Legal Issues in Irish Residential Mortgages

Transcription

1 1 arthur cox FINANCe Group Briefing September 2013 Legal Issues in Irish Residential Mortgages This document contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate. Numerous acts, regulations and practice directions govern the enforcement of residential mortgages which protect borrowers (Mortgagors) and oblige lenders (Mortgagees) to fulfil onerous obligations to enable them to enforce their security. We continue to advise clients who are interested in acquiring books of Irish residential mortgages, investing in Irish covered bonds or investing in Irish RMBS. This Briefing updates our previous November 2012 Briefing on the same topic, taking into account legal and regulatory developments since that date. It contains a summary of certain legal considerations relevant to potential purchasers together with a brief outline of legal issues regarding the servicing of Irish residential mortgages. Of particular concern to potential investors should be issues which impact on either the enforceability of the mortgages themselves or the enforcement timeline. ENFORCING RESIDENTIAL MORTGAGES Issues which Impact on Enforceability Repossessions/Start Mortgages v Gunn The cases of Start Mortgages Ltd & Ors v Gunn & Ors [2011] IEHC 275 and the subsequent decision in Tom Kavanagh and Fergus Lowe v Jeremiah Lynch and Saint Angela s Student Residences Limited [2011] IEHC 348 highlighted issues with the manner in which the Land and Conveyancing Law Reform Act 2009 repealed or amended provisions of the Conveyancing Act 1881 and the Registration of Title Act 1964, leading to uncertainty for Mortgagees who wished to exercise, as regards pre-1 December 2009 mortgages, their summary possession power, power of sale, power to appoint a receiver or power to overreach (i.e. to sell clear of subsequent interests such as judgment mortgages). On 24 July 2013, the Land and Conveyancing Law Reform Act 2013 was signed into law, and Section 1 of that Act, which came into force immediately, rectified these issues save in respect of pre-1 December 2009 mortgages where legal proceedings had started before 24 July In those cases, to benefit from the new Act, the proceedings would need to be withdrawn and re-commenced. As regards enforcement proceedings against the estates of deceased persons, the Act provides that so long as those proceedings are brought within 6 months of 24 July 2013, they will be deemed to have been commenced within the time-limits set out in the Civil Liability Act 1961.

2 2 arthur cox FINANCe European Communities (Unfair Terms in Consumer Contracts) Regulations 1995, 2000 and 2013 (the Unfair Terms Regulations) The Unfair Terms Regulations are particularly relevant in respect of the enforceability of residential mortgages and related loan documentation. An unfair term in a consumer contract is not binding on the consumer, however this should not affect core terms if they are drafted using plain intelligible language. In the case of a residential mortgage where the Mortgagor is a consumer, if the relevant loan or mortgage contract is capable of continuing in existence without the unfair term, that contract will continue to bind the parties. If any charges are found to be in violation of the Unfair Terms Regulations, the Mortgagee may be precluded from recovering those amounts, or they may be set-off against the total amount secured, which will damage the value of the Mortgagee s security. Potential purchasers of Irish residential mortgage books should inspect carefully the terms of the mortgage and loan documentation to ensure that there is no violation of the Unfair Terms Regulations. European Communities (Distance Marketing of Consumer Financial Services) Regulations 2004 (as amended) (the Distance Marketing Regulations) Residential mortgage and lending contracts entered into without the Mortgagee and Mortgagor being simultaneously present may be regarded as distance contracts and come within the scope of the Distance Marketing Regulations where the Mortgagor is a consumer. Under the Distance Marketing Regulations a distance contract may not be enforceable against a consumer if the supplier has failed to give certain information to a consumer before that consumer is bound by the contract. This information includes details of certain contractual terms and conditions and the total price to be paid by the consumer. If the Mortgagee did not provide such information to the Mortgagor, the Courts may find the relevant mortgage or loan contract unenforceable. However, a Court may decide that the contract is enforceable if it is satisfied that the breach was not deliberate and did not prejudice the Mortgagor, and that it would be just and equitable to dispense with the Mortgagee s obligation to provide that information. Potential purchasers should bear in mind that checking an Irish residential mortgage book for compliance with the Distance Marketing Regulations is essential. Protection of the Family Home A family home is defined in Irish law as a dwelling in which a married couple ordinarily resides. In Ireland, the family home is afforded special protection under both the Constitution and legislation, which renders enforcement of security over family homes more difficult for Mortgagees. Under the Family Home Protection Act 1976 (as amended, the 1976 Act) a spouse who does not own the family home must give prior written consent to any disposal of an interest in the family home, including by way of mortgage. If this consent is ineffective or has not been given, any transaction disposing of the family home could potentially be set aside at the instance of the non-owning spouse within certain time limits. The 1976 Act also provides that a Court may restrict enforcement of a mortgage or sale in certain circumstances. Pursuant to the Family Law (Divorce) Act 1996, if an individual is found by the Courts to have disposed of the family home with an intention to deny his/ her spouse a right to that family home, the transaction disposing of the asset can be set aside. A Mortgagee will only be protected if it is shown to have acted without intentionally seeking to deny a spouse his/her rights. Family home issues are normally dealt with by the Mortgagee obtaining a declaration that the relevant Irish property either is or is not a family home. Potential purchasers of Irish residential mortgage books should conduct their own diligence of the relevant loan files to confirm that these declarations have been provided, or obtain appropriate warranties from the seller that such declarations have been obtained and the relevant legislation has been complied with. Since the enactment of both the Personal Insolvency Act 2012 and the Land and Conveyancing Law Reform Act 2013, further protections are now available for the family home. Under the Land and Conveyancing Law Reform Act 2013, where a property is the principal private residence of a Mortgagor or his/her spouse/partner, and a Mortgagee brings repossession proceedings in respect of that property, a Court may adjourn those proceedings (of its own motion, or on application) for up to 2 months (which period can be further extended) to enable the Mortgagor to consult with a Personal Insolvency Practitioner if certain conditions are met. Under the Personal Insolvency Act 2012, a Mortgagor cannot be forced to leave his/her principal private residence as part of a Debt Settlement Arrangement or a Personal Insolvency Arrangement, unless he/she opts to do so or unless the relevant Personal Insolvency Practitioner forms the opinion that the costs of the Mortgagor continuing to reside there will be disproportionately large. Land and Conveyancing Law Reform Act 2009 This Act is particularly relevant when dealing with a mortgage entered into on or after 1 December It contains certain enforcement-provisions which are mandatory in respect of Irish residential mortgages (these provisions can be contracted out of by agreement of the Mortgagee and Mortgagor in the case of non-residential mortgages). One of these mandatory provisions is that the Mortgagee s enforcement rights provided for in the Act are only exercisable for the purposes of protecting the mortgaged property or for realising the Mortgagee s security. Further, Court orders must be obtained before the Mortgagee can take possession of, or sell, the residential property. These particular provisions apply only to mortgages entered into on or after 1 December It is also worth noting that foreclosure, which allowed for a Mortgagee to take a Mortgagor to Court to remove his/her equity of redemption (i.e. the Mortgagor s right to have the mortgaged property returned), was abolished by this Act.

3 3 arthur cox FINANCe Issues which Impact on the Timing of Enforcement Actions Revised Code of Conduct on Mortgage Arrears 2013 (CCMA) On 13 March 2013, the Central Bank published its Consultation Paper 63 regarding its proposed changes to the previous edition of the CCMA, and its Mortgage Arrears Resolution Targets. A copy of our March 2013 Briefing on the consultation and those targets is available here. The revised CCMA then came into force on 1 July Key changes introduced by the revised CCMA: clarified when borrowers are to be treated as not cooperating removed the cap on the number of monthly unsolicited communications» required lenders to draw up and implement a policy on communicating with distressed borrowers expanded the list of possible alternative repayment arrangements shortened the moratorium period on repossession proceedings A copy of our July 2013 Briefing on the revised CCMA is available here. Compliance with Central Bank Codes Impact on Enforcement A regulated Mortgagee which is subject to the revised CCMA may be obliged to swear an affidavit that it has complied with the CCMA and its own Mortgage Arrears Resolution Process (MARP). Notably, even in cases where no affidavit is sought, recent Court decisions have indicated that the question of whether or not a regulated Mortgagee has complied with the CCMA may affect a Court s decision as to whether or not to grant an order for possession. In Stepstone Mortgage Funding Limited v Fitzell & Anor [2012] IEHC 142 Laffoy J stated that she found it impossible to agree with the proposition that in proceedings for possession of a primary residence by a Mortgagee where the CCMA is relevant, the Mortgagee does not have to demonstrate compliance with the CCMA to the Court. In Irish Life & Permanent plc v Duff & Anor [2013] IEHC 43, Hogan J followed the decision in Stepstone v Fitzell on the basis that it was the most recent pronouncement of the High Court on the issue however, he noted his concerns that if non-compliance with the CCMA resulted in the courts declining to make orders for possession solely on that basis, the CCMA could be given a status that it did not otherwise legally merit. It is worth noting that, in the case of Friends First Finance Ltd v Cronin [2013] IEHC 59, Herbert J noted that a failure by a regulated entity to comply with the provisions of another Central Bank code, the Consumer Protection Code 2006, could not afford a defence to the defendant in that case. In light of these decisions, there is a risk that failure to adhere to the requirements of the CCMA could affect a Mortgagee s ability to obtain a repossession order in respect of residential mortgage security. In 2012, the Central Bank sought and obtained information from the leading Irish-regulated Mortgagees regarding the mortgage arrears resolution strategies (MARS) which it had asked those Mortgagees to develop, in particular as regards loan forbearance and modification techniques. The Central Bank has noted that, throughout 2013, it will continue to assess the appropriateness of these MARS, and provide feedback on required improvements, with the overriding objectives of developing and overseeing steps to help achieve a return to financial stability in mortgage loan portfolios, while treating customers fairly. New Personal Insolvency Legislation and Reform of Bankruptcy Legislation Under the EU/IMF Programme of Financial Support for Ireland, the Irish Government was required to reform the existing laws in relation to personal insolvency. The Personal Insolvency Act 2012 was signed into law on 26 December 2012 (our January 2013 Briefing on the Act is available here). The Act introduced three types of non-judicial debt settlement arrangement (Debt Relief Notices, Debt Settlement Arrangements and Personal Insolvency Arrangements), established the Insolvency Service of Ireland (ISI) (with effect from 1 March 2013) and (once its remaining provisions are commenced) will reduce the bankruptcy period from 12 years to 3 years. The ISI has recently begun to authorise Personal Insolvency Practitioners and Approved Intermediaries and began to accept applications from individuals seeking Debt Relief Notices, Personal Insolvency Arrangements or Debt Settlement Arrangements from 9 September The ISI has published a range of additional regulations governing procedural aspects of these new arrangements. We will shortly be issuing an updated Briefing on this topic. Consumer Protection Code (the CPC) The CPC (a revised version of which came into effect on 1 January 2012) sets out various conduct of business requirements that regulated entities (including regulated Mortgagees and purchasers of books of loans if they themselves are regulated) must adhere to. The general principles of the CPC (for example, ensuring that all customers are treated fairly) apply to all customers with other provisions being relevant to either consumers generally (being individuals (whether acting for business purposes or not) and certain small businesses) or personal consumers (being individuals acting for personal purposes). Compliance with the CPC is a legal obligation and failure to comply may result in the Central Bank invoking its Administrative Sanctions Procedure (but will not automatically invalidate a loan or mortgage contract, or render it unenforceable). Where a regulated entity is a Mortgagee which is also subject to the CCMA, in its dealings with particular Mortgagors the provisions of the CCMA will apply to that Mortgagee in lieu of certain provisions of the CPC. Court Enforcement Procedure Assuming that a Mortgagee has complied with its obligations under both the CCMA and (where the mortgage was entered into on or after 1 December 2009) the Land and Conveyancing Law Reform Act 2009, the relevant enforcement

4 4 arthur cox FINANCe procedures are as set out below. Where the mortgage was entered into prior to 1 December 2009, the contractual provisions of the mortgage must be very carefully considered, together with any procedural restrictions contained in the Conveyancing Act 1881 (if not disapplied). In the case of principal private residences, repossession proceedings must be issued in the Circuit Court (this was the case for housing loan mortgages entered into on or after 1 December 2009 under the Land and Conveyancing Law Reform Act 2009 and this requirement was extended to pre-1 December 2009 mortgages over principal private residences by the Land and Conveyancing Law Reform Act 2013). When initiating proceedings, a Circuit Court civil bill (grounded on affidavit) will be filed in the Court office and a return date will be assigned. Time between filing and the return date can vary, however it is generally 6 weeks. In the case of Circuit Court proceedings, if no appearance or prima facie defence is entered by the defaulting Mortgagor, the County Registrar can grant an order for possession or a well-charging order. If the Mortgagor enters a prima facie defence by replying affidavit, the County Registrar will send the matter forward to be heard by the Court. If the action is sent forward, significant delays and legal costs can be expected, in particular if discovery orders are granted and if the matter continues to a full plenary hearing. The County Registrar and the relevant Court itself each has discretion to award the costs involved in the enforcement proceedings to either party. Where the defaulting Mortgagor s defence has not been successful, a costs order can frequently be made against that Mortgagor. Where a Mortgagee seeks an order for possession under the Land and Conveyancing Law Reform Act 2009, the Court may adjourn the proceedings or stay the order if it appears to the Court that the Mortgagor is likely to be able to pay the arrears within a reasonable period of time. If a Mortgagee succeeds in obtaining an order for sale under the Land and Conveyancing Law Reform Act 2009, it is obliged (as far as reasonably practicable) to take steps to obtain the best price reasonably obtainable for the property. Other Relevant Issues Consumer Credit Act 1995 (as amended) (the CCA) and the Consumer Protection Act 2007 (the CPA) The CCA imposes extensive requirements as to form and content of loan documentation (including documentation relating to mortgage loans) where a Mortgagee is dealing with a consumer-mortgagor (i.e. a natural person acting outside his/her business, trade or profession). Failure to comply with the provisions of the CCA may constitute an offence. The section of the CCA which renders a loan agreement unenforceable for failure to comply with the CCA does not apply to a housing loan. The definition of a housing loan is quite complex, and covers loans secured on the Mortgagor s principal private residence and loans where the Mortgagor is a consumer and the loan is secured on a residential property (whether that it is his/her principal private residence or not). Notwithstanding the fact that noncompliance with the terms of the CCA should not, of itself, render a housing loan unenforceable, this does not mean that a Court would not hold the relevant agreement unenforceable were it to form the view that a consumer-mortgagor had suffered unfair prejudice both due to a failure to comply with the CCA and due to breaches of other legal and regulatory obligations. A potential purchaser of an Irish residential mortgage book should carefully inspect the terms of the loan documentation to ensure compliance with the CCA. The CPA should also be considered by potential purchasers as it imposes a duty on lending institutions to act fairly in commercial contracts (including mortgages) with consumers and prohibits misleading or aggressive practices. However, failure to comply with the CPA does not render the underlying contract unenforceable. Interpretation of Contractual Terms Under Irish law, when a contract contains an ambiguous term, the contract will usually be interpreted against the interests of the party who drafted it (known as the contra proferentem rule). As a mortgage will generally be drafted for or on behalf of the Mortgagee, any unclear term may be construed against the Mortgagee and affect its ability to enforce. Registration Registration of a mortgage is of particular importance as regards priority over other creditors. Until recently, the usual practice in Irish residential mortgage transactions was for the Mortgagor s solicitor to give an undertaking to the Mortgagee to register the mortgage following drawdown of the loan. Solicitors who fail to fulfil such undertaking within a 6 year period can be sanctioned by the Law Society of Ireland, and may also face actions for damages. It is now usual for Mortgagees to manage this registration process themselves. To date in Ireland, there have been significant delays in registration. Potential purchasers of Irish residential mortgage books should diligence the level of unregistered mortgages and outstanding undertakings relevant to the book and seek appropriate warranties from the seller. Guarantees A residential mortgage may frequently have been guaranteed by a third party. Where this is the case, and a Mortgagee wishes to pursue the guarantor, the Mortgagee must ensure that: the guarantee is stated to be irrevocable and unconditional none of the terms of the guarantee violate the Unfair Terms Regulations (see above) and if the guarantee is from a family member, the guarantor obtained independent legal advice (to counteract any potential arguments of undue influence having been exerted by the Mortgagor). Life Policies In residential mortgages, a life assurance policy is often provided as security. The CCA makes it mandatory for the Mortgagee to arrange for life assurance or mortgage protection cover guaranteeing repayment of the housing loan in the

5 5 arthur cox FINANCe event of the Mortgagor s death. There are certain exceptions, such as where such life cover is already in place. Code of Practice on the Transfer of Mortgages It is vital that due diligence is carried out to ensure that there are no restrictions on assignability. This is also important in the context of the Central Bank s Code of Practice on the Transfer of Mortgages (the Code of Practice) which provides that a Mortgagee must seek the Mortgagor s consent to the transfer of that Mortgagor s residential mortgage to a third party. Usually such consent is provided at the outset of the residential mortgage transaction and contained in the mortgage or loan document. However, the Code of Practice goes on to provide that the Mortgagee must seek a further consent from the Mortgagor to the transfer where, following the transfer, the Mortgagee will not control the setting of interest rates or the management of arrears. The Code of Practice applies to any loan secured by a mortgage of residential property and is not limited to private dwelling houses (i.e. it applies to loans secured by residential investment properties). Any transfer of an Irish residential mortgage book where the seller will no longer service the book may, as a result, oblige the seller to obtain the Mortgagors further consent. This could be a significant impediment to a sale process. There are a variety of arguments as to why the Code of Practice may not apply in the case of portfolio sale (i.e. as it is voluntary, any purchaser is likely to implement the same arrears management procedure as the seller and there are certain exemptions) but this issue needs early consideration in any proposed transaction. It is worth noting that in the recent case of Freeman & anor v Bank of Scotland (Ireland) Limited & ors [2013] IEHC 371, the plaintiffs alleged that the Bank had breached both the Code of Practice together with the Central Bank s Asset Securitisation Code. While Herbert J allowed the plaintiffs to proceed with this claim (striking out four of their other five claims), he made reference to the low threshold that the plaintiffs had to meet to avoid the claim being struck out, and did not make any decision as to the merits of the plaintiffs allegations. The Bank had brought the voluntary nature of those codes to the Court s attention as part of its submissions, and the Court also noted the uncertainty surrounding the status of other Central Bank codes (as mentioned earlier in this Briefing). We will issue a further update as this case proceeds. Retail Credit The requirement that providers of retail credit be authorised under the Central Bank Act 1997 should be considered if a purchaser proposes to either make further advances to borrowers in the future, or agree to extend repayment dates. While there is an exemption from the requirement to be authorised as a retail credit firm for purchasers of residential mortgages, this is generally viewed as being limited to SPV type purchasers for securitisation or financing purposes. As such, advice should be taken regarding possible authorisation requirements for potential purchasers depending on the purchaser s ultimate intentions with regard to management of the relevant book. Payment Protection Insurance (PPI) Potential purchasers should also bear in mind that the Central Bank is conducting an ongoing review of the manner in which payment protection policies were sold by ten Irish regulated entities and approximately 13,000 customers who purchased PPI in July 2007 have been contacted. The Financial Services Ombudsman (FSO) has issued a related press release reminding consumers of their rights to complain to the FSO s office if they are not satisfied with the outcome of the PPI review. Any potential purchaser of an Irish residential mortgage book should address whether this is an issue as regards the relevant seller, albeit that in the case of Irish residential mortgages, this matter was usually dealt with by way of the provision, by the Mortgagor, of security over its life assurance policy (see Life Policies above). Other Important Points The terms of the underlying mortgage and loan documents should also be reviewed to assess what consents to the disclosure of personal data under data protection legislation were given by the Mortgagor at the outset, and whether these are adequate in the context of the proposed sale. The adequacy of the seller s anti-money-laundering (AML) processes, and the related identification information obtained at the outset of the relationship with the Mortgagor, will also be important. Our July 2013 Briefing on amendments to the legislative regime relating to AML (the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 as amended by the Criminal Justice Act 2013) is available here. Conclusion Repossession and enforcement of mortgages over residential property in Ireland is often a time-consuming and costly process for Mortgagees. As set out above, various laws and codes exist which are designed to protect Mortgagors and restrict the rights of Mortgagees. Figures published by the Central Bank on 23 August 2013 for Q indicate a continuing increase in the number of enforcement actions being taken by Mortgagees. The number of primary residences in respect of which Mortgagees were in possession at the end of Q was 1001, with 133 primary residences disposed of during Q and 160 voluntarily surrendered or abandoned during that same period. Although all of the considerations set out in this Briefing are relevant to any potential purchasers of an Irish residential mortgage book, in our view particular attention should be paid to the following: the importance of conducting diligence on standard form documentation to ensure compliance with the CCA, CPC, the Unfair Terms Regulations and the Distance Marketing Regulations»» reviewing the underlying mortgage documentation to assess whether the charging language is effective

6 6 arthur cox FINANCe the importance of reviewing the seller s files to assess compliance with the CCMA and its own MARP, and the MARS-related commitments that the seller may have given to the Central Bank analysing the impact of the Code of Practice and whether there are any other contractual restrictions on assignability and the Personal Insolvency Act 2012 and the impending commencement of reforms to the Irish bankruptcy regime. As part of any diligence on an Irish residential mortgage book, attention should also be paid to the number of outstanding undertakings, the number of missing, incomplete or inadequate documents, the number of undischarged prior-ranking charges, other priority creditors, ongoing litigation, outstanding registrations, title issues and remediation steps that the seller might be able to take prior to any sale. The scale of any issues is likely to underpin the negotiation of warranties and pricerelated discussions. ISSUES FOR SERVICERS OF IRISH RESIDENTIAL MORTGAGES For the time being, the servicing of mortgages is not, per se, a regulated activity in Ireland (although it is expected that this may change in the future). However, there are a number of issues that potential servicers should be aware of. Enforcement Issues Enforcing Residential Mortgages The issues discussed in Enforcing Residential Mortgages above will be highly relevant to servicers. In particular awareness of the CCMA and Courtenforcement procedures when managing arrears cases will be important. regime for debt management firms, albeit that this is focused on those firms that are engaged by consumers to advise on their debts and negotiate with their creditors and so should not be relevant to standard mortgage servicing. Our Briefing on the new Act (commenced on 1 August 2013 with the exception of Section 72, which was commenced on 1 September 2013) is available here. Fitness and Probity/Minimum Competency A mortgage servicer should also be aware of its potential obligations under the Central Bank s fitness and probity regime, and its minimum competency regime. If regulated in Ireland, a mortgage servicer will need to ensure certain staff members are assessed on the basis of both regimes. Further, the appointment of directors would also require the Central Bank s prior approval. In addition, if mortgage servicing is being performed on behalf of a regulated entity, even if the mortgage servicer is not itself regulated, both the mortgage servicer and the regulated entity will need to be aware of the obligations of the regulated entity under both regimes. The Central Bank maintains a list of frequently asked questions, together with related guidance for regulated financial service providers, on its fitness and probity regime on its website at: centralbank.ie/regulation/processes/fandp/ serviceproviders/pages/default.aspx. Data Protection Acts 1998 and 2003 (the Data Protection Acts) The Data Protection Acts seek to protect data concerning living persons. A mortgage servicer is likely to be a data controller or data processor under the Data Protection Acts and therefore must comply with the restriction on use of data thereunder. Debt Management The Central Bank (Supervision and Enforcement) Act 2013, in addition to broadening the suite of powers available to the Central Bank and the penalties that it can levy, introduced a regulatory

7 7 arthur cox FINANCe key contacts For further information on any of these items, please contact Orla O Connor, Robert Cain, Cormac Kissane or your usual Arthur Cox contact. Orla O Connor partner orla.oconnor@arthurcox.com Robert Cain partner robert.cain@arthurcox.com Cormac Kissane partner cormac.kissane@arthurcox.com

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