Credit Servicing Act – New Regulatory Regime For Owners And Servicers Of Irish …

New legislation enacted in Ireland (Credit Servicing Act)
will have implications for persons carrying on loan servicing
activities in Ireland and both owners and purchasers of Irish
debt.

Background

In recent times, a political issue surfaced in Ireland
surrounding the sale of loan portfolios by a number of Irish
banking entities. These portfolios were often acquired from
regulated banks by newly-formed Irish special purpose companies.
The Irish Government announced that it intended to introduce new
laws to ensure that borrowers whose loans are sold by a
regulated entity to a currently unregulated entity maintain the
same regulatory protections as they had prior to the sale.
Following a long consultation process, the Consumer Protection
(Regulation of Credit Servicing Firms) Act 2015 (the
Act) was enacted on 8 July 2015.

The Act, in general, requires the servicer (or in the absence of
a servicer, the owner) of such loans to become authorised as a
credit servicing firm.Credit servicing firms will now,
as a result, be subject to supervision and enforcement by the
Central Bank of Ireland (the CBI).

The Act permits customers of credit servicing firms (ie the
underlying borrowers) to complain to the Irish Financial Services
Ombudsman about the conduct of the firm and will provide such
customers with protection under the Central Bank#39;s Code of
Conduct on Mortgage Arrears, the Code of Conduct for Business
Lending to Small and Medium Enterprises and the Consumer Protection
Code (the Codes).

Practical impact

The immediate impact of the new Act is that special purpose
vehicles (SPVs) that have acquired
Irish consumer loan portfolios will need to ensure that the
existing servicer appointed to service the portfolio applies to the
Irish Central Bank to become authorised as a credit servicing firm
before 8 October 2015. If the existing servicer fails to apply or,
having applied, fails to achieve authorisation then the SPV itself
would in theory be required to seek authorisation as a credit
servicing firm. Bearing in mind that an SPV is unlikely to achieve
such authorisation, the likely practical solution in such
circumstances will be that a separate authorised credit servicing
firm will need to be appointed by the SPV to service the
portfolio.

SPVs that have acquired Irish consumer loan portfolios will also
need to check the terms of their contractual arrangements in order
to ensure that the tasks being undertaken by parties other than the
servicer (such as the SPV itself or any master servicer or other
parties involved in the transaction) do not amount to credit
servicing. If credit servicing is being undertaken by any
parties other than the servicer, then they too will need to seek
authorisation as a credit servicing firm or will need to amend the
terms of the contractual arrangements in order to clarify the
position.

What is a credit servicing firm?

As mentioned above, the Act introduces a new concept of credit
servicing firm. A credit servicing firm is required to apply for
authorisation under the Act. A credit servicing firm means a person
who:

  1. undertakes credit servicing for an
    unregulated entity; that is to say an entity that is not 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, for example an
    Equivalent Authority, to provide credit in Ireland,
    or
  2. 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.

The definition of credit servicing firm also includes a
regulated financial service provider authorised by the CBI or an
equivalent authority to provide credit in Ireland (a
Regulated Provider).

All existing and new Regulated Providers will, automatically, be
taken to be authorised to carry on the business of a credit
servicing firm.

A number of things about the concept of credit servicing firm
are notable:

  1. Owners of loans who appoint servicers
    that are Regulated Providers will not be required to become
    authorised as credit servicing firms. This exclusion would not
    extend to servicers that are authorised to undertake activities
    other than providing credit in Ireland (such as regulated mortgage
    administrators in the UK).
  2. Servicers who only provide credit
    servicing to Irish banks, non-Irish banks that have passported into
    Ireland to provide credit in Ireland, or Irish retail credit firms
    will not need to seek authorisation as a credit servicing
    firm.
  3. All Regulated Providers (which
    includes all Irish banks and all foreign banks that have passported
    into Ireland to provide credit in Ireland) will be required to
    comply with any new rules (yet to be finalised) to be imposed upon
    credit servicing firms. This appears to be the case even where
    these Regulated Providers do not in fact carry on any credit
    servicing. This is an odd result and is discussed, along with some
    other peculiarities of the Act, below.

In general, Irish SPVs that have purchased or will purchase
Irish loan portfolios where the loans were originally advanced to
Irish individuals or small and medium enterprises
(SMEs), as defined below, will need to
appoint an authorised credit servicing firm to manage such
portfolios to comply with the requirements of the Act.

What is credit servicing?

Credit servicing is defined as managing or administering a
credit agreement, including:

  1. 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;
  2. taking any necessary steps for the
    purposes of collecting or recovering payments due under the credit
    agreement from the relevant borrower;
  3. managing or administering any of the
    following:

    1. repayments under the credit
      agreement;
    2. any charges imposed on the relevant
      borrower under the credit agreement;
    3. any errors made in relation to the
      credit agreement;
    4. any complaints made by the relevant
      borrower;
    5. information or records relating to
      the relevant borrower in respect of the credit agreement;
    6. the process by which a relevant
      borrower#39;s financial difficulties are addressed;
    7. any alternative arrangements for
      repayment or other restructuring;
    8. assessment of the relevant
      borrower#39;s financial circumstances and ability to repay under
      the credit agreement;

    or

  4. communicating with the relevant
    borrower in respect of any of the matters referred to in paragraphs
    (a) to (c).

What is not credit servicing?

The Act clarifies that credit servicing does not include:

  1. the determination of the overall
    strategy for the management and administration of a portfolio of
    credit agreements;
  2. the maintenance of control over key
    decisions relating to such portfolio; or
  3. taking such steps as may be necessary
    for the purposes of:

    1. enabling the undertaking of credit
      servicing by another person, or
    2. enforcing a credit agreement,

whether any action referred to in paragraphs (x) to (z) is taken
by a person who holds the legal title to credit in respect of a
portfolio of credit agreements (the
holder) or a person acting on behalf
of the holder, provided that such action (whether taken by the
holder or such person) is not taken in a manner that, if it were so
taken by a regulated financial service provider, it would be a
breach of certain provisions of financial services legislation or
codes of conduct.

These exclusions from the definition of credit servicing should
be generally helpful for SPV owners of loans, master servicers of
loans and trustees in securitisation deals.

What is a credit agreement?

A credit agreement is an agreement whereby a person grants, or
promises to grant, credit (being a cash loan) to a relevant
borrower.

What is a relevant borrower?

A relevant borrower is:

  1. any individual person (excluding
    professional clients under Markets in Financial Instruments
    Directive (MiFID) and persons who are
    regulated service providers) situated in Ireland; or
  2. any SME (ie an entity that employs
    fewer than 250 persons and has an annual turnover of not more than
    €50 million and/or an annual balance sheet total of not more
    than €43 million).

The definition of SME is derived from EU Commission
Recommendation 2003/361/EC of 6 May 2003 and is very broad and
includes companies, partnerships and sole traders. The definition
of SME is not (on the face of the Act) restricted to SMEs located
in Ireland, but it is assumed that it is intended only to apply to
SMEs located in Ireland. The definition of relevant borrower only
applies, so far as an SME is concerned, where the credit advanced
to the SME was originally advanced by a Regulated Provider.

Authorisation process and requirements for credit servicing
firms

The Act provides for a three month transitional period for
persons deemed by the Act to be existing credit servicing firms to
seek authorisation. Such persons will be deemed to be authorised to
carry on the business of a credit servicing firm until the CBI has
granted or refused authorisation, provided that such person has
applied for authorisation before 8 October 2015.

Where a person is deemed to be authorised, it must comply with
the Codes, the Minimum Competency Code, Part V of the Central Bank
Act 1997 and the Fitness and Probity Regime and must take steps to
update its IT systems, all documentation, policies and procedures
to comply with these codes and regimes and must train their staff
appropriately.

Each credit servicing firm is required to apply to the CBI for
authorisation to carry on such credit servicing business. The
application must contain such information as the CBI has published
in their Stage 1 Application for Authorisation as a credit
servicing firm (available at www.centralbank.ie). If the CBI wishes to
refuse an application, it must specify in writing the grounds on
which it proposes to do so.

In granting an application for authorisation, the CBI may impose
certain conditions on the authorised credit servicing firm. The CBI
has published Consultation Paper 96 entitled Consultation on
the Authorisation Requirements and Standards for Credit Servicing
Firms and Consequential Amendments to Statutory Codes dated
July 2015 (available at www.centralbank.ie). Interested parties can
provide comments on this Consultation Paper prior to 30 September
2015.

What is the potential impact of non-compliance?

A person who acts as a credit servicer without authorisation
will commit a criminal offence carrying a maximum penalty of
€100,000. Subject to certain defences, individual officers in
a firm, which has committed an offence under the Central Bank Act
1997, can be subject to personal liability carrying maximum
penalties of a fine of €50,000 or imprisonment for up to 12
months, or both.

When a firm becomes a regulated credit servicer it becomes
subject to the CBI#39;s supervision regime which allows the CBI to
impose a range of administrative sanctions including a monetary
penalty of €10 million or up to 10% of the turnover of the
credit servicer. Subject to certain defences, individuals concerned
in the management of the firm can become subject to a personal fine
of up to €1 million and/or a prohibition on being concerned in
the management of a regulated firm in Ireland permanently or for a
specified period of time.

There is also a specific offence created by the Act that applies
where a holder of legal title to credit (such as an SPV) instructs
a credit servicing firm to take or fail to take an action which
would be a contravention of certain existing laws. This offence can
give rise to a fine of up to €250,000 or imprisonment for up
to five years, or both.

Examples of situations affected by the Act

Where a loan made to a relevant borrower was originated by a
Regulated Provider and has been acquired by a person who has not
appointed a servicer to service the portfolio, then that person is
now required to apply for authorisation under the Act (unless that
person is already a Regulated Provider).

Where a loan made to a relevant borrower was originated by a
Regulated Provider and has been acquired by a person who has
appointed a servicer to service the portfolio, then that person
will need to ensure that the servicer seeks authorisation under the
Act prior to 8 October 2015 (unless the servicer is already a
Regulated Provider). If the servicer does not seek authorisation
(or fails to become authorised by the CBI in due course), then the
person who acquired the loan will need to seek authorisation
itself, or else replace the servicer with an authorised credit
servicing firm.

Where a loan made to a relevant borrower was originated by a
Regulated Provider and has been acquired by a person who has
appointed a servicer to service the portfolio, it is sometimes the
case that the servicer may delegate some of the activities outlined
in the definition of credit servicing to a third party (such as
collection or recovery services). In such cases, the person and the
servicer should ensure that the third party seeks authorisation
(unless the third party is already a Regulated Provider).

In some cases, loans made to a relevant borrower which were
originated by a Regulated Provider have been acquired by an SPV
that has separately appointed both a servicer and a master servicer
(where the master servicer oversees the servicing arrangements). In
such cases, it is likely that the servicer will always need to seek
authorisation under the Act. However, it is also possible that the
master servicer may need to seek authorisation if it provides any
services that are not excluded from the definition of credit
services as set out above.

Where any loan made to a relevant borrower was originated by a
Regulated Provider and has been included in a securitisation or CLO
structure, in addition to the requirement for the servicer or
manager to seek authorisation, any back-up servicer should also
seek (or be required to seek) authorisation. Further, where any
special servicer is appointed, the special servicer will need to
seek authorisation.

Some unexpected concerns

As mentioned above, the Act presents some unexpected
concerns.

It appears that all Regulated Providers (which includes all
Irish banks and all foreign banks that have passported into Ireland
to provide credit in Ireland) will be required to comply with any
new rules (yet to be finalised) to be imposed upon credit servicing
firms. We await the publication of the relevant rules by the CBI
following the end of the consultation period (ie 30 September
2015). It is hoped that the CBI might in due course clarify that
these rules will only apply where the Regulated Provider is
actually involved in credit servicing, although we note that the
Act does not contain such a limitation.

It also appears as if all Regulated Providers (which includes
all Irish banks and all foreign banks that have passported into
Ireland to provide credit in Ireland) that have advanced loans to
Irish individuals or SMEs in the past may need to be aware that the
transfer of such loans may be more complicated than in the past.
Where such loans are transferred to another Regulated Provider then
no particular issues should arise under the Act. However, where
such loans are transferred to an unregulated entity (such as an SPV
or a special situations fund) then the transferee may need to
appoint a credit servicing firm to administer the loans. Due to the
broad definition of SME, this could include any loans originally
granted to an Irish individual, an Irish SPV, an Irish fund or any
other Irish entity. Buyers of loans should raise this issue as part
of their due diligence. This is likely to become a discussion point
upon the future transfer of Irish loans.

Finally, the definition of credit servicing is quite broad
– possibly broader than necessary. Persons carrying on
activities that involve (or might in the future involve) some
element of credit servicing will need to review the nature of their
services in order to ensure that they are not captured by the
requirement to seek authorisation under the Act. For example, any
person who communicates with a relevant borrower may need to review
their arrangements – this could include facility agents,
special servicers, master servicers and back-up servicers.

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.

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