics who are experiencing difficulties with their mortgages. Customers of Allied Irish Banks, Bank of Ireland or permanent tasb can refer to the code of conduct on mortgage arrears when dealing with their financial institutions and have their statutory legal rights, albeit limited in certain cases, upheld. However, others who take issue with letters from private equity funds and service providers on the basis that they are being treated unfairly and that their restructuring agreements with their former financial institutions are not being honoured by the new owners of the mortgage find themselves in legal limbo. This is an unsatisfactory position which must be addressed.

This is particularly the case in light of the fact there is significant potential for more mortgage loan books to be sold. There is an issue of concern in regard to State-supported banks. For example, under clause 11 of the relationship framework with AIB, the bank is not obliged to consult with the Minister if it proposes a disposal of a tranche of loans for an amount of less than €100 million, and a €50 million limit would apply in the case of Permanent TSB making a similar disposal. Therefore, many mortgages could be sold, even by the main institutions in Ireland, without the consent of, or any consultation with, the Minister for Finance. In our view, that issue needs to be dealt with.

I have spoken already about the problems with voluntary compliance. It is an issue that has been teased out at the joint Oireachtas finance committee on a number of occasions. The new purchasers of the mortgages have made it clear through, for example, KPMG, the special liquidator in respect of the sale of IBRC, that there is absolutely nothing in writing to give a reassurance that the CCMA will be adhered to or that it is legally binding, which it cannot be because the new owners are not governed by the legislation.

I have spoken about the issue of third party administrators and the potential difficulties that arise if this Bill is enacted as proposed, in that the owners will not be fully subject to regulation on a par with all of the other institutions in Ireland. That raises real concerns which we will tease out on Committee Stage.

There are a number of other issues which are not covered by the CCMA itself and which fall directly outside the ambit of this Bill. The important thing is to focus on ensuring that mortgage holders and other people who are going to benefit from the extension of the legislation and other loans, for example, will come under this regulation without any further delay. While that is something we will be supporting in principle, it will be very much subject to a proper analysis of the way in which this is being constructed, given the owner is not going to be a regulated entity and will not come under the CCMA. With regard to the service provider, with whom the mortgage holder does have day-to-day contact in respect of the administration of the mortgage, although only in respect of its administration, key decisions in respect of the future of that mortgage, for example, any restructuring of that mortgage or any decision to go down the legal road and commence enforcement proceedings, will be taken by the owner of the mortgage. The fact the mortgage owners will not come under the CCMA or the statutory protections is a concern which I hope the Minister will be able to assuage in the course of Committee and Report Stages.

See this speech in context