New Framework a poser for credit unions

While much attention has been focused on the new insolvency regime and the plight of those who find themselves in a position to desperately avail of its relief measures, there remain a substantial number of individuals and families whose situation is comparable but for whom the new measures have no relevance.

These are the people who, while not technically insolvent (they have assets whose values are in excess of their liabilities) they are however unable to pay their debts. Effectively, their only route out of their predicament is to sell the family home and realise whatever equity there may be. Unfortunately, in that event, these people are highly unlikely ever to find another mortgage lender to service their needs. For many, the difficulty of their situation is compounded by being multi-banked with substantial unsecured loans.

But help may be at hand. In early May, and without any warning, the Central Bank published its Framework for a Pilot Approach to the Co-ordinated Resolution of Multiple Debts owed by a Distressed Borrower. The document describes a pilot scheme by which borrowers with multiple distressed debts “can reach fair and equitable solutions with multiple lenders.” The aim of the pilot is to “enhance co-operation between lenders of secured and unsecured debt in order to fairly resolve distressed debt for the borrower.”

While the personal insolvency schemes are likely to be a wrestle between secured and unsecured debtors (where secured wins every time leaving little or nothing for unsecured), the Central Bank pilot is different. Under the pilot it will be “necessary for lenders to co-operate to provide appropriate solutions for such cases”.

The Central Bank envisages that many other cases will be resolved by mutual effort among lenders and the borrower before the “difficult” insolvency stage is reached.

Dame Street is hopeful that an agreed framework will evolve that will “reduce costs and time for the lenders to reach agreement with borrowers and will facilitate burden sharing arrangements that work sensibly for both secured and unsecured lenders as well as for the individual borrower without the need to proceed to a full debt settlement arrangement, personal insolvency arrangement or bankruptcy.”

The incentive for individuals to partake of such a scheme as outlined by the Central Bank is substantial: for one thing it means that the potential avoidance of adverse publicity from court judgments and brings to an end unwelcome communications from unhappy creditors. It is also attractive to those individuals who prefer to keep their names off the insolvency register.

But the scheme will not be for everyone. Debt situations involving Buy to Let Properties (‘BTL’) are outside the scope of the
Framework. The same applies to debt situations involving business related debts or where the borrower is deemed to be ‘non-cooperating’, as defined in the Code of Conduct for Mortgage Arrears.

It is also acknowledged that Framework may not provide solutions for all borrowers due to the extent of indebtedness relative to available income. Meanwhile, like the formal insolvency schemes: debtors are expected to experience appropriate pain: prospects for the Framework will only be admitted “after taking reasonable steps to maximise income and curtail expenditure” and these guidelines will be established by the participating lenders.

Now that there has been some time to digest the legislation it has become apparent that the types of arrangement that are likely to materialize from the new insolvency regime will in many cases be fiendishly complex, particularly Personal Insolvency Arrangements (PIA) that encompass both secured and unsecured debt.

The Framework has an advantage over PIA schemes in that it does precisely what it describes – it provides a rigid framework rather than leaving open a multitude of outcomes depending on the position and negotiating power of various parties to the PIA scheme.

The Framework decision “waterfall” is admirably clear and sets out a range of progressively more generous concessions based on the borrower’s ability (or lack of ability) to repay. This ranges from temporary mortgage payment reduction to extension of unsecured credit terms and reduction of interest rates all the way to “significant mortgage restructure”.

But while the Framework may prove popular with debtors, not all creditors will be so enamoured, specifically the credit unions that see it as another stitch-up to protect the capital positions of the mortgage-heavy pillar banks at the expense of unsecured creditors.

In fact, the credit union sector has refused to participate in the Framework – something that earned the criticism of newly-appointed Registrar of Credit Unions when she addressed the CUMA Seminar ‘The New Debt, Investment and Payments Environment’ earlier this week.

“I have heard many different views about [the Framework] in the last few weeks and I ask you to consider how your members can solve their indebtedness problems without some form of co-ordination among their creditors, essentially, what is the alternative?” said Ms Donnery. “And for the wider credit union sector, what is best way to ensure that you can influence the outcomes?”

For credit unions the Framework is another manifestation of a growing sense of powerlessness in the face of an array of adverse developments that threaten the sector. We’ll be returning to this subject in detail in the next bulletin.