Central Bank to assess if lenders broke debt restructuring rules

The Central Bank has started to examine whether mortgage lenders mishandled some borrowers who have availed of the most popular form of debt restructuring on offer for distressed home loans.

Two private equity firms – or so-called vulture funds – that have bought hundreds of millions of nonperforming mortgages in recent years have highlighted the Central Bank move in documents as they refinanced some of these loans in the international bond markets.

A vehicle used by one of the funds, Lone Star, said in a prospectus that the regulator has questioned lenders about how they use a mortgage-restructuring method called arrears capitalisation. This is an arrangement where a borrower who is behind in repayments has some or all of the amount in arrears added to the remaining principle balance, to be repaid over time. Arrears capitalisation accounted for a third of all restructured mortgages at the end of 2016.

The Lone Star document said the Central Bank has "individually posed certain queries to some (if not all) credit firms" on an issue relating to arrears capitalisation that was initially highlighted in the UK last year by the Financial Conduct Authority and came to a head last week.

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The FCA found that some lenders implemented a practice known as “automatic capitalisation”, where they agreed a separate repayment plan for the arrears but also included the outstanding debt in calculations for monthly repayments on the mortgage capital. The issue usually comes about when lenders recalculate monthly repayments after an interest rate change in either direction.

The FCA estimates that 750,000 UK borrowers were affected. Fixing the problem will cost up to £2,000 per affected borrower, according to reports.

At best, the practice means it would take borrowers longer to clear arrears. However, it could have resulted in the borrower paying additional fees and charges. Irish lenders have not been allowed to charge penalties on arrears since 2010.

Full investigation

The Lone Star prospectus – which relates to the sale of bonds backed by about €420 million of troubled loans that were originally made by the now-defunct Bank of Scotland (Ireland) and subprime lender Start Mortgages before the property bubble burst – states that there is a risk that the Central Bank of Ireland’s initial queries could lead to a full industry investigation.

Mars Capital, an affiliate of American private equity giant Oaktree, used similar language in its a recent prospectus linked to the sale of bonds to refinance about €320 million of loans issued by Irish Nationwide Building Society and a former subprime mortgage subsidiary of Permanent TSB, known as Springboard. Mars Capital bought the loans in 2014.

Both said that “there is a risk that Irish lenders” engaged in similar arrears capitalisation practices to UK peers “and the issue be subject to a Central Bank investigation, either targeted at specific lenders or industry wide”. Both acknowledge that while the regulator has questioned lenders on the issue, “it has not publicly announced any such investigations or examinations”.

The Lone Star vehicle said that the outcome of any investigation may result in delays “in any enforcement against the relevant borrower”.

A spokeswoman for the Central Bank declined to comment.

The Central Bank’s move to assess whether there is an issue worthy of a full investigation comes as the nation’s lenders find themselves at the centre of a massive examination into overcharging of borrowers who were wrongly denied low-cost loans that track the European Central Bank’s main rate.

Almost €80 million has been paid by lenders to 2,600 mortgage account holders in redress and compensation as of the end of February. Some 9,900 borrowers have been affected by the issue, according to the Central Bank’s latest figures.