Introduction
The Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 (the “Act”) was enacted on the 8th July 2015 and through its creation of a new type of regulated entity called a ‘credit serving firm’, it attempts to introduce safeguards for the Irish consumer who may have lost certain protections where their loans were sold to an unregulated body.
As such, the Act is a long awaited recognition of the regulatory gap that arises where a mortgage is sold on. Over the last decade Ireland has seen an increase in this type of sale where a particular tranche of loans or an entire loan book is sold by a regulated financial institution to an unregulated financial entity.
The issue arising related to the fact that this type of purchaser was under no obligation to apply the Central Bank codes. In turn, the failure to apply said codes in a mandatory fashion reduced the safeguards in operation for borrowers and so the pendulum swung in favour of the unregulated financial entity creating an undesired imbalance in terms of consumer protection within the financial services industry.
The introduction of the Act now puts in place a regulated playing field where this type of purchaser is under an obligation to adhere to the Central Bank codes in a similar fashion as the previous owner of the mortgage.
Application of the Act
To understand what exactly triggers the application of this Act it is important to identify the necessary parties involved and the type of commercial behaviour that needs to be carried out by the financial entity:
In order to avail of the protections offered by the Act, the consumer must fall within the ambit of what may be described as the ‘relevant borrower’:
- A relevant / natural person or;
- A micro, small or medium enterprise within the meaning of Article 2 of the Annex to the Commission Recommendation 2003 / 361 / EC of 6th May 2003 (i.e.) an enterprise which employs fewer than 250 persons and which has an annual turnover not exceeding €50 million and / or an annual balance sheet total not exceeding €43 million.
A credit agreement must be in place and this agreement must commit to the granting of credit to the ‘relevant borrower’.
The final ingredient acting as a catalyst in the application of the Act is a ‘credit servicing firm’ carrying out ‘credit servicing’ activities.
The Act defines a ‘credit servicing firm’ as including:
a) a person (other than the National Asset Management Agency or a NAMA group entity within the meaning of the National Asset Management Agency Act 2009) who —
(i) undertakes credit servicing other than on behalf of a regulated financial service provider authorised, by the Bank or an authority that performs functions in an EEA country that are comparable to the functions performed by the Bank, to provide credit in the State, or
(ii) holds the legal title to credit granted under a credit agreement in respect of which credit servicing is not being undertaken by a person authorised to carry on the business of a credit servicing firm
and
b) a regulated financial service provider taken to be authorised to carry on the business of a credit servicing firm due to the fact that it is authorised to do so, either before or after the Act referred to herein was enacted.
‘Credit servicing’ activities under the Act include managing and administering the credit agreement in the following ways;
- Notifying the relevant borrower of changes in interest rates or in payments due under the credit agreement or other matters of which the credit agreement requires the relevant borrower to be notified;
- Taking any necessary steps for the purposes of collecting or recovering payments due under the credit agreement from the relevant borrower;
- Managing or administering any of the following actions;
- a) Repayments under the credit agreement
- b) Any charges imposed on the relevant borrower under the credit agreement
- c) Any errors made in relation to the credit agreement
- d) Any complaints made by the relevant borrower
- e) Information or records relating to the relevant borrower in respect of the credit agreement
- f) Information or records relating to the relevant borrower in respect of the credit agreement
- g) The process by which a relevant borrowers financial difficulties are addressed
- h) Any alternative arrangements for repayment or other restructuring
- i) The assessment of the relevant borrower’s circumstances and ability to repay under the credit agreement
- Communicating with the relevant borrower in respect of the aforementioned actions enumerated at points 1 - 3.
The Act expressly excludes the following activities from the definition of ‘credit servicing’ in turn narrowing its scope:
- The determination of the overall strategy for the management and administration of a portfolio of credit agreements;
- The maintenance of control over key decisions relating to such portfolios; or
- Taking such steps as may be necessary for the purposes of –
- enabling the undertaking of credit servicing by another person or
- enforcing a credit agreement.
Ultimately, a relevant borrower privy to a credit agreement being serviced by credit servicing firm undertaking credit servicing activities as described above falls under the umbrella of this new piece of legislation. As such, the relevant borrower is afforded greater protection and the credit servicing firm must seek Central Bank approval in order to operate within the financial services industry.
Scenarios giving rise to the onus to seek Central Bank approval and the type of financial behaviour giving rise to the licensing requirement
A credit servicing firm will be required to obtain authorisation in the following scenarios:
- An unregulated entity acquires a consumer loan portfolio and fails to appoint an appropriate regulated entity to undertake credit servicing activities on its behalf in respect of the affected consumer loans purchased therein;
- An unregulated entity acquires a consumer loan portfolio and appoints an appropriate regulated entity to undertake credit servicing activities on its behalf but the unregulated entity engages in day to day activities which are caught by the definition of credit servicing activities.
Or
Thus, it is of paramount importance that any unregulated entity acquiring a loan portfolio shields itself from inadvertently doing or omitting to do something which would trigger a requirement for it to be authorised as a credit servicing fund.
The extent of protection offered to the ‘relevant borrower’
- The relevant borrower will be afforded greater protection in line with the fact that the credit servicing firm will operate under the supervision and enforcement of the Central Bank.
- The relevant borrower will have access to the Financial Services Ombudsman complaints procedure.
The transitionary period applicable to existing credit servicing firms operating at the time the Act was enacted
Unregulated service providers operating before the enactment of the Act were to submit applications for authorisation under section 30 of the Central Bank Act 1997 (amended). Entities seeking to avail of this transitional arrangement were required to have completed and submitted the application by 8th October 2015 in order to continue to provide such services
Thus, on the 15th July 2015 unregulated firms were deemed to have authority to service affected loans, provided an application was made within the three month timeframe from the date the Act came into being. Consultation Paper 96 issued by the Central Bank in July 2015 offered guidance in respect of the authorisation requirements and standards to be met.
Entities that failed to submit a fully completed and signed application for authorisation to the Central Bank by 8th of October will now not be deemed to stand authorised and will have to cease to provide such services.
Obviously this transitional period did not apply to firms not carrying out credit servicing activities prior to enactment and as such, any firm now intending on carrying out such services cannot do so in advance of obtaining Central Bank approval.
Conclusion
To conclude, it is advisable that moving forward purchasers of loan portfolios adopt an analytical approach so that a determination can be made in terms of loans falling within the scope of the Act and loans that remain unaffected. Once identified a regulated servicer should be appointed to service the affected tranche of loans. It is imperative that the purchaser does not engage in any of the credit servicing activities enumerated above as this action will activate the licensing requirement. Finally, should the purchaser decide to service the administrative and managerial tasks attached to the affected loans, they will need to seek Central Bank authority themselves before engaging in this service. It is a criminal offense for an entity to carry on a regulated financial services business in Ireland without the required authorisation.
For further information on the Credit Servicing Act, please contact Niamh O’Connor.
