Regulatory expectations on the treatment of customers availing of COVID-19 payment breaks
The Central Bank has stated that it is prioritising its work on distressed debt and is intrusively engaging with lenders to ensure that regulatory expectations are being met. Deputy Governor Ed Sibley made the announcement at a virtual event hosted by the University of Limerick on 28 September 2020.
Over 220,000 loans were subject to payment breaks in June 2020, 80% of which related to loans that were performing prior to the pandemic. While many borrowers are now returning to full repayments, there are many who will require further support.
The Central Bank has stressed its expectation that this support must be tailored to the individual to address their specific solvency and affordability issues and lenders must use their full suite of tools and forbearance options for borrowers that require support. The regulator will intensively supervise to ensure these expectations are being met.
These expectations relate to ensuring customers are treated fairly, that appropriate solutions for sustainable debt are being found, that lenders are proactively engaging with customers to determine individual needs, that lenders are exploring the full array of solutions and that lenders are not overly reliant on short term solutions. Specific support must also be given to Small and Medium Enterprises (SMEs) to assess long term effects on those customer's businesses.
What does this mean for lenders?
There is a pre-existing regulatory framework in place to deal with borrowers with distressed debt in the Code of Conduct on Mortgage Arrears, the Consumer Protection Code and SME Regulations.
Effective engagement between borrowers and lenders is vital in order to find an appropriate solution to distressed debt. The Central Bank has set its expectation that lenders should proactively engage with retail and SME borrowers to assess their repayment capability and determine if forbearance or other measures are required. It will be important for borrowers to be able to refer to and document the operation of this process for individual borrowers and to demonstrate an up to date assessment of customer income.
The Central Bank has emphasised that there are no regulatory impediments to lenders offering further payment breaks to borrowers provided they are appropriate for those individual borrowers. Accordingly, this option should be considered as part of the lender's suite of options for distressed borrowers. Nevertheless, it is important for lenders to be conscious that forbearance is not effective in dealing with permanent distress. The regulator has stated that excessive reliance on temporary forbearance is not in the borrower's long term interest and banks must demonstrate that the proposed solution is sustainable for the borrower.
Banks must reclassify loans appropriately and provision accordingly. However, the Central Bank indicated that effective engagement and individually tailored forbearance can in some cases mean that, following assessment, a loan can remain at viable performing status and avoid being classified as being in default.
Boards and senior management should ensure that these regulatory expectations are being factored in to operations. Reporting mechanisms should be in place to allow for the Board and senior managers to have oversight of the progress and effectiveness of the institution's approach to dealing with distressed debt.
The Central Bank has also signaled intensive engagement with lenders will continue to ensure that these expectations are being met.
We have tracked regulatory announcements since the onset of the pandemic, including those on non-performing loans and forbearance measures and had anticipated this additional guidance from regulators on the treatment of consumers with distressed debt. For more information please contact Dario Dagostino, Patrick Brandt and Kevin Allen Financial Regulation Partners or Sinéad Prunty Financial Regulation Knowledge Lawyer.
Date Published: 30 September 2020