OREANDA-NEWS. April 03, 2015. Central Bank continues to take action regarding the elevated levels of mortgage arrears, as part of its overall approach to resolving distressed debt (including commercial non-performing loans).

Relevant actions taken by the Central Bank since 2010 include: capital assessment reviews, stress tests, distressed credit operation reviews, balance sheet assessment exercises and on-going, intensive supervisory engagement with the banks regarding distressed debt.  The Central Bank’s approach from 2011 has required banks to fix their operational capability and ensure that they execute appropriate strategies to address mortgage arrears. From March 2013 to December 2014, the Central Bank required the banks to meet public Mortgage Arrears Resolution Targets (MART). All of this was done in the context of the protections for borrowers under our consumer protection framework, including in particular the additional protections introduced by the Central Bank in 2009 by the Code of Conduct on Mortgage Arrears.

Under the Central Bank’s assertive supervisory engagement the capacity and approach of the banks for dealing with distressed borrowers has materially improved, with a significant shift from relying on short term forbearance, to longer term sustainable solutions. This changed approach has resulted in sustainable[1] solutions being proposed to the majority of those in arrears, and concluded in 62 per cent of these cases. We expect that this progress will continue and will result in a continued increase in the number of concluded longer term sustainable solutions.

The Central Bank recognises that the improvements in the banks’ strategies and operations and reduced reliance on short-term forbearance has resulted in an increase in legal action being taken by the banks, particularly where borrowers are deemed to be not cooperating.   In this context, in addition to meeting supervisory targets, lenders are also required to comply with consumer protection requirements and the Code of Conduct on Mortgage Arrears (CCMA) which sets out requirements for mortgage lenders dealing with borrowers facing or in mortgage arrears. The CCMA provides a strong consumer protection framework to ensure that borrowers struggling to keep up mortgage repayments are treated in a fair and transparent manner by their lender, and that lenders make every reasonable effort under the CCMA to agree an alternative arrangement before resorting to legal proceedings for repossession.  A themed inspection of compliance with the CCMA is currently underway and it is planned to publish the outcomes from this inspection in the first half of 2015.

Notwithstanding the progress outlined, significant bank specific areas for improvement remain.  However, progress is now well established and there is a strong pipeline of sustainable solutions, which will conclude over the coming months, and will in turn, over time continue to reduce arrears, and the level of non-performing loans. 

Recognising these developments, alongside changes in the supervision of the banks following the introduction of the Single Supervisory Mechanism (SSM), the Central Bank has conducted a thorough assessment of the supervisory approach to mortgage arrears, together with the approach to resolving the banks’ non-performing loans more widely (including distressed commercial debt).

The Central Bank has determined that relying on common quarterly solution targets across all banks is no longer appropriate.  The Central Bank has written to each bank setting out new requirements that:

  • concluded sustainable solutions are in place for the vast majority of distressed borrowers by the end of 2015;
  • they meet the ‘terms being met’ target of 75 per cent of concluded solutions to the end of 2015 and beyond;
  • they continue to comply with the Code of Conduct on Mortgage Arrears;
  • where they  take legal action that may result in loss of ownership for a borrower, they should be prepared to re-engage with the borrower and explore alternative solutions if the borrower re-engages; and
  • they engage fully and appropriately in the process set out in the Personal Insolvency Act,  2012.

The banks have also been required to submit enhanced information on the resolution of non-performing loans, including their strategies for delivering the outcomes outlined above. Further, the banks will be subject to enhanced and more granular monitoring of specific cohorts of distressed borrowers where progress has been slower.

The Central Bank, including in its role as part of the SSM, remains focused on ensuring that the banks continue to improve issues identified in relation to their individual systems and procedures to ensure that they resolve arrears cases by implementing sustainable solutions for distressed borrowers in a fair manner.  

Ongoing supervision will continue to be intrusive, supplemented by targeted inspections and audits and enhanced monitoring of performance of the banks in delivery of the above outcomes. 

[1] The Central Bank of Ireland (Central Bank) published sustainability guidelines, published in September 2013 and subsequently updated them in June 2014. The guidelines are available at http://www.centralbank.ie/regulation/industry-sectors/credit-institutions/Documents/Internal%20Guideline%20-%20Sustainable%20Mortgage%20Arrears%20Solutions.pdf