Pilot Approach to Co-Ordinated Resolution of Multiple Debts
The Central Bank have established a pilot programme for borrowers with multiple distressed debts to engage with their lenders in an effort to enhance co-operation between lenders of secured and unsecured debt and fairly resolve distressed debt for borrowers.
The process is to be operated by a third party service provider who will seek completion of Standard Financial Statements from the borrower, assess their veracity and develop a treatment option by reference to what is termed “the Restructuring Waterfall” set out in the framework.
Once the treatment option is provided by the service provider to the participating lenders, the lenders will have 48 hours to either seek additional information which would be relevant/require the proposal to be re-assessed, OR object to the proposal. Lenders are prohibited from unduly opposing a reasonable restructure having regard to the borrowers underlying circumstances and must act in good faith at all stages of the process.
The purpose of the framework is to address the situation of borrowers experiencing financial difficulties but who are not insolvent and will not be eligible to avail of the new insolvency regime.
In order to be eligible for the framework to be applied, a borrower must:
- Be co-operating as defined in the Code of Conduct on Mortgage Arrears (“CCMA”) with his mortgage lender.
- Must have taken steps to adjust his/her expenditure to establish norms.
- Must give consent to a third party independent service provider to liaise with all Lenders.
The Framework will only apply to borrowers experiencing significant financial difficulty with regard to the payment of the mortgage on his/her principle private residence and other unsecured debt.
Borrowers will continue to be covered by the protections of the CCMA for mortgage debt and the CPC for unsecured debt.
The framework will not apply in the case of buy to let properties, business related debts or borrowers who are not co-operating as defined within the CCMA.
The framework is designed to produce fair reasonable consistent outcomes for dealing with the secured and unsecured debt, will seek to form arrangements where borrowers can remain in their homes (where appropriate to their means and needs) and will provide for the extension of the terms of loans through term extension and interest rate reduction, reflecting individual circumstances of each borrower based on affordability and sustainability.
The Restructuring Waterfall operates by setting out a sliding scale of remedial options ranging from:
- Assessment of affordability and determination that the borrower’s debts are affordable leading to a requirement for full repayment of all loans.
- Short term moratoriums or reduced repayment arrangements where the affordability shortfall is anticipated to exist for six months or less.
- Overdraft or credit card (“Demand Credit Debt) repayments to be extended to 5 year terms and a standardised interest rate of 9%.
- Extension of unsecured debt term up to 5 years and combination of Demand Credit Debt to a 5 year term and standardised interest rate of 9%, extension of unsecured debt AND Demand Credit Debt up to a 5 year term AND extension of mortgage debt to a maximum maturity of 65 years of age (full principle repayment expected in this scenario).
- Extension of unsecured debt and Demand Credit Debt up to a 5 year term and a standardised interest rate of 4.5% AND mortgage debt extended to a maximum maturity of 65 years of age AND unsecured debt interest rate reduced to 4.5% (full principle repayment expected in this scenario).
- Unsecured debt and Demand Credit Debt extended up to a 5 year term at a standardised interest rate of 4.5%, an extension of mortgage debt term to a maximum maturity of 65 years of age AND unsecured debt interest rate reduced to 4.5% AND mortgage debt interest rate reduced to 4.5% or tracker rate (if applicable) for a period of 5 years (full principle repayment expected in this scenario).
- Significant mortgage restructure including split mortgage, negative equity trade down and other solutions.
- PIA bankruptcy or repossession.
Mortgage restructure is deemed to be the last resort before personal insolvency bankruptcy or repossession and after all other modifications or options have been exhausted.
The operation of the pilot framework will be familiar to Banks given the similarities to the framework involved in the Code of Conduct on Mortgage Arrears. Subject to confirmation of the lenders participating the framework, it is likely that although termed a pilot approach and subject to review by the Central Bank after a period of 3 months in operation, the framework is likely to provide a reference point for borrowers and lending institutions in terms of dealing with borrowers with secured and unsecured debt alongside the Code of Conduct on Mortgage Arrears.