Regulation of Loan Portfolio Buyers
On 21 July 2014 the Department of Finance issued a Consultation Paper (available here) setting out draft legislative proposals to address the Government’s objective of ensuring that individuals whose loans are sold to unregulated buyers continue to have the same regulatory protections as they had prior to the sale. This follows the announcement by the Government on 15 January 2014 that it intended to publish a bill “to cater for the sale of loan books by regulated financial institutions to unregulated financial institutions” in 2015.
We have set out below:
- a summary of the existing retail credit firm regime and the proposed changes to this regime set out in the Consultation Paper aimed at regulating purchasers of loan portfolios
- the potential impact which the proposals (as currently drafted) could have on purchasers of Irish loan portfolios.
Existing Retail Credit Firm Regime
The Central Bank Act 1997 (the 1997 Act) was amended in 2007 to prohibit a person from acting as a retail credit firm without authorisation from the Central Bank of Ireland (the CBI). A retail credit firm means:
“a person prescribed for the purpose of paragraph (e) of the definition of ‘credit institution’ in section 2(1) of the Consumer Credit Act 1995, or any other person who holds itself out as carrying on a business of, and whose business consists wholly or partly of, providing credit directly to relevant persons…”.
For the purposes of the above definition:
- “credit” means a “cash loan”
- “relevant person” means a natural person within Ireland, other than:
- a professional client for the purposes of MiFID, or
- a person who is themselves a regulated financial service provider.
Therefore, in essence, a retail credit firm is a person whose business consists of providing cash loans directly to individuals. Non-bank mortgage lenders or providers of personal credit potentially fall within the regime, as do lenders providing commercial or SME loans to individuals.
The 1997 Act currently provides exemptions from the requirement to hold a retail credit firm authorisation, including for:
- entities that purchase loans originated by another party (the loan purchase exemption). Therefore purchasers of portfolios of Irish loans are not currently required to hold a retail credit firm authorisation, unless they subsequently provide credit to individuals or their restructuring activities following the purchase trigger the authorisation requirement; and
- entities which are already regulated financial service providers in Ireland and in the EEA (the regulated financial services provider exemption).
Retail credit firms are required to adhere to the Code of Conduct on Mortgage Arrears (the CCMA), the Consumer Protection Code (the CPC) and the Code of Conduct for Business Lending to Small and Medium Enterprises (as applicable) and certain of their customers may also make complaints to the Financial Services Ombudsman (the FSO) in respect of their lender’s conduct. These requirements do not apply to unregulated entities. Retail credit firms may also be subject to, amongst other things, the CBI’s administrative sanctions regime in respect of breaches of their regulatory requirements.
Because of the current loan purchase exemption, if a loan portfolio is sold to an unregulated entity, the purchaser will not automatically require authorisation as a retail credit firm – as a result the relevant borrowers no longer get the protections of the above Codes and cannot make a complaint to the FSO.
The Department of Finance Consultation Paper sets out proposed changes to the 1997 Act to bring purchasers of certain loan portfolios within the existing retail credit firm regime.
The key proposals are as follows:
- both providing and owning credit in the form of cash loans to individuals in Ireland would require authorisation as a retail credit firm under the revised definition
- the current loan purchase exemption will be amended and will only be available to securitisation special purpose vehicles (SSPVs)
- the current regulated financial services provider exemption will be narrowed to apply only to an entity which is a regulated financial service provider authorised by the CBI or another EEA regulator “to provide or own credit otherwise than under this Part”. A number of entities currently providing credit in the market and availing of this exemption hold authorisations unrelated to the provision of credit. On the basis of the Consultation Paper, they would now require a retail credit firm authorisation
- the new requirement for a retail credit firm authorisation for loan portfolio purchasers will also apply to current holders of loan portfolios – there will be a 3 month grandfathering period for such entities to apply for a retail credit firm authorisation
The process for obtaining a retail credit firm authorisation is not unduly onerous. However, the majority of vehicles that will be caught by the regime (e.g. special purpose vehicles in the form of Irish Section 110 companies) are not set-up to be authorised and comply with the licencing regime on an ongoing basis, as they do not have the ownership structure, internal governance or infrastructure that would be necessary to obtain an authorisation from the Central Bank.
Potential Impacts for the Sale and Purchase of Loan Portfolios
We have set out below a number of key considerations for buyers and sellers of Irish loan portfolios if the proposals set out in the Consultation Paper are implemented:
- Impact on the buyer of a mortgage book with CCMA protection
A new purchaser or existing holder of a residential loan portfolio would be required to hold a retail credit firm authorisation (unless otherwise exempt). Where the relevant loan portfolio is currently subject to the CCMA, the purchaser will be required by law to adhere to the CCMA requirements once it is authorised. While many purchasers currently do this on a voluntary basis, the CBI would now have jurisdiction to police compliance and sanction breaches. In addition, as the CCMA will be applicable, evidence of compliance may be required to be provided in court proceedings before an order for possession would be granted by an Irish court in an enforcement action – although most buyers assume this will be the case notwithstanding that the CCMA does not apply to them currently.
- Impact on the buyer of a consumer loan book – personal consumers for CPC purposes and consumers under the Consumer Credit Act 1995
A new purchaser or existing holder of a consumer loan book (e.g. a credit card book or a personal loans book) would be required to hold a retail credit firm authorisation (unless otherwise exempt) and would therefore be obliged to adhere to the requirements of the CPC, including arrears handling provisions.
Open Questions and Conclusion
There are a number of open questions and issues raised by the proposed legislation, which will hopefully be resolved following the consultation process:
- it is unclear whether the SSPV exemption will apply to Irish RMBS and other Irish consumer loan securitisation transactions – this is because the special purpose vehicle (SPV) used to hold the assets in those transactions will generally have some form of servicing role in the event of enforcement of the underlying assets
- the legislation is expressed not to be retrospective but, as holding loans is a continuous activity, it will catch historic transactions and will require either the SPV to be regulated or the structure of the deal to be altered
- the Consultation Paper refers to SME loan books being caught by the new regime – this would be a significant extension of the current scope of the retail credit firm regime (as SME lending, other than to sole traders, is not currently caught) and may be unintentional
- as mentioned above, some entities (in both Ireland and overseas) are currently exempt from the retail credit firm regime under the regulated financial services provider exemption on the basis that they hold a licence/authorisation for other regulated activities (e.g. insurance mediation) – this exemption is being amended so that it applies only to firms licensed to provide credit and will bring an additional licensing burden on those firms currently exempt because they are already licensed albeit not to provide credit
- the CBI will need to prepare for a wave of applications as a large number of SPVs relating to existing transactions and other entities currently exempt from the regime may all need to apply for an authorisation at the same time
- the Consultation Paper suggests that non-Irish vehicles will not be able to obtain a licence – this will clearly impact transactions where a non-Irish acquisition vehicle has already been used.
The Consultation closes on 22 August 2014. While the Government has signalled its intention to introduce this legislation in 2015, there is a reasonable prospect of the proposed amendments being introduced by the end of 2014. If implemented in its current form, the legislation has clear regulatory, structuring and cost impacts for buyers and sellers of residential/consumer/SME loan portfolios and for existing transactions.
The Consultation Paper refers to the fact that the possibility of regulating mortgage/loan servicers (which is norm in other jurisdictions, such as the UK) was considered and discounted. One solution to the issues referred to above could be to return to that idea and simply amend the retail credit firm regime to capture the relatively limited number of mortgage servicers in the market and continue the loan purchase exemption that is currently used by SPVs.