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Addressing the issue of mortgage arrears in Ireland: a good practice guide from HML

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This good practice white paper details HML’s experience of managing mortgage arrears in Ireland, with our main focus on ensuring the most sustainable outcomes for customers. With banks in the country currently under increasing pressure from the Central Bank of Ireland (CBI) to not only propose sustainable solutions to customers, but to also complete deals, a significant amount of resources will need putting into arrears management and collections. Not every bank, mortgage portfolio owner or other stakeholders may have the capacity to ramp up customer contact and collections, which is where HML can prove to be of assistance. We have been servicing Irish lenders’ loan portfolios since 2005 and have in-depth knowledge and experience of Ireland’s unique financial environment, making us ideally situated to help banks meet their CBI targets.

At HML, we believe Standard Financial Statement (SFS) engagement with the borrower should be at the heart of any successful arrears management strategy, as this is the gateway to the Mortgage Arrears Resolution Process (MARP). Once within MARP, mortgage customers can evidence they are engaging with their lender, which – to a point – protects the borrower from repossession. Cash collection also increases when a customer is within MARP, which is beneficial to both the borrower and their lender.

This white paper will take you through the process of managing Irish mortgage accounts in arrears, from ensuring SFS completion and engaging with MARP to sustainable restructures and the next steps lenders need to take in order to meet their CBI targets. We will draw upon our experience and provide a case study as an example of where a client has seen considerable success after HML supported its arrears management strategy and collections operations.

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Addressing the issue of mortgage arrears in Ireland: a good practice guide from HML

  1. 1. ADDRESSING THE ISSUE OF MORTGAGE ARREARS IN IRELAND a good practice guide from HML
  2. 2. Contents Section 1: Section 2: Section 3: Section 4: Section 1: About this paper About this paper A brief introduction to HML Ireland: where are we now? Tackling residential and buy-to-let (BTL) mortgage arrears Section 5: This good practice white paper details HML’s experience of managing mortgage arrears in Ireland, with our main focus on ensuring the most sustainable outcomes for customers. With banks in the country currently under increasing pressure from the Central Bank of Ireland (CBI) to not only propose sustainable solutions to customers, but to also complete deals, a significant amount of resources will need putting into arrears management and collections. At HML, we believe Standard Financial Statement (SFS) engagement with the borrower should be at the heart of any successful arrears management strategy, as this is the gateway to the Mortgage Arrears Resolution Process (MARP). Once within MARP, mortgage customers can evidence they are engaging with their lender, which – to a point – protects the borrower from repossession. Cash collection also increases when a customer is within MARP, which is beneficial to both the borrower and their lender. This white paper will take you through the process of managing Irish mortgage accounts in arrears, from ensuring SFS completion and engaging with MARP to sustainable restructures and the next steps lenders need to take in order to meet their CBI targets. We will draw upon our experience and provide a case study as an example of where a client has seen considerable success after HML supported its arrears management strategy and collections operations. Not every bank, mortgage portfolio owner or other stakeholders may have the capacity to ramp up customer contact and collections, which is where HML can prove to be of assistance. We have been servicing Irish lenders’ loan portfolios since 2005 and have in-depth knowledge and experience of Ireland’s unique financial environment, making us ideally situated to help banks meet their CBI targets. Conclusion and next steps: a sustainable financial future for mortgage arrears Ireland Section 6: Definitions 2 3
  3. 3. Section 1: About the authors Section 2: A brief introduction to HML HML is a third-party mortgage administration company that operates in the financial services sector. It has 25 years of experience in the outsourcing industry and is based at four sites - it is headquartered in Skipton, and also has offices in Glasgow, Derry and Dublin, with approximately 1,300 employees in total. It has been servicing Irish lenders’ portfolios since 2005. It currently has approximately £44 billion (€53 billion) of managed assets and 50 major clients, including banks and building societies. Mortgage administration and servicing is HML’s main service at present, although it also offers standby servicing and securitisation, business intelligence and asset trading, among other services. In August 2013, Fitch announced that HML’s UK residential primary (prime and sub-prime) servicer ratings had been upgraded to RPS1- from RPS2+. HML’s new RPS1- primary (prime) servicer rating is the highest of any third-party mortgage administration company in the UK and Ireland. Its RPS1- primary (sub-prime) rating is the highest in Europe. Fitch affirmed HML’s Irish residential mortgage primary servicer ratings for both prime and sub-prime at RPS2, while its UK special servicer rating was affirmed at RSS21. In August 2013, S&P revised the outlook of HML’s primary servicing of residential mortgages in the UK from stable to positive. It also affirmed the above average rankings for HML as a primary and special servicer of UK residential mortgages, and as a primary servicer of residential mortgages in Ireland. GLASGOW (opened 2007) In addition, HML’s stable outlook was affirmed for the special servicing of UK mortgages and the primary servicing of Irish residential mortgages2. DERRY James Hudson Rachel Bayley James is lead strategist – portfolio servicing at HML and has worked within the arrears management side of the company since 2005. James is responsible for designing arrears strategies, as well as implementing them and providing oversight, working to drive improved arrears servicing for UK and Ireland clients. (opened 2004) Rachel is a marketing executive at HML. After completing a journalism degree at the University of Sheffield, she went straight into the content marketing industry, where she worked at an agency for five years before moving to HML at the start of 2013. Her main responsibility is to produce external marketing copy, including white papers, press releases and blogs. SKIPTON HQ (opened 2010) DUBLIN (opened 2013) 1 4 www.hml.co.uk/latest-thinking/2013/08/fitch-upgrades-hml-to-rps1-for-uk-residential-prime-and-sub-prime/ 2 www.hml.co.uk/latest-thinking/2013/08/hml-receives-sp-outlook-revision/ 5
  4. 4. Section 3: Section 3: Executive summary: The spotlight is currently on banks in the Irish financial sector. In addition to the significant issue of loss-making tracker mortgages, a combination of the CBI pushing banks to complete sustainable deals with their customers in mortgage arrears, along with negative equity and a lack of borrower engagement, is piling pressure on to lenders. A balance needs to be struck to ensure treatments and restructures not only produce favourable outcomes for mortgage customers – which must be a priority – but to also ensure they support banks in the long term in resolving the issue of arrears in Ireland. The problem of negative equity is also running alongside climbing mortgage arrears. The CBI’s October quarterly bulletin for 2013 revealed that since 2009, the number of principal dwelling houses mortgages in arrears of more than 90 days has almost quadrupled. These type of mortgages totalled €18.6 billion by the end of June 201310. Ireland: where are we now? In March 2013 the CBI set banks in Ireland targets to propose solutions to half of those in mortgage arrears of more than 90 days by the end of 20133. Since then, it has increased the pressure on banks to take sustainable and long-term action, with banks being told that they must have completed deals for 15 per cent of this cohort by the end of 2013. In addition, by the end of March 2014, banks must have proposed solutions to 70 per cent of over-90 day arrears customers and completed deals for 25 per cent4. In early December 2013, the CBI went one step further and announced additional targets. By the end of June 2014, banks must have offered sustainable solutions to 75 per cent of over-90 day arrears customers and have completed solutions for 35 per cent of this cohort5. Rewind to 2008, and it provides a clear background as to the position the country finds itself in now and why the CBI must steer the industry so firmly. During Q2 of 2008, the average price of a second-hand home was €356,638, according to the Department of the Environment, Community and Local Government6. By the same quarter the following year, this had declined to €313,4317 and to €279,839 in 20108. The Q2 house prices for 2013 noted that this price had fallen further still to €260,0309. The downturn in the Irish residential property market has implications for both banks and borrowers. Borrowers who may have previously stretched themselves to get their foot on to the housing ladder are struggling to downsize due to the economic conditions and stagnant market. Even if they were able to sell, they would achieve a much lower selling price than the original purchase price, compounding the issue of negative equity. http://www.centralbank.ie/press-area/press-releases/Documents/ Approach%20to%20Mortage%20Arrears%20Resolution%20-.pdf The March 2013 targets from the CBI laid out three types of sustainable solutions: 1: Payments are re-established as per the original CBI governor Patrick Honohan informed the Oireachtas Finance Committee that as of the end of June 2013, there were 98,000 mortgages in arrears of more than 90 days. Of these, around 75 per cent (74,000) “were not yet in an arrangement” with their mortgage lender. Mr Honohan said: “Things are still not moving as quickly as the Central Bank would prefer; the indications are that the process is working, momentum is building, but there is some way to go11.” schedule or as mutually agreed 2: Borrower opts for a Personal Insolvency Agreement 3: Surrender or repossession of the property The last option is not ideal for neither the banks or the borrower, and borrower engagement and commitment remains the fundamental attribute to resolving the problem of mortgage arrears. In November 2013, the CBI revealed that as of the end of September, there were 99,189 mortgage accounts in arrears of more than 90 days, although it was clear to point out that the big driver for this increase was accounts that had been behind for more than 720 days. The number of accounts in early arrears of less than 90 days fell by six per cent during the third quarter. This decline stood at 3.3 per cent during the previous three-month period12. We will now take a look at good practice for mortgage arrears management and resolution and the different strategies and forbearance options that lenders can adopt. While residential property prices are starting to recover, albeit mainly supported by rallying values in Dublin (where in Q2 2013 the average second-hand home cost €351,99813), the issue of mortgage arrears is proving to remain problematic. 7 http://www.centralbank.ie/press-area/press-releases/Pages/ CentralBankstatementonMortgageArrearsResolutionTargets ConcludedArrangements.aspx Continued http://www.environ.ie/en/Publications/StatisticsandRegularPublications/ HousingStatistics/FileDownLoad,21279,en.pdf 8 3 http://www.environ.ie/en/Publications/StatisticsandRegularPublications/ HousingStatistics/FileDownLoad,25191,en.pdf 4 http://www.environ.ie/en/Publications/StatisticsandRegularPublications/ HousingStatistics/ (Excel download: Latest House Prices, Loans and Profile of Borrowers) 9 http://www.centralbank.ie/press-area/press-releases%5CPages%5CCentr alBankstatementonMortgageArrearsResolutionTargets.aspx 5 http://www.environ.ie/en/Publications/StatisticsandRegularPublications/ HousingStatistics/FileDownLoad,20957,en.pdf 6 6 http://www.centralbank.ie/publications/Documents/Quarterly%20 Bulletin%20Q4%202013.pdf http://www.centralbank.ie/press-area/press-releases/Pages/ ResidentialMortgageArrearsandRepossessionsStatisticsQ32013.aspx 10 12 http://www.centralbank.ie/press-area/speeches/Pages/ IntroductorystatementbyGovernorPatrickHonohan.aspx 13 http://www.environ.ie/en/Publications/StatisticsandRegularPublications/ HousingStatistics/ (Excel download: Latest House Prices, Loans and Profile of Borrowers) 11 7
  5. 5. Section 4: Section 4.1: 4.1: The right information at the right time How we use this information to enhance our arrears management in Ireland is a four-stage process: Tackling residential and BTL mortgage arrears Having access to in-depth information at the right time is essential for successful arrears management, including driving pre-emptive pre-arrears action. However, information is only useful if it can be used intelligently to assess each customer’s propensity and willingness to pay. In this way, the right resources can be applied to each customer’s unique set of circumstances. Executive summary: A successful arrears management and restructure strategy usually begins with predictive analytics. Having this powerful tool to hand means a full picture of each customer can be created, ensuring customer contact, arrears management and collections strategies are all tailored to the individual. In the UK, predictive analytics are partly based on credit bureau data, but in Ireland, the CBI holds all of this information, which is not publically available. In the UK, predictive analytics is a key tool that HML employs for this purpose. It allows each customer to be assessed quickly and accurately on the basis of that individual’s information. The output from the predictive analytics process is a set of forward-looking predictions that describe how each customer is likely to behave in the future. This can include the propensity of a customer to recover their account on their own, i.e. self-cure, and the likelihood that a customer will redeem and repay the capital. While predictive analytics have been successfully used in other countries with major banking systems14, the financial and regulatory environment is very different in Ireland. There are no consumer-facing credit bureaus in the country; instead, the CBI holds credit data which is not publically available, meaning in Ireland we currently draw solely upon payment and contact history (behavioural analytics) instead. Instead, HML currently uses accountlevel and SFS information to help accomplish lenders’ objectives. For all lenders in Ireland, these tend to include driving people into the protections of MARP and the successful deployment of sustainable restructures. However, the changing regulatory landscape surrounding contact attempts now favours the development and deployment of more predictive analytics, an area of specialism for HML. Of course, the rapidly changing regulatory landscape surrounding contact attempts under the Code of Conduct on Mortgage Arrears (CCMA) now favours the development and deployment of more predictive analytics, an area of specialism for HML; we will be deploying newlydeveloped predictive scorecards in the early part of 2014. Continued The Collections stage of the process is to integrate the analytics outputs with what is happening on the ground, in order to drive the specific collections strategies. Individually-tailored contact strategies are then applied. HML’s highly-trained arrears management executives within the Arrears Support Unit (ASU) deliver the bespoke approach required for each customer within each segment. Analyse Review Segment The final stage of the process is to Review and learn through the use of appropriate Management Information (MI). HML has developed a rich suite of MI designed to provide insight and analysis into not only the performance of the portfolio, but also key tranches, including an account-level lens. Using granular data to advise on the effectiveness of strategies results in efficient decisionmaking, whether on a daily, weekly or monthly basis. Collect In the Analyse stage, payment and contact history information is applied to assign behavioural scores to each account. Each score represents a different aspect of a customer’s behavioural profile. So we might have predictive scores that provide an assessment of the risk that the individual represents, drawing upon loan-tovalue, repayment type and payment and contact history, for example. This knowledge, along with other information derived from our analytics capability, enables our portfolio servicing team to shape our arrears management and collections strategies. In the Segmentation stage, the scores are used in conjunction with information such as recent payment performance and affordability, to identify key groups (segments) within the population. A segmentation strategy might look something like the chart below. Risk assessment (predictive score) Recent payment performance Affordability High “Our track record in developing and deploying predictive analytics to enhance collections in the UK has delivered substantial benefits for our clients and their customers. It is HML’s aim to bring the same intelligence to our collections teams working on Irish mortgage portfolios to improve the outcomes for existing and new clients and their customers in Ireland during 2014 and beyond.” Damian Riley, director of business intelligence at HML 8 B 6 C 7 D 8 E 9 D 10 F High 11 G Low 9 5 Low Poor http://www.deloitte.com/assets/Dcom-Australia/Local%20Assets/ Documents/Deloitte_FSI_UnleashingthePower_MBStudy.pdf 14 C High High risk 4 Low Good A High Poor 3 Low Medium risk B High Good 2 Low Poor A High Low risk 1 Low Good Customer segment Collections strategy 12 H
  6. 6. Section 4.2: 4.2: Arrears management and collections strategies in practice Under the CCMA, the limit of three unsolicited contacts per month has been removed, although lenders must ensure contact is proportionate and not excessive. A board-approved communications policy must be put in place by lenders to protect borrowers from unnecessarily frequent contact and harassment. Executive summary: The CCMA is a central part of HML’s arrears management and collections strategies in Ireland, as well as increased customer contact. Our highly-trained and qualified collections executives ensure customer contact is made at the right time and is tailored to the individual and includes phone calls, letters and face-to-face meetings. From when the account first falls into arrears right up to the eviction date (if the situation progresses to this point), HML makes every effort to re-engage the customer into MARP to ensure they benefit from the most sustainable outcomes. Highlighting the success we have had with one of our clients in Ireland shows how increased customer contact at the right time works. Since June 2012, when HML implemented a new arrears management strategy, calls to customers have increased by fivefold. However, as we have said, contact has to be made at the right time, and HML’s current contact hours – in-line with the CCMA – are from 09:00-20:30 Monday to Friday and 09:00-13:00 on Saturdays. However, we can be flexible with this and extend to 09:00-21:00 Monday to Saturday, as outlined under the Consumer Protection Code (CPC). Several methods of communication are used to uplift engagement levels. As well as outbound calls, generic and bespoke letters and face-to-face meetings are also used. Where telephony and contact letters have failed to engage a borrower, a suite of bespoke re-engagement letters are used which highlight the importance of engaging with MARP. In addition, these letters explain the consequences of being classed as non-cooperative, which includes a timeline within which a non-cooperative account could be progressed into litigation. The next step, if appropriate, is that a field agent will be instructed to engage the borrower and achieve a signed SFS. This is all done within the CCMA framework, which states that unsolicited personal visits to a borrower’s home are only permitted when all other attempts at contact have failed or immediately prior to classifying a borrower as non-cooperating. The lender must also provide five days’ notice before making an unsolicited personal visit to a borrower’s home. HML has been servicing Irish lenders’ portfolios since 2005 and has a deep understanding of Ireland’s unique financial environment. This experience, as well as our 25 years in the third-party financial administration sector, means we are well placed to deploy arrears management and collections strategies in Ireland that are fully compliant with the CCMA. Section 4.2: Continued MARP SFS Documents Field Agent, Letter Suite, Non-Cooperation Decision Borrower Acceptance Arrangement Offer Mortgage Unsustainable Monitor Arrangement Performance Field Agent, Letter Suite, Non-Cooperation Offer Not Accepted Demand Legal As you can see, it is essential that a combination of effective strategies is deployed in order for lenders to make real headway into the issue of mortgage arrears in Ireland and we have enjoyed success by adopting such an approach. The following case study is based on one of our clients in Ireland for whom we deployed an arrears management strategy. Outbound dialling will continue throughout the strategy to maximise borrower contact and engagement with MARP. As borrowers return a completed SFS and adhere to MARP, they are removed from this process. It is important to note that our contact begins when an account first falls into arrears and continues until eviction date, if the process is required to go this far. Contact strives to reengage the customer at every opportunity to bring them into MARP and ensure repossession is avoided where possible. Even when legal proceedings commence, HML does not think the relationship of engagement between a customer and lender is ‘beyond repair’ and we do everything possible to ensure customers remain in their homes. The revised CCMA, which was introduced by the CBI on July 1st 2013, is another integral part of HML’s arrears management and collections strategies and has put in place a consumer protection framework for those mortgage customers who genuinely cannot afford their monthly repayments15. http://www.centralbank.ie/press-area/press-releases/Pages/ CentralBankPublishesRevisedCodeofConductonMortgageArrears.aspx 15 10 Arrangement Deployed 11
  7. 7. Section 4.2: Section 4.3: Case study: Increasing the repossession protections of MARP for customers 4.3: SFS engagement: at the heart of successful arrears management Continued It is worth noting that under the contact restrictions of the former CCMA, we maximised our efforts within the framework to uplift contact levels, which has continued under the revised CCMA. Our approach: Our work with this client in Ireland resulted in HML winning the Best Debt and Arrears Strategy category at the Mortgage Finance Gazette Awards 2014, showing how even with the challenges we face – such as not having access to credit bureau data – we can still achieve value for both lenders and customers16. • In this example, our client had seen an increasing arrears profile since January 2008. • HML was asked to service a non-conforming Irish residential mortgage portfolio to increase cash collections, contain arrears emergence and increase the lender’s focus on sustainable restructures. • We deployed an arrears management strategy that is compliant with the CCMA, with a particular focus on increasing customer engagement through the SFS process. What our client says: “HML have worked with us to improve portfolio performance, while at the same time ensuring more customers can remain in their homes through long-term sustainable and affordable treatments.” Delivered results: • Number of accounts that had been in arrears for more than 12 months increased at a smaller rate during the second half of 2012, compared to the same period in 2011, which was prior to HML implementing the new strategy. • Between July 2012 and October 2013, there was a significant increase in the volume of arrears accounts with an SFS captured, helping to mitigate the risk of repossession, allowing customers to stay in their home under the protections of MARP. • Number of accounts paying full monthly payment with SFS gathered more than doubled over the period. • Cash collections throughout 2013 increased. • Since adopting the new approach in June 2012, there has been a sizeable uplift in the number of accounts in arrears of more than one month making payment of greater than the contractual instalment and an almost doubling of the 12 month+ portfolio paying contractual instalment or more. items within an SFS, such as income and expenditure. If customers do not paint an accurate picture for executives by giving as much detailed information as possible, this could put them at risk of being seen as not engaging properly with MARP. It is therefore in their best interests to be as accurate as possible, not only so they are seen as engaging with their lender, but also so any restructures and treatments deployed are appropriate to their circumstances, helping them to stay in their home. Executive summary: Have we done everything we can with the tools we have to prevent repossession? This is a question we regularly ask ourselves to ensure we have maximised our arrears management and collections efforts inline with the CCMA to ensure favourable outcomes for borrowers. Increased SFS collection should be at the centre of every arrears management strategy, as this is the gateway to MARP. Every available tool should be used to increase the completion by customers of the SFS. Of course, while lenders will know of the importance of customer engagement, it is another matter to see success in this area. AIB chief executive officer David Duffy told the Oireachtas Finance Committee that four per cent of the bank’s mortgage customers are choosing not to repay their home loan, resulting in them being in ‘strategic default’. He added that around a fifth of its total mortgage holders are in arrears, with a similar percentage of these having access to a disposable income to pay their mortgage, but choose not to17. The previous case study noted our success at improving SFS engagement – so how did we do this? We ensured our customer contact strategies were tailored to the individual circumstances of customers and were particularly focused on those who may have been more at risk of repossession. We knew customer contact had to increase, but also ensure communications were made to the right customer at the right time. At HML, we believe that improved borrower engagement through increased SFS collection should be at the centre of every arrears management strategy. By taking part in the SFS process, customers can enter the gateway to MARP, which shows that they are engaging with their lender. Evidence shows that repayments increase when customers are within MARP. We also renew a customer’s SFS on a six-monthly basis where appropriate - which is in-line with the CCMA – which enables us to react to a customer’s changing affordability profile to ensure the arrangement they are on is the most suitable. Improving SFS engagement is a central part of our arrears management strategies in Ireland, as this – combined with appropriate and sustainable restructures – results in the best outcomes for customers. Focusing on individuals who are at a higher risk of repossession first by using our analytics to identify this cohort will ensure the right individuals – who are also the riskiest for lenders – are prioritised, bringing them into the protections of MARP as quickly as possible. Have we done everything we can with the tools we have to prevent repossession? This is a question we regularly ask ourselves and one that we believe the CBI will increasingly ask lenders. We maximise every tool we have in-line with the CCMA, including phone calls, letters, text messaging and field agents to ensure sustainable restructuring and the best outcomes for customers. Having skilled and qualified collections executives who understand the root cause of the customer’s difficulties is integral, and the SFS allows an accurate financial position to be established. However, customers must also honestly engage with lenders during the SFS process, as this will result in sustainable and realistic repayment plans. These skilled executives are also experienced in challenging http://www.mortgagefinancegazette.com/awards-special/winnersannounced-in-the-mortgage-finance-gazette-awards-2014/ When we look back over a case that is potentially about to fall into legal proceedings, we want to be able to say that we have done everything we can before taking further action. 16 http://www.independent.ie/business/personal-finance/propertymortgages/aib-crackdown-on-strategic-defaulters-29466902.html 17 http://www.hml.ie/latest-thinking/2013/11/hml-takes-home-3-mortgage- finance-gazette-awards/ http://www.thejournal.ie/aib-mortgage-default-1066811-Sep2013/ 12 13
  8. 8. Section 4.4: Section 4.4: 4.4: Sustainable restructuring mortgage so as to secure a debt write-off. Lenders, for this reason, tend to shy away from overtly writing off debt. However, it again underlines the requirement for a detailed, case-by-case assessment of each borrower. Notably, Ulster Bank and the Bank of Ireland (BOI) have previously stated that they will not consider debt forgiveness as part of their restructure suite18. There is an argument, however, that only truly sustainable solutions can be achieved in the cases of some borrowers if some form of debt forgiveness plays a role. Short-term restructuring measures, such as switching a mortgage to interest-only, are not designed to provide sustainable solutions for borrowers in arrears. Instead, advanced restructure strategies are required to guide lenders and their customers to a more stable, long-term future. Executive summary: Long-term sustainable restructures are key to helping resolve the issue of mortgage arrears in Ireland. Short-term measures will not support mortgage customers going forward, albeit they can provide relief while homeowners organise their finances. HML has significant experience in administering a range of long-term restructures, and we ensure regular contact with customers remains to make sure the arrangement continues to be suitable and produce the best outcomes for them. HML currently administers accounts in Ireland with a mixture of arrangement types, including short and longterm restructures. Arrangements are decided by the lenders whose portfolios we service following analysis of the customer’s SFS and their previous repayment patterns to ensure they meet the individual needs of the borrower. Some of the restructures that we currently administer include term extension, capital payment holiday, adjusted interest rate, arrears repayment, capitalisation and split mortgage options. We recognise the importance of communicating with debt advice providers, such as the Money Advice and Budgeting Service, to gather appropriate information and aid decision-making. During the last 12 months, HML has provided forbearance on 3,996 accounts and entered into 52,249 arrangements to pay with borrowers in both the UK and Ireland. With an excess of 700 residential Irish mortgage restructures in the last 12 months, we have significant restructure experience. Continued Lenders must clearly identify uncooperative borrowers and provide a warning letter with at least 20 business days’ notice to those borrowers who could fall into this category and which outlines the implications of being classed as not cooperating. Where borrowers have engaged with their lenders, repossession action can only begin if their bank has made every reasonable effort to agree an alternative arrangement or an alternative arrangement has not been accepted or offered due to the circumstances. As mentioned, HML maximises the toolkit we have available in-line with the CCMA to ensure repossession is a last resort for lenders. However, should this route need to be taken, we collect as much information about the property as possible to ensure robust asset management is deployed, including marketing it for sale or rent and, where needed, bringing it up to standards. HML has a strong panel of suppliers we can draw upon, including field agents, debt advice providers, litigation solicitors and asset managers. Minister for Justice Alan Shatter is one of the advocates of debt forgiveness, although he stresses it should only be used for those who genuinely cannot pay their mortgage, rather than those who can but won’t19. It remains to be seen which bank will take – if any do – the first steps towards systematic debt forgiveness due to the obvious problems of implementation. In some cases, the only option for lenders is to start legal proceedings. Under the CCMA, if a borrower is classed as being uncooperative and therefore not within the confines of MARP, lenders can commence repossession action. “It is without doubt that despite best efforts to agree long-term sustainable solutions, a resolution will not be appropriate or possible in all cases. Consequently, the court process may be the only option. Judges will scrutinise the proceedings to ensure every effort has been made to negotiate with borrowers before granting orders for possession.” Long-term restructures are put in place with trial periods to test the affordability and sustainability of the arrangement, as well as the willingness of the borrower to commit to it. This monitoring regime allows us to see if this works or if a new SFS is required. Our executives work with customers on an ongoing basis through regular contact, allowing them to quickly react to any changes to ensure the customer is on the right arrangement for their needs. Gráinne Dever, partner in the Debt and Asset Recovery Department in Lavelle Coleman Solicitors It is essential that customers fully understand restructures and trust their lender that this is the best option for them. New arrangements need to be clearly articulated to highlight the potential benefits to the borrower and remove any suspicion they may have. In some cases, borrowers simply cannot afford their mortgage, even when efforts have been made by both the customer and lender to manage payments. The issue of debt forgiveness is a tricky one to tackle in Ireland given the quantum of the problem, as doing so could potentially provide an incentive to borrowers to not pay their http://www.irishexaminer.com/business/ulster-bank-boss-rules-out-debtforgiveness-for-customers-224172.html 18 http://oireachtasdebates.oireachtas.ie/debates%20authoring/ DebatesWebPack.nsf/committeetakes/FIJ2013090400018 http://www.justice.ie/en/JELR/Pages/SP13000345 19 14 15
  9. 9. Section 4.5: Section 4.6: 4.5: iCONNECT: drawing upon IT capability 4.6: The importance of Management Information “[HML’s investment in IT] is seen across all areas of the business and is particularly evident in its roll out of the new iPortal online client reporting tool. Fitch views this type of innovation favourably, and considers it to be market best practice20.” Executive summary: In today’s fastmoving financial world, it is essential that IT platforms can withstand the demands of a modern mortgage market. HML’s iCONNECT is a custom-built platform in which over €34.5 million has been invested in the last three years and it is optimised for effective and efficient collections. Fitch has highlighted that our servicing platform can be tailored to satisfy the different regulatory and market requirements in Ireland, drawing upon our experience of the UK’s mortgage market. Fitch report into HML’s ratings upgrade, August 2013 Our iCONNECT system provides consultants with quick access to key functions and account and borrower data. It has extensive use of automation and workflows fully configured to support MARP and supports all restructure types advocated by the CBI, including mortgage splits, assisted voluntary sales, part and part and a reduced interest rate. Once an arrangement has been agreed, HML will issue a confirmation letter, including the arrangement’s terms, expectations of the borrower and the consequences of failure to comply with the payment schedule. iCONNECT monitors the performance of the arrangement and identifies missing and underpayments at the point the payment is due. Contact will then be attempted to rectify payment default through cash collection or gain an updated SFS enabling reassessment of the borrower’s financial situation. Weekly and monthly reports track performance against key metrics. HML iCONNECT is our custom-built platform from which we run our mortgage administration services. Our clients can use HML’s iCONNECT as part of a white-labelled account administration package or on a remote systemonly basis. In the case of our arrears management work in Ireland, the platform supports a multi-channel approach for customers including phone, post, email, web self-serve and IVR card payments. With system availability of 99.9 per cent, iCONNECT provides an efficient and fast performance, proven reliability and is fully configurable to suit individual client requirements. HML has a suite of MI which we use to aid decisionmaking, such as whether we are calling the right customers, whether they are responding to our contact and if our clients’ service level agreements (SLAs) are being met. Our extensive range of dashboards and reporting, which can be tailored to a client’s specific requirements, include portfolio performance, cash collections, loan modification persistency and complaints. Executive summary: An important part of our arrears management and collections strategies is MI. HML has a significant volume of information that we use to aid decision-making, however, it can only be effectively put into practice if the right people with the right skillset are making appropriate decisions and changes off the back of MI. Our MI feeds back into our Analyse process, allowing us to assign a new risk status, if necessary, to an account. This allows us to make any changes that are required in order to drive improved performance. Our MI is intuitive and has translated into better arrears management performance in Ireland in several ways. It allows us to see at which stage of MARP an account is in and whether an account is or isn’t engaging. For example, we can easily see which households haven’t returned an SFS and investigate this. We can then deploy various tools, such as letters, calls and field agents, to remove any blockages to MARP, bringing customers into its protections and increasing cash collected. On a daily basis, we monitor client SLAs, customer correspondence and the number of paying accounts. On a weekly basis, we look at SFS collation and arrangements offered and deployed. Meanwhile, we use MI monthly to assess the overall performance of a portfolio and to take a more holistic view of how arrangements are working. However, while our MI is comprehensive, its true value can only be realised if the right people with the right skillset are using the information to make decisions and changes, resulting in an improved portfolio performance. An improved arrears performance can help lenders reduce their provisioning requirements and loss and bad debt charge. Our portfolio servicing team provides insight of operational areas to ensure successful delivery and customer service. The members of the team have over 125 years of combined industry and supplier management experience and know how to use MI and ongoing monitoring to quickly adjust strategies to ensure consistent delivery of targeted performance. MI enables us to ensure MARP runs smoothly, our tools are being maximised and allows us to debate, discuss and take action if required. “The ability of HML to service Irish assets as a primary servicer benefits from its experience in operating in the UK market. The existing servicing platform in the UK can be tailored to satisfy the different market and regulatory requirements in Ireland by leveraging operational efficiencies, sound technology and experienced staff21.” We are also in the unique position of being able to service assets on a single platform. Fitch, the rating agency, recently commented that our IT systems compare favourably with those of our competitors in Ireland and the UK. HML’s bespoke MI portal can also be accessed by clients, ensuring they benefit from visibility of the data that shapes their strategies and portfolio performance. This links back to our analytics and feeds into our Analyse process, allowing the loop to start again. Fitch’s September 2013 servicer report http://www.fitchratings.com/creditdesk/press_releases/detail.cfm?pr_ id=799778 20 http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_ id=716875 21 16 17
  10. 10. Section 4.7: Section 4.7: 4.7: Operating in Ireland’s regulatory environment However, operating in Ireland’s regulatory environment needs to go beyond simply adhering to the rules. Striving for the best possible outcomes for customers is integral to our work in Ireland, and we are aware of the deep cultural differences between lenders and mortgage borrowers. For example, some people - whether they realise it or not - could afford their mortgage if they changed their lifestyles to reflect their current situation, but haven’t. In addition, many borrowers choose to prioritise their unsecured loan commitments over their mortgage. This is why our executives are highly experienced in assessing a customer’s financial situation and supporting them with the most appropriate restructure or treatment for their circumstances. Ireland’s financial sector regulations differ from those in the UK, although there are many similarities which ensure lenders deliver the best outcomes for customers. HML’s operations in Ireland are fully compliant with the CBI’s regulations, while we also undertake oversight and monitoring in relation to Irish law. We closely monitor any rulings coming out of the court system and the CBI that may impact upon our client’s contact, collection and litigation processes. These include Land Registry issues and unsolicited contact policies. Executive summary: While it is essential that operations in Ireland are fully compliant with the CBI’s rules and regulations, companies need to remember that customer service needs to be at the heart of everything they do. At HML, our collections executives have the appropriate skills and qualifications to ensure they are equipped to help achieve the most sustainable outcomes for customers. In addition, our proactive compliance team works with clients to discuss, debate and challenge strategies to ensure maximum value and full compliance is being achieved. We also undertake second-line monitoring of activity, with recent audits undertaken including Irish Credit Bureau and CBI reporting, as well as CCMA account and call monitoring reviews, testing and ensuring compliance with the CCMA, CPC and Mortgage Arrears Resolution Strategies (MARS) targets. For arrears management and collections strategies to be truly successful, it is essential that the executives who deploy them have the appropriate skills and qualifications, not only from an operational perspective, but also so customers feel they are being dealt with by the appropriate individuals. In addition, the CBI’s Minimum Competency Code expects this level of qualification22. Our ASU executives are trained in how to execute MARS and how to comply with Irish mortgage regulation, such as the newly-revised CCMA and the CPC. Continued HML’s quality culture has been highlighted in various ratings reports, and is the subject of our 2013 white paper Destination 100%: the evolutionary journey to a total quality concept in the mortgage servicing sector. Our vision is to achieve total customer and client interaction quality at all times and to help lead a shift in the financial industry’s mindset to 100 per cent24. Organisations within the financial services sector, including third-party administrators, should strive for zero per cent appetite for customer service failures and conduct risk. This sentiment is made even more pertinent when you consider the stress that an individual’s financial situation can cause - with even the smallest of issues often magnified. It is clear how important it is to place customers at the centre of everything we do and be aware at all times that a poor-quality service could prove detrimental to them. HML operates a team of Accredited Product Adviser (APA)-qualified quality associates (QAs) that are independent of operations and responsible for the frontline performance assessments of staff23. The QAs are equipped to provide developmental feedback and coaching to improve performance and ensure customers are dealt with in a safe, fair and dignified environment. They work within a risk management framework that is designed to promote a risk-aware culture and implement robust practices to identify, assess, measure and monitor risk across HML. “HML’s internal control and risk management framework are particularly robust, which when combined with an increased focus on staff training, allow HML to have an excellent level of control and efficiency26.” Fitch report into HML’s ratings upgrade, August 2013 In addition, HML has a dedicated Irish compliance unit that enables us to quickly react to any changes on the ground, providing us with the ability to challenge our current service and ensure we maximise its value. In the example of our case study, our compliance team worked with the lender’s own compliance experts to discuss how the new CCMA should be applied, such as how this may impact upon customer correspondence. “HML’s risk management discipline is robust and operates in a controlled environment, in our view25.” SP servicer evaluation report, September 2013 “Having a robust risk framework and adhering to regulatory codes such as the CCMA are vital to operational delivery and compliance. However, the focus of our business must be on good customer outcomes, and recognising this is essential to building an appropriate culture in any regulatory operation.” Martin Berry, director of compliance at HML http://www.iob.ie/?q=apa http://www.standardandpoors.com/ratings/articles/en/ us/?articleType=HTMLassetID=1245357525005 23 http://www.centralbank.ie/press-area/press-releases/Pages/ CentralBankPublishesEnhancedMinimumCompetencyCode toStrengthen01Sep.aspx 25 http://www.slideshare.net/HML_Corporate/hml-destination-100-spreadsupdated-october 22 24 18 http://www.fitchratings.com/creditdesk/press_releases/detail.cfm?pr_ id=799778 26 19
  11. 11. Section 5: Section 5: Executive summary: With the CBI increasing pressure on banks to conclude mortgage arrears deals and to increase the strength of their provisioning, it is clear lenders need to take action ‘on the ground’. Success will only be achieved if arrears management and collections strategies are centred on borrower engagement – it is an improved customer-bank relationship that is the key to a sustainable financial future for Ireland. The CBI published its Macro Financial Review in December 2013, which stated that domestic banks are currently capitalised above the 10.5 per cent minimum Core Tier 1 ratio. However, capital has been negatively impacted due to higher provisions, deleveraging, amortisation and operating losses. Conclusions and next steps: a sustainable financial future for Ireland While repossession and surrender may meet CBI targets, as noted in section 4.2, HML believes it is good practice to continually try and engage with a borrower, even throughout any legal process, to attempt to bring them back into MARP. Where lenders have been successful at deploying arrangements for customers, the next important step will be how these borrowers are managed to ensure they adhere to the terms. This links back to regular SFS monitoring; once a mortgage book has changed, lenders need to monitor and react to a customer’s changing financial situation, whether this improves or worsens. Borrower engagement and commitment remains the fundamental attribute to resolving mortgage arrears in Ireland, but it is a very detailed, specialised and timeconsuming task requiring expert staff, analytics and interpersonal skills, along with well-focused engagement and collection strategies. The CBI’s targets have moved away from banks simply needing to propose sustainable solutions to customers in mortgage arrears to completing deals. This watershed from proposal targets to deal-led ones will increase the pressure on lenders to make significant headway in contributing to a sustainable financial future for Ireland. Indeed, the June 2014 targets set in December 2013 show how the Central Bank is pushing forward with its desire to see lenders taking action and completing deals. Three categories of sustainable solutions were laid out in the CBI’s March 2013 targets; payments are re-established as per the original or a new schedule, the borrower opts for a Personal Insolvency Agreement or the property is surrendered or repossessed. While HML has seen considerable success in Ireland by placing customer outcomes, SFS completion and engagement at the heart of its arrears management and collections strategies, as with most things, more can be done. Predictive analytics will be increasingly drawn upon, with newly-developed scorecards set to be deployed in early 2014. Scorecards are statistical models that provide account-level predictions of certain events happening – a pre-delinquency scorecard, for example, predicts the likelihood of an account moving into arrears. Statistical models can help lenders build strategies and assess the capital required for future unexpected losses and help to build provisioning models. During Q2 and Q3 of 2013, 62 per cent and 55 per cent respectively of the banks’ proposed sustainable arrears solutions for borrowers fell into the surrender and repossession category27. Although these meet the requirements of the CBI targets for offers, they will be difficult to translate to deals in practice due to the lack of borrower engagement. Another option banks could take is to significantly change and refocus their efforts to engage their borrowers as is required under CCMA guidelines. This route is preferable for a number of reasons, not least that in many cases it will prove to be the best outcome for the borrower. It is accepted that while repossession is the least attractive option for the bank and the borrower from an overall economic and social perspective, in some situations it is the only option where the bank and borrower engagement relationship has broken down. Continued While as of January 2014 the ECB key interest rate remained at the historic low of 0.25 per cent31, the rate will not stay at this level. When economic recovery gains momentum, property demand and prices will rise, and the ECB will be required to keep a check on inflation via a higher base rate. As such, lenders need to take action now to resolve as many arrears cases as possible. The large cohort of borrowers who are just about managing their mortgage (and unsecured) repayments now could potentially slip into arrears - making it essential that preemptive solutions are also deployed as soon as possible. Lenders need to assess whether they could cope with an influx of further arrears cases. “While the aggregate coverage ratio increased marginally in the third quarter of 2013, to just over 50 per cent, concerns remain about whether domestic banks are sufficiently provisioned to cope with the outstanding stock of distressed loans,” the CBI said in its report. Meanwhile, capital ratios for foreign-owned banks in Ireland continue to move upward, with Core Tier 1 capital hitting 20 per cent in September 2013. The review came ahead of Ireland exiting the troika bailout in the middle of December, and while this step is positive, the CBI noted the “challenging” macro-financial environment. This is not only in relation to mortgage arrears, but also the “particularly acute” distress among small and mediumsized enterprises28. HML is taking several proactive steps to help combat this, not only by making our arrears management and collections strategies more sophisticated through the introduction of predictive analytics, but also through expanding our presence in Ireland. By getting more executives on the ground in Ireland, we can further support lenders with their Irish mortgage arrears portfolios and help them to shape and deploy their strategies before an interest rate shock potentially reverses any progress made with mortgage arrears in Ireland. This is compounded by recent comments by European Central Bank (ECB) president Mario Draghi, who expressed concern about the robustness of Irish banks following the results of the recent CBI’s analysis of the balance sheets of AIB, BOI and PTSB. Mr Draghi called for action to address weaknesses29. The International Monetary Fund recently reflected a similar concern in its statement to mark Ireland’s exit from the bailout and highlighted the specific need for banks to deal with the problem of mortgage arrears30. Get in touch For more information about our mortgage servicing in Ireland and how HML can assist you, contact managing director, HML Ireland David Kelly on +353862387145 or david.kelly@hml.ie “While the aggregate coverage ratio increased marginally in the third quarter of 2013, to just over 50 per cent, concerns remain about whether domestic banks are sufficiently provisioned to cope with the outstanding stock of distressed loans.” CBI’s Micro Financial Review http://www.centralbank.ie/publications/Documents/Macro-Financial%20 Review%202013.2.pdf http://www.ecb.europa.eu/press/pr/date/2013/html/pr131108_1.en.html 28 30 http://www.ecb.europa.eu/press/pr/date/2014/html/pr140109_2.en.html 31 http://www.ecb.europa.eu/press/key/date/2013/html/sp131216.en.html 29 http://www.independent.ie/incoming/irish-banking-sector-remains-a source-of-some-concern-mario-draghi-29843101.html http://www.irishtimes.com/business/sectors/financial-services/draghi expresses-concern-about-health-of-irish-banks-1.1629952 http://www.centralbank.ie/press-area/press-releases/Pages/ CentralBankpublishesoutcomeofMortgageArrears.aspx 27 20 21
  12. 12. Section 6: Definitions Code of Conduct on Mortgage Arrears (CCMA) NOTES Management Information (MI) MI is data that is used to report on performance achieved, to provide insight on future strategies and to deliver the input to statistic scorecard development which will enable operational strategies to be put in place to maximise collections performance. The CCMA sets out how mortgage lenders must treat borrowers in or facing mortgage arrears, with each case needing to be considered on its own merits. On July 1st 2013, a revised CCMA came into effect and replaced the previous one that was introduced on January 1st 2011. Mortgage Arrears Resolution Strategies (MARS) Under the revised code, it clarifies the CBI’s definition of an uncooperative borrower as broadly one who doesn’t provide their lender with the information that is required to assess the borrower’s financial circumstances. The CBI’s MARS programme engages with lenders to ensure they are developing strategic plans and have the operational capability to address the problem of mortgage arrears. The CBI’s review of lenders’ MARS includes the assessment of strategy roll-out, treatment options, resources, systems and MI. Standard Financial Statement (SFS) An SFS is a comprehensive document that details the income and expenditure of a household, in addition to other information. The CBI has created an industry standard format which must be used. It is designed to assist borrowers to set out their current financial circumstances so that their lender can determine which solution is the most appropriate and sustainable for each customer case. Consumer Protection Code (CPC) The CPC was first introduced in August 2006 to ensure a consistent level of protection for consumers. The code was updated on January 1st 2012. Accredited Product Adviser (APA) Mortgage Arrears Resolution Process (MARP) The APA designation allows individuals to become accredited under the CBI’s Minimum Competency Code, which applies to people who are advising consumers or and/or carrying out specified functions relating to certain retail financial products. Under Provision 16 of the CBI’s CCMA, lenders must operate a MARP framework when dealing with pre-arrears and arrears customers. The four steps of MARP are communication, financial information, assessment and resolution and by engaging with the framework, customers are provided with protection from repossession, to an extent. Arrears Support Unit (ASU) Under Provision 17 of the CCMA, a lender must have an ASU, which must be adequately staffed, to manage cases under MARP. The lender must pass on a completed SFS immediately to its ASU and provide a copy to the borrower. The ASU must immediately review a borrower’s case, including their SFS, if the individual ceases to adhere to the terms of an alternative repayment arrangement. 22 23
  13. 13. www.twitter.com/HMLIreland www.twitter.com/HMLcorporate www.linkedin.com/company/hml www.hml.ie

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