The Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 (the "Act") was enacted on 8th July 2015. The Act is designed to provide regulatory protection to consumers where their loans have been sold to an unregulated entity. This protection is afforded through the creation of a new type of regulated entity called a 'credit servicing firm'. Owners of affected loans and the parties that service such loans will need to carefully assess the implications of the Act for their business.
Over the last two years there has been significant media coverage and public debate about Irish consumers losing certain regulatory protections where their loans have been sold to an unregulated entity. While many unregulated purchasers voluntarily agreed to apply the Central Bank of Ireland's (the "CBI") Code of Conduct on Mortgage Arrears, the Consumer Protection Code and the Code of Conduct for Business Lending to Small and Medium Enterprises (the "Codes") when managing their loan books, voluntary compliance is not enforceable by the CBI. In addition, access to the Financial Services Ombudsman (the "FSO") is not currently possible in respect of complaints against a new lender which is not regulated by the CBI.
After a public consultation by the Department of Finance, the Consumer Protection (Regulation of Credit Servicing Firms) Bill 2015 (the "Bill") was published in January to address these issues. The Bill sought to regulate the day-to-day servicing of the loans and the entities who engage in borrower-facing activities rather than the actual owner of the loans which can often be a tax efficient special purpose vehicle or fund.
Q: What has changed?
In short, the Act requires firms that service certain types of consumer or SME loans to be authorised and regulated by the CBI. In addition, any loan purchaser who does not outsource the servicing of such loans to a regulated servicer will be required to be directly regulated by the CBI.
Q: What type of loans fall within scope of the Act?
The Act provides protection to a consumer whose loan is being serviced by a 'credit servicing firm' provided the consumer falls within the category of 'relevant borrower'. A "relevant borrower" is defined as:
(a) a natural person within Ireland (unless that person is a regulated financial service provider or it is, or it satisfies the criteria to elect to be treated as, a professional client for the purpose of the MiFID Regulations); or
(b) a micro, small or medium sized enterprise1 but only to the extent that the credit granted to it under the credit agreement concerned was provided by a financial service provider authorised by the CBI (or an authority that performs functions in an EEA country that are comparable to the functions performed by the CBI) to provide credit in Ireland. Accordingly, fresh new credit/loan origination by an unregulated lender is not caught by the Act, and, in such circumstances, the unregulated lender will not have to appoint a regulated credit servicing firm.
It is worth noting that although the scope of the Act is restricted to loans to individuals within Ireland, it appears that the Act has been enacted with no such geographical restriction in respect of loans to micro, small or medium sized enterprises. This could result in the unusual scenario where, for example, an unregulated purchaser of a loan to a Spanish company would have to comply with the Act where the loan was originally provided by an Irish credit institution. This would result in additional compliance cost for non-Irish loan portfolios.
Q: Who must comply with the Act?
The Act applies to a new type of regulated entity known as a 'credit servicing firm'. The Act defines a "credit servicing firm" as:
- A person (other than NAMA or a NAMA group entity) who:
(a) undertakes credit servicing other than on behalf of a regulated financial service provider authorised by the CBI (or an authority that performs functions in an EEA country that are comparable to the functions performed by the CBI) to provide credit in Ireland; or
(b) holds the legal title to credit granted under a credit agreement in respect of which credit servicing is not being undertaken by a person authorized to carry on the business of a credit servicing firm.
- A regulated financial service provider taken to be authorised to carry on the business of a credit servicing firm because it is authorised, whether before or after the coming into operation of the Act, by the CBI (or an authority that performs functions in an EEA country that are comparable to the functions performed by the CBI) to provide credit in Ireland.
Q: How is 'credit servicing' defined in the Act?
The definition of "credit servicing" in the Act is quite broad and includes typical day to day loan servicing activities such as:
- notifying the borrower of changes in terms and conditions;
- taking steps for the purposes of collecting or recovering payments due; or
- managing or administering repayments, charges, errors, complaints, underwriting, restructuring, borrower communications and information or records relating to the borrower.
The Act contains a carve-out for the following functions typically retained by a lender/loan purchaser with respect to a loan portfolio including:
- the determination of overall strategy for the management and administration of the loan portfolio;
- the maintenance of control over key decisions relating to such loan portfolio;
- taking steps for the purposes of enabling the undertaking of credit servicing by another person; and
- enforcing the relevant credit agreements.
The Act does contain a proviso that such carved-out actions must not be carried out in a manner which would equate to a breach of applicable financial services legislation if undertaken by a regulated financial services provider. This appears to purportedly impose an obligation on unregulated lenders/loan purchasers to respect the Codes when dealing with borrowers.
Q: How will the Act impact on relevant borrowers?
Regardless of the identity of the owner of their loans, relevant borrowers will continue to enjoy regulatory protection under the Codes and have access to the FSO complaints procedure. The CBI will be able to supervise the credit servicing firm and take enforcement action where instances of non-compliance are detected.
Q: How will the Act impact unregulated purchasers of Irish loan portfolios?
Purchasers of an Irish consumer or SME loan portfolio, including Irish Section 110 SPVs, will need to analyse their loan portfolios to determine which of the loans (if any) will fall within scope of the Act. Having done so, the purchaser may need to appoint a regulated servicer to service the relevant loans. A purchaser that appoints a regulated servicer will need to exercise caution when instructing the regulated servicer as it is a criminal offence to instruct the regulated servicer to take or fail to take an action that would breach applicable financial services legislation. The purchaser will also need to ensure that it does not inadvertently carry out any activities itself which constitute credit servicing as this could trigger a licensing requirement.
Purchasers of loans that are within scope of the Act that do not outsource the management or administration of their loan book to an authorised credit servicing firm will need to seek authorisation as a credit servicing firm themselves.
Q: How will the Act impact firms that engage in the activity of loan servicing?
A firm will need to apply to the CBI for authorisation in the event that:
(a) it is not currently a regulated financial service provider taken to be authorised to carry on the business of a credit servicing firm because it is authorised by the CBI (or an equivalent regulator in the EEA) to provide credit in Ireland; and
(b) it intends to service loans on behalf of unregulated entities.
Q: What are the authorisation requirements for credit servicing firms?
The CBI has issued a consultation paper on the authorisation requirements and standards for credit servicing firms. The consultation will run until 30 September 2015, following which, the finalised version of the authorisation requirements and standards will be published. In the interim, all firms applying for authorisation will be required to submit a completed Stage 1 application form and individual questionnaires in respect of each person proposed to hold a Pre- Approved Controlled Function ("Stage 1 application"). When the authorisation requirement and standards have been finalised, all firms that have submitted a Stage 1 application will be contacted by the CBI regarding submission of a more detailed supplemental application form ("Stage 2 application").
Firms that wish to avail of interim authorisation (i.e. firms that have been engaged in credit servicing prior to the Act coming into operation) will, as part of the Stage 1 application, have to confirm that they have carried out an assessment of all applicable regulatory requirements and that they are in a position to comply with these requirements going forward. This may involve making changes to systems, policies, procedures, documentation and providing staff training. Such firms will be taken to be authorised to carry on credit servicing business until the CBI has granted or refused authorisation, provided that an application for authorisation is made within 3 months of the Act coming into operation i.e. by 8 October 2015.
Once authorised, credit servicing firms will obviously be subject to ongoing supervision by the CBI.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.