Ability to resolve long-term arrears essential to tackling Ireland’s NPLs

Sharon Donnelly, Deputy Governor, of Ireland’s Central Bank has highlighted the progress made to date in tackling non-performing loans (NPLs) in Ireland, though notes the significant complexity in dealing with the outstanding arrears cases. This comes in a signed article co-authored with Trevor Fitzpatrick, Darren Greaney, Fergal McCann and Mícheál O’Keeffe and published as part of the Central Bank of Ireland’s forthcoming Quarterly Bulletin II 2018.

Research published today documents how NPLs arose following the Irish financial crisis and how they are still adversely affecting banks and the economy, and remain a cause of distress to many borrowers. The article outlines the policies and procedures which have been implemented by the Central Bank to ensure a deliberate and determined reduction in NPLs while ensuring borrowers are protected.

The research shows that of the total Primary Dwelling House (PDH) accounts that have been restructured, 87% are meeting the terms of the restructuring arrangement, showing the willingness and ability of both borrowers and lenders to address mortgage arrears. However:

• Within the regulated banking sector, the average days past due (DPD) and arrears balances of loans in long-term arrears (720+ days) are increasing
• 44% of loans in long-term arrears (720+ days) are more than five years past due date as of June 2017, increasing from 34% one year previously
• As of end 2016, 61% of borrowers in long-term arrears (720+ days) had engaged with their lender, meaning that 39% had not engaged and had no sustainable solution in place

Deputy Governor Donnery said: “Durable restructures have been the prominent method for NPL mortgage resolution in Ireland. However, whilst the amount of late-stage arrears cases is decreasing, a significant number of cases remain and appear to be getting worse. The financial crisis brought great hardship to many people, but the engagement of borrowers is essential for this issue to be effectively tackled.”

The article, titled ‘Resolving Non-Performing Loans in Ireland: 2010-2018’ offers a summary of how both the Central Bank and lenders sought to address NPLs. Concerns around the quality and timeliness of the response from banks led to the increasingly intrusive nature of supervision adopted by the Central Bank.

The article also sets out the revisions made to the Code of Conduct on Mortgage Arrears by the Central Bank in 2013 and the protections offered to consumers under the Credit Servicing Act, including:

• the provision that borrowers must be notified in advance of being treated as not co-operating and how they can avoid it
• a restriction on legal proceedings meaning they can only commence after three months from the issuance of written communication or eight months from the date the arrears arose, whichever date is later
• borrowers whose loans are sold to unregulated third parties are afforded the same regulatory protections they had prior to the sale, with loan owners obliged by law to engage a ‘credit serving firm’ authorised and regulated by the Central Bank.

The approach of the Central Bank has been to put the greatest focus on restructuring loans in the mortgage market, with almost 120,000 restructured PDH mortgages as of Q3 2017. Since Q3 2009, 8,195 PDH properties resulted in loss of ownership with 2,722 resulting in repossession from a court order and 5,473 properties surrendered voluntarily.

Deputy Governor Donnery concluded: “Experience has taught us that there is no single measure that will resolve NPLs. NPLs remain one of the primary sources of vulnerability in our economy today and resolving them is in all our interests. They inhibit a bank’s ability to fulfil its primary function of lending to the economy. Ultimately, they push up costs for the banks and result in higher rates of borrowing for prospective home-buyers or businesses seeking to expand.”