Stephen Donnelly: Banks have too much wiggle room on debt law
Late Wednesday night in Leinster House the Personal Insolvency Bill was voted into existence. It has the potential to help hundreds of thousands of people, but contains one major flaw – it requires the good will of the banks. Events this week suggest that, for some banks at least, this may be in very short supply.
Here's an example of how the bill is meant to work, based on a real case. A lady in Wicklow borrowed €250k to buy an apartment in 2006. It's now worth around €70k. She had to give up her job in 2009. Her changed circumstances mean that when she finds a job, she will be able to service a mortgage of €150k. Under the new legislation, a Personal Insolvency Practitioner, PIP, would propose a deal to the bank whereby she services the €150k, and in three or four years the bank surrenders the other €100k. To ensure she doesn't profit from the deal, the PIP further proposes that if the apartment is ever sold for more than €150k, the bank gets the difference. She stays in her home, she is taken out of a debt trap which would otherwise destroy her life, she works hard and contributes to the country's economic recovery, and the bank gets far more than if it had repossessed her home and sold it.
All good, in theory. But the bill gives the bank a veto over any proposal from the PIP. Deals like this one require the banks to agree to debt surrender, or 'debt forgiveness'. So what's their position?
Last Monday, the chief executive of Bank of Ireland, Richie Boucher, was reported to have "categorically ruled out reducing a portion of the personal debt of any of its customers". On Thursday, Bank of Ireland's two public interest directors appeared before the Finance Committee. I asked them if they supported Mr Boucher's position, of no debt surrender, or Justice Minister Alan Shatter's position, of debt surrender where appropriate. They didn't say. Though their replies annoyed the chairman of the committee so much that he ended up shouting at them.
On Wednesday, the public interest directors of Permanent TSB appeared before the committee. One of them, ex-Fianna Fail Finance Minister Ray MacSharry, was similarly categorical. He repeatedly stated that there would be no debt forgiveness.
Credit where credit's due, the chief executive of AIB, David Duffy, has stated that his bank will be engaging, not only in the letter of the law, but in the spirit of it, too.
Unlike Mr Shatter, I never expected the banks to co-operate with this legislation. I was taken aback by the public interest directors, but Mr Boucher's position is entirely rational. His job is to make Bank of Ireland as much money as possible, and you don't do that by surrendering debt, no matter how unlikely you are to ever get it back.
Nonetheless, I supported Mr Shatter and his bill. Why? Because it contained one critical change to the law – it reduced bankruptcy from 12 to three years, and that's a game-changer. Let's go back to the lady in Wicklow. Assume the bank vetoed the PIP's proposal. Assume they said: "We'll take the money for the €250k she can service, but we're never going to surrender the
other €150k. So if her financial circumstances ever improve, we'll be back for the rest." In this case, the bill gives her a credible threat. It allows her to say: "If you don't agree to the PIP's proposal, I will bankrupt myself. Instead of the €250k, you'll get €70k for the apartment, less costs, and in three years I will owe you nothing." That's a pretty effective threat. In this case, it should lead to the bank accepting the proposal.
However, the bill contains a 'Get out of Deal Free' card for the bank. Amendment 200, voted through by government TDs on Wednesday night (voted against by all non-government TDs), allows the bank to apply for a 'bankruptcy payment order'. This gives it a portion of the bankrupt's income for up to five years. And it can be applied for right up to the end of the three-year bankruptcy period. Back to Wicklow, now the bank can point out that it's not really three years of hardship the lady has to deal with, it's eight.
Mr Shatter points out that the court may not award the bank any such payment order; that the amount awarded may be a small portion of the bankrupt's income; that the real bankruptcy period is still just the first three years. And he's right. But that's not how negotiations between banks and distressed mortgage-holders work. The banks will point to the line in the legislation saying the total period can be no more than eight years. And it's the eight years that will stick in people's heads.
Three years is a credible threat for most borrowers to make. Eight years is far less so. And it is the threat of eight years the banks will use to intimidate borrowers into continuing to make payments. It is the card they will play to avoid surrendering any debt.
Again, Mr Shatter has made it very clear that if the banks don't play ball, he will be back to Dail Eireann with amending legislation. But we shouldn't be in that position. The legislation just passed should not contain the considerable wiggle room it affords the banks. As we can see, so confident are they of the weakness of the bill, several are already stating publicly that they're not going to do what is expected of them.
It is vital that the banks surrender a hold on unsustainable debts. The cost to the State would be relatively small. We have given the banks billions of euro to deal with distressed mortgages and other debts. They have already adjusted their own balance sheets accordingly. In our example above, the bank has already used our money to accept and provide for a loss of €150k on the mortgage – it's just not willing to pass that relief on to the borrower.
But the gain to the State would be enormous. Nearly one in five residential mortgages is now in arrears or has been restructured. That means about 350,000 men, women and children are in houses in great financial distress, just on their mortgages. These adults cannot contribute to our recovery as much as they could if their debts were sustainable and they knew they would not be pursued for the rest of their lives.
We need insolvency and bankruptcy legislation that encourages entrepreneurial risk-taking, that takes unsustainable debts out of the system, and that facilitates recovery. For this to happen, debtors and creditors need to be on an even footing at the negotiating table. The personal insolvency legislation nearly fit the bill. I fear it fell at the last hurdle. I hope I'm wrong, and failing that, I hope to be in the Dail discussing tighter rules with Mr Shatter.
Stephen Donnelly is the Independent TD for Wicklow and Carlow East