Stephen Donnelly: Pilot debt scheme will keep borrowers on never-never
A plan to help people in distress merely protects banks and does little for those trapped by big loans.
IN refusing to participate in a new Central Bank scheme for borrowers, the credit unions are taking a leadership role long vacated by politicians.
Last week, the Irish League of Credit Unions (ILCU) took a stand. They refused to participate in a Central Bank pilot scheme aimed at over-indebted citizens. Announced last week, the scheme is aimed at helping borrowers with multiple distressed debts reach 'fair and equitable' solutions with their lenders.
Sounds dull, I know, but some mechanism is desperately needed. Many people with unsustainable debts have several creditors. A family might be servicing their mortgage but, due to job loss or pay cuts, can't meet payments on a student, credit union or business loan. Five years into the crisis, no workable framework exists for multiple lenders to agree a joined-up position. So families get bounced between lenders, and the interest continues to mount. And that affects everybody.
So, the Central Bank has, finally, stepped in. Its scheme is snappily entitled 'Framework for a Pilot Approach to the Co-ordinated Resolution of Multiple Debts owed by a Distressed Borrower'. It provides a common set of rules for lenders to use, so that a single agreement can be reached between borrowers and their lenders. The launch was greeted warmly by RTE, who reported that "a major new initiative has been agreed . . . to alleviate the debt burden of over-stretched borrowers".
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Why, then, are the credit unions refusing to play ball? Because, predictably, the scheme is not what it seems. It may, in the short term, help distressed borrowers pay the interest on their loans. But it won't really help them pay those debts down. It will, however, increase bank profitability on many of the loans.
Here's how: lenders will follow a 'Multiple Debts Resolution Waterfall'. This specifies a strict order of steps lenders must take with borrowers. It starts with lenders putting the mortgage on interest-only for six months. This increases bank profits. If that doesn't work, lenders are to reduce credit card and overdraft interest rates to 9 per cent for five years. This might help, but the lender still makes significant profits at 9 per cent – and gets the capital back in full.
If that doesn't do the trick, lenders are to extend the repayment terms for any unsecured loans, followed by the mortgage. Both of these steps increase profits for the banks. After that, lenders will reduce interest rates on unsecured debts to 4.5 per cent, and then do the same for the mortgage, for up to five years. Again, lenders are still making considerable profits at these rates, and the capital is paid back in full.
Then, and only then, are lenders to consider a 'Significant Mortgage Restructure'. But fear not – the two options suggested are split mortgages and negative equity trade-downs. Some banks, like AIB, PTSB and EBS will, to be fair, forego profits on the split mortgages, but all capital is still paid back. Bank of Ireland forego no profits on the split mortgage, as they charge the full rate of interest on the shelved portion. No bank loses any profits on a negative equity trade-down.
In the Central Bank document outlining the process, the sentence "Full repayment of all principle expected", or one just like it, is repeated five times on one page. And the scheme puts the banks in the driving seat. They decide what constitutes a reasonable standard of living for borrowers. They decide what a sustainable offer looks like. They decide which borrowers are eligible – those designated as 'non-co-operating' by the banks are excluded. There is an oblique reference to unsecured debt being written down – and it is the bank holding the mortgage that decides.
'The plan just helps people
And so the ILCU has withdrawn. It believes the scheme has been designed, not to help Irish citizens, but to protect bank capital – a pattern that has become the norm in Ireland. The credit unions recognise that debts have to be written down if citizens, and society as a whole, are to recover. It sees this scheme for what it is – a method of keeping borrowers on the never-never. Of helping them service their loans, not getting out from under them.
This works for the banks – it keeps the money flowing in and means they don't have to make provisions on their balance sheets for not getting their capital back. In many cases, it means total profits from distressed borrowers will be far higher than had they been able to pay back the loans on schedule.
But it doesn't work for the country as a whole – keeping large swathes of people in debt traps locks in economic stagnation and double-digit unemployment. The money earned by these households is not circulating. It is not being invested in new businesses. Instead, it's flowing into the banks and staying there. Everybody is affected. This week the ESRI told us that people under 45 years of age have reduced their consumption by 20 per cent – significantly more than their incomes have fallen.
Why? Because they're trying to pay down these debts. One result is that they're opting out of private health insurance. But their premiums support the whole system, as younger people pay in far more than they use. And so we hear that the private health insurance market might collapse. For better or worse, we are in this together.
The banks do not take this system-wide view. Their job is not to find the best solution for Ireland, but to find the best one for themselves, to return to profitability as quickly as possible. Nor is it the job of the Central Bank – to it we entrust the task of regulation – to ensure the banking system does not destroy itself again.
The wider view, the long-term socio-economic planning, is meant to fall to the politicians. But we appear to have washed our hands of any responsibility. The Dail doesn't hold the Cabinet to account. And the Cabinet acts to protect the banks. Between this one and the last, they gave the banks €64bn – more than half of which went to two dead casinos.
They set up Nama to clear the banks of their dodgy property loans. They offered 'no opinion' on compensation packages worth more than €900k. They shrugged at AIB topping up its pension pot with €1.1bn of public money. They gave the banks a veto and a host of other sops in the insolvency legislation. They are allowing pensioners to be wiped out in the liquidation of Anglo.
And this week, they watch as the Central Bank introduces the wrong scheme. There is no doubt that some Central Bank officials would push the banks further, to provide real protection and meaningful solutions to Irish citizens. But that requires political leadership – and when it comes to the banks, that is something we are all still waiting for.
Stephen Donnelly is TD for Wicklow East