New rules for banks on mortgage arrears lack transparency
Opinion: Homeowners need to see full reasons for banks’ decisions on arrears
Minister for Finance Michael Noonan and financial regulator Matthew Elderfield at the announcement last month of new Central Bank measures to deal with mortgage arrears. Photograph: Brenda Fitzsimons
In 1913, commenting on excessive compensation of bankers in the US, then lawyer and later to become US Supreme Court justice Louis Brandeis said: “Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”
For the sake of the 118, 000 households currently in home mortgage arrears, it is essential that transparency be applied to the process whereby deals are reached with their banks in respect of mortgage debt.
On March 13th last the Central Bank announced additional measures to address the issue of mortgage arrears in respect of family homes. Whilst progressive in substance , the approach is buried both in self-flagellating acronyms and in administrative speak such as Mortgage Arrears Resolution Strategies (Mars), Code of Conduct on Mortgage Arrears (CCMA) and Mortgage Arrears Resolution Targets (Marts, anyone?)
Nonetheless, the combination of these new measures together with the new personal insolvency regime and the proposed statutory correction of the loophole concerning repossession, identified by Ms Justice Dunne, means that by the end of this year, there should be a complete framework to resolve the legacy of the Irish property bubble of the late 1990s and of the early noughties.
First, the stick: common public targets and institution-specific targets, for resolution of mortgage arrears cases have been set for the banks. The Central Bank has said that if the targets are not met, it will exercise its powers of supervision. This will include directing the banks to set aside further capital to meet mortgage arrears balances. The Central Bank has also said it will carry out inspections and audits to verify that these targets are being met. Whilst the targets are new, the powers of supervision are not. On the other hand, the threat, in the form of a penalty, to force banks to reserve additional capital against mortgage arrears is novel.
Second, the carrot: revision to the Central Bank Code of Conduct on Mortgage Arrears is proposed to be completed by the end of May of this year. This will likely allow the specified banks to expedite the mortgage arrears resolution process. This is to be done by, among other things, forcing greater co-operation by borrowers with the banks, allowing increased communication by the banks with borrowers, expanding the types of alternative repayment options, in certain cases eliminating or streamlining the need to fill out a standard financial statement, and reducing the 12-month moratorium on repossession in certain situations.
It is possible to view these new measures and their time-specific targets as a quasi amnesty, whereby homeowners who promptly submit proposals will benefit disproportionately from the banks’ imperative of meeting Central Bank targets.
As an approach adopted between Government and the Central Bank , however,these new measures are an example of what the late John M Kelly TD described as the inner or hidden Constitution, that is to say an area of activity which the State takes upon itself to regulate. This type of regulation tends to involve the granting of something to person X whilst refusing or withholding something from person Y, with its end result expressed in the State’s power to enrich individuals or in the case of mortgage arrears, the State’s power to alleviate financial stress.
Acknowledging that this type of regulation is a direct interference by the State into a contract made between a borrower and her bank, the State has allowed the banks to reach the decision as to whether a sustainable solution on mortgage debt is possible or whether, in the final event, the family home is to be repossessed.
It is within this process of mortgage debt resolution that Justice Louis Brandeis’s disinfectant of sunlight and policeman of electric light are most needed but least provided for. In trying to reach a deal with their bank, how are homeowners to know that their bank is properly and fairly adhering even to the broad principles set out by the Central Bank? What are homeowners to do if their bank does not properly and fairly comply with those principles? How are homeowners to be protected if a bank refuses to reach a mortgage debt deal or proposes a deal on unfair terms?
The Central Bank measures do provide for an appeal to each individual bank, led by personnel independent of the original decision-makers in the bank. However, there are neither sufficient rules as to how this internal appeal is to be conducted nor any obvious established principles to guide the appeal body in reaching its decision
In this context, there is no rule within the Central Bank measures permitting homeowners to fully see the basis for the individual bank’s decision and, equally important, how the bank’s decision was arrived at. If there were such a rule, homeowners could be either satisfied that a fair and reasonable decision had been made or decide to appeal the decision.
There is also provision for a further appeal to the Financial Services Ombudsman (provided no legal proceedings are in being) but again the ombudsman has no published or established principles or policies as to how he may decide upon any given mortgage debt resolution deal.
Finding themselves within the operation of this hidden Constitution, homeowners deserve far more protection. As part of the new measures, a single appeal from the bank’s decision should be provided for. The appeal should be to a truly independent body such as the Financial Services Ombudsman and should permit all parties to see how the bank reached its decision concerning the homeowners and direct the banks to provide sufficient information to appreciate the reasons why the bank reached its decision. The appeal body itself should be obliged to publish its reasons and in appropriate circumstances, name the bank concerned.
Once the mortgage resolution process is supervised in this way, individual homeowners can expect a transparent and consistent process and we, as a society, can be assured that the process is free from the nasty bugs that a lack of sunlight might attract.
Patrick O’Reilly is a senior counsel