Ireland: Government Proposes Additional Measures To Address Mortgage Arrears

On 13 May 2015, the Government announced a series of measures intended to further assist those in mortgage arrears, most notably by giving the Courts the ability to overturn a secured creditor's decision to reject a borrower's proposal for a Personal Insolvency Arrangement (PIA). Legislation to give effect to this change is expected to be passed before the Oireachtas Summer recess.

This Briefing sets out the background to the announcement, summarises the measures proposed and discusses the potential implications.

BACKGROUND

The Personal Insolvency Act 2012 (the 2012 Act) was signed into law on 26 December 2012 (see our previous briefing here). It reformed the Bankruptcy Act 1988 (the Bankruptcy Act), and introduced three forms of non-judicial debt settlement arrangement (the PIA, the Debt Settlement Arrangement (DSA) and the Debt Relief Notice (DRN)). The Insolvency Service of Ireland (the ISI) was formed under the 2012 Act and opened for business on 9 September 2013. In its ISI Statistics Quarter 1 2015, it confirmed the following for the period from the start of Q4 2013 to the end of Q1 2015:

In summary, approximately 27% of PIA applications have led to a PIA being approved, with the figure increasing to approximately 36% for DSAs and approximately 84% for DRNs.

In parallel with the introduction of the PIA, DSA and DRN solutions under the 2012 Act and the establishment of the ISI, various other measures were taken with a view to assisting those in mortgage arrears. These included:

• introducing Mortgage Arrears Resolution Targets (the Targets) for the main banks in respect of primary residences (PDHs) and buy-to-let (BTL) properties, with those banks being set common public targets and institution-specific targets regarding the offering of sustainable solutions to distressed borrowers (see our briefing on the Targets here);
• revising the Central Bank's Code of Conduct on Mortgage Arrears (the CCMA) to strengthen the mortgage arrears resolution framework available to consumers (see our briefing on the revised CCMA here);
• amending the Bankruptcy Act to reduce the bankruptcy period from 12 years to 3 years;
• introducing a Mortgage-to-Rent Scheme (details here) under which a distressed borrower can voluntarily surrender ownership of his/her home to his/her lender, with the home then being purchased from the lender by a housing association which then lets the house back to the borrower;
• the suspension by the ISI of application fees for PIAs, DSAs and DRNs from October 2014 until the end of 2015; and
• setting up dedicated websites (www.backontrack.ie– set up by the ISI, and www.keepingyourhome.ie).

WHY ARE FURTHER MEASURES BEING PROPOSED NOW?

Continued high levels of mortgage arrears

The most recent statistics issued by the Department of Finance (for March 2015, covering the six lenders that are subject to the Targets) showed that:

• 12% of PDH mortgage accounts were in arrears (3% being < 90 days in arrears and 9% being > 90 days in arrears); and
• 23% of BTL mortgage accounts were in arrears (4% being < 90 days in arrears and 19% being > 90 days in arrears).

The most recent statistics issued by the Central Bank (for Q4 2015) showed that:

• 110,366 PDH mortgage accounts were in arrears with 10.4% of all PDH mortgage accounts in > 90 days arrears; and
• 35,583 BTL mortgage accounts were in arrears with 20.7% of all BTL mortgage accounts in > 90 days arrears.

Concerns regarding banks' ability to 'veto' PIAs

The 2012 Act provided that a majority of creditors representing >65% in value of the total debt (secured and unsecured) attending and voting at the creditors' meeting must vote in favour of a PIA for it to take effect (and at least 50% in value of attending and voting secured creditors, and at least 50% in value of attending and voting unsecured creditors, must also vote in favour).

This gave rise to concerns that these provisions afforded secured creditors an effective veto over a PIA proposal as individuals with secured debt tend to concentrate their borrowings within one institution. As indicated above, almost three-quarters of PIA applications do not result in a PIA arrangement being approved, and speculation had increased among the media and bodies representing distressed borrowers that the perceived 'veto' was to blame.

WHAT IS BEING PROPOSED?

The following are the key proposals announced on 13 May 2015:

• where a PIA is rejected by one or more banks, the decision to reject will be capable of being reviewed by the Courts and, if appropriate, a Court may overturn the rejection and approve the PIA. The Government has indicated that it will pass legislation to facilitate this before the Summer recess;
• to further promote the reform introduced by the Land and Conveyancing Law Reform Act 2013 whereby a repossession case can be adjourned to give the borrower an opportunity to engage with a Personal Insolvency Practitioner, Court rules and procedures will be streamlined so as to help borrowers who are unfamiliar with the Court process and the provide clarity around the options available to them;
• the scope of the Mortgage-to-Rent Scheme will be increased (notably, the property value threshold will be raised and kept under review); and
• the role of MABS (the Money Advice and Budgeting Service) will be broadened to enable it to provide additional assistance to distressed borrowers.

IMPLICATIONS

The Minister for Justice and Equality has commented that these proposals are aimed at ensuring that the 2012 Act operates as was originally intended, by attempting to strike a better balance between distressed borrowers and their lenders, with the Minister for Finance commenting that the proposals are an attempt to "...remove what was known as the bank veto over insolvency arrangements".

It is expected that the Personal Insolvency (Amendment) Bill 2014, which was presented to the Dáil in October 2014 and is currently awaiting Report Stage, will be amended at Report Stage to give effect to the proposals around Court review of PIA rejections.

On one hand, the proposals may lead to increased levels of applications for PIAs and reduce the number of PIA proposals voted against by secured creditors if the possibility of a Court review is seen as an incentive to reach agreement. However, on the other hand, it remains to be seen whether the Courts will in fact take a different view to the vetoing secured creditor if asked to reconsider a rejected PIA and how the Courts will approach what is in effect a commercial rather than a legal decision (the criteria the Courts will use to make their determinations is not clear). It may be the case that the new process reveals that the low level of PIA approvals has largely been due to the secured creditors being asked to take a commercially unsustainable level of debt write-down.

Another issue that remains to be clarified is that of the costs involved in a debtor seeking a Court reconsideration of a rejected PIA proposal and who will meet these costs – if the Court upholds the rejection, will the debtor be required to pay additional costs, further weakening his/her financial position? If the Court decides that the PIA proposal should be approved, will the costs be dealt with as part of the PIA (possibly further reducing the amount that the secured creditor will receive) or will the secured creditor be separately liable for these?

All in all, the resolution as quickly as possible of the mortgage arrears issue in Ireland is in the interests of both borrowers and banks. It is likely that the proposals will facilitate earlier resolution of more mortgages but, in our view, there is still plenty of protection for banks against wholesale write-downs.

Enormous progress has been made (the recent Central Bank statistics indicate that 114,674 PDH mortgage accounts had been restructured by the end of 2014). The remaining un-restructured mortgages were always likely to be the most problematic to resolve.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.