Guidelines for Extra-Judicial Restructuring of Mortgage Loans

Transcription

1 Guidelines for Extra-Judicial Restructuring of Mortgage Loans Helping lenders to manage better risks and consumers to make more informed decisions Friedemann Roy The World Bank, Washington DC

2 2 Objectives of workshop Learn about the Guidelines for Extra-Judicial Restructuring of Mortgage Loans Understand why guidelines help you to build a more competitive business

3 3 Main messages of the workshop No conflict between consumer protection/better informed customers and safety and soundness regulations on financial sector Transparent and open communication with customer nurtures trust and creates basis for long-term relationships which leads to competitive edge Dealing with customers in payment difficulties already starts with application and servicing process (i.e. long before customer may face problems)

4 4 The loan administration process Management (people and processes) Production Origination: Counselling Customer application Credit assessment Property valuation Loan offer and completion Servicing: File set up Payment processing Document control Customer service Administration Asset preservation: Collections Arrears management Foreclosure Technology support and quality control

5 5 Main objectives of origination All details of loan are complete and accurate and they are properly reflected in company s internal processing system Customer understands and is aware of obligations he will assume: Loan redemption rates are affordable Customer is aware of risks Customer understands the specifics of mortgage loan products (i.e. type of interest rate adjustment, collateral, etc.) Appropriate documentation of customer s understanding (e.g. EU Code of conduct on pre-contractual information for home loans)

6 6 Main objectives of servicing process Ensure that customer all payments are correctly processed Documents are up to date and reflect changes in borrower s situation (e.g. marriage, updates in the land register, etc.) Advisor remains in contact with borrower to advise on questions, learn about new sales opportunities, etc.

7 7 Main objectives of asset preservation process Avoid foreclosure as it is costly and time consuming and lender often fail to recover full loan amount Manage borrowers in arrears with help of active borrower communication and counseling Preserving and protecting lender s creditor and collateral position (e.g. on-sight visits, etc.)

8 8 Why is it advantageous to lenders to have better informed customers? (I) Growth of mortgage debt between 2002 and % 50% 40% 30% 20% 10% 0% Average EU 15 countries Average new EU members Romania Hungary Source: EMF Growth of mortgage markets in CEE countries has benefitted lenders and consumers alike

9 9 Why is it advantageous to lenders to have better informed customers? (II) Mortgage loans in foreign currency to total mortgage loans in selected CEE countries 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 84% 92% 94% 71% 66% 59% 49% 52% 33% 3% Hungary Poland Romania Bulgaria Latvia Source: Central Banks (data for Bulgaria and Romania, January 2007) But, risk exposure of lenders and consumers dramatically increased When crisis appeared, delinquency and default rates rose to high levels

10 10 Why is it advantageous to lenders to have better informed customers? (III) For consumers/borrowers: Rising sophistication of financial products requires better understanding of financial issues Help consumers to budget and manage their incomes Raise financial capabilities of consumers For lenders: Helping consumers to make informed decisions is critical to building trust and long-term relationships Transparent operations are a competitive advantage in long run Key tool for cross-selling

11 11 Good practices in mortgage lending (I) Disclosure and sales practices Simple, easy to understand and comparable Key facts statement Regular statements and early notifications of changes (e.g. interest) Proper assessment of consumer s creditworthiness by well-trained staff No abusive business practices Bundling and tying clauses Cooling-off period Abusive debt collection practices

12 12 Good practices in mortgage lending (II) Easy, inexpensive and speedy method of resolving disputes Deal fairly and honestly with customers Customers who complain are most valuable customers Clear procedures for handling customer complaints (very common: third-party ombudsman) Availability of financial education Helps consumers to understand financial products and make informed decisions Both responsibility of regulator and financial services industry What can we do as lenders?

13 13 Where is Romania? Disclosure and sales practices Mortgage contracts printed in 6-font size Difficult to obtain contract and information about fees before signing contract Dispute resolution No out-of court dispute resolution system Availability of financial education Awareness campaigns for pensions only Some lenders have developed information brochures

14 14 Role of the Guidelines of Extra-Judicial Restructuring of mortgage loans Objective: Principles aimed at avoiding enforcement of mortgage collateral and allowing borrowers in financial distress to fulfill their obligations Do not affect existing contractual obligations nor establish borrower s right to a restructuring of her/his loan agreement Scope: Borrowers who have taken out loan secured by mortgage Applies to all lenders in Romania

15 15 The 12 principles of the Guidelines (I) 1. Borrower should contact lender in case of problems 2. Lender provides clear overview of borrower s outstanding obligations 3. Offer to restructure is a concession by lender 4. Good faith 5. Clear communication 6. Borrower should provide all relevant information to lender to allow for proper evaluation of her/his situation

16 16 The 12 principles of the Guidelines (II) 7. Before enforcement, alternatives should be discussed 8. Lender should provide prompt response to borrower 9. Borrower has time to consider lender s proposal 10. Restructuring should be reasonable and achievable 11. No court proceedings as long as borrower complies with terms of loan restructuring 12. Confidentiality

17 17 Example of restructuring process Reason for arrears Understand the problem Borrower s financial capabilities Property value Confirm reason for arrears and determine borrower s intention Analyze the problem Financial statement, tax returns, check stubs, and credit card statements Appraisal to determine current value of security Willingness,but no ability Voluntary sale Foreclosure Hardship Resolve the problem Willingness with potential ability Forbeareance, modification, capitalisation, freezing Voluntary sale Non-hardship No willingness, but ability Foreclosure Foreclosure

18 18 Trends in the European Union The acquis communautaire entitles EU-Commission to ensure creation of integrated market for residential mortgages Objective of EU-Commission s intervention: competitive and efficient EU mortgage credit markets Facilitating cross border supply and funding of mortgage credit Increasing product diversity Improving consumer confidence Facilitating customer mobility A number of measures initiated, such as: 2005: Green Paper: Mortgage Credit in the EU 2007: White Paper on Mortgage Credit in the EU European Agreement on Voluntary Code of Conduct of Pre- Contractual Information for Home Loans 2011: Directive for responsible mortgage lending and borrowing

19 19 Trends on national level in the EU Examples (I) United Kingdom Already existing: website of Financial Services Authority (FSA): Money made clear Consumer Protection and Markets Authority FSA rules on income verification and affordability assessment Germany New law to protect private investors (under discussion): In case of wrong advice, advisors may not advise clients for up to two years Mandatory key fact statements for every product

20 20 Trends on national level in the EU Examples (II) Sweden Financial Supervisory Authority: maximum loan-to-value ratios (LTV), set at 85% Hungary Central bank: maximum LTV limits for mortgage loans in relation to currency of loan: Forint: maximum LTV limit: 75% EUR: maximum LTV limit 60% Other: maximum LTV limit 45%

21 21 Development of framework for mortgage lending options Protection Characteristics: Consumer driven Responsible consumer Proportionate responsible lending protection Protect consumers from themselves Characteristics: Competition driven Responsible lender Self regulation and best practice compliance Responsible adult Sustainable market Characteristics: Risk driven Regulate for lowest common denominator Rules and intervention Market led Characteristics: Needs and access driven Meets majority consumer aspiration Proportionate protection of vulnerable Regulation

22 22 Development of framework for mortgage lending options Protection Benefits: Self determination Minimizes exclusion and potential for recovery from distress Protect consumers from themselves Benefits: Enhanced competition Innovation Reduced cost Responsible adult Sustainable market Benefits: Responsible lending Reduced mis-selling Conservative lender set Market led Benefits: Meets legitimate needs Limits housing bubbles Access for optimal number Regulation

23 23 Development of framework for mortgage lending options Protection Risks: Irresponsible borrowing Sub-optimal outcomes for vulnerable possible Asset inflation Protect consumers from themselves Risks: Potential for irresponsible lending Potential for mis-selling Responsible adult Sustainable market Risks: Restricted access Frustrated aspiration Social inequity Market led Risks: Inadequate mortgage supply Property chains dislocated Regulation

24 Friedemann Roy Senior Housing Finance Specialist Non-Bank Financial Institutions Group Global Capital Markets Development Department Tel