IN PRACTICE
Advising clients on how to deal with
Vulture Funds
BY
Tom Murray
Advising clients on how to
deal with Vulture Funds
Tom Murray outlines the pros and cons and the best ways of dealing
with Vulture Funds.
Tom Murray is authorised
by the Insolvency Service of
Ireland to carry on practice
as a personal insolvency
practitioner.
The Government to some extent took heed
of these concerns and new legislation, the
Consumer Regulation (Regulation of Credit
Servicing Firms) Act 2015 (the “Act”) to
regulate the activity of administering and
managing loans to Irish individuals and
small to medium-sized enterprises (“SMEs”)
was passed into law on 8 July 2015.
Crucially, a central premise of the Act is
to ensure that Irish individuals and SMEs
continue to enjoy statutory protections
where their loans have been transferred to
an unregulated purchaser – i.e. the same
terms, conditions and protections that they
had with the original provider of the debt.
As the deleveraging of banks continue
many CPA members and their clients are
likely to find that their loans have been
sold to one of the so-called Vulture funds.
In this situation practitioners may be
asked to provide advice to clients (or may
themselves be implicated as borrowers).
Significant concern was brought to bear
by practitioners, lobbyists, journalists and
interested parties on how individuals and
companies would be treated by these
funds, particularly as the funds were in
many cases unregulated and, also, as it was
felt that they may not have a long term
commercial interest in this jurisdiction.
A significant number of these firms
are “Section 110 Companies” and are
unregulated. Section 110 companies are
special purpose vehicles (SPVs) established
as ‘qualifying companies’ under section 110
of the Irish Taxes Consolidation Act 1997
(as amended). Provided they meet certain
conditions, such companies can conduct
their activities and participate in financial
transactions on a tax neutral basis.
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90 YEARS OF CPA
Previously, where such a loan was
transferred to an unregulated purchaser
the borrower would lose such statutory
protections. Whilst some purchasers
agreed voluntarily to observe these
regulatory standards, this was not
considered by the Irish government to be
satisfactory from a policy perspective.
The Act requires any person who
administers or manages a loan portfolio,
other than an owner of relevant loans
which is itself authorised to provide credit in
Ireland, to become authorised as a servicing
firm by the Central Bank of Ireland (“CBI”).
An unregulated owner, such as certain
Vulture Funds, need not become authorised
where it has appointed a servicing firm and
engages in high-level strategic decision
making only in relation to the portfolio. In
terms of what is “High-Level” strategic
decision making, the unauthorised person
must limit themselves to:
• Determining the overall strategy for the
portfolio;
• Maintaining control over key decisions
relating to the portfolio; and
• Taking decisions that are necessary to
enforce the terms of a credit agreement.
A further provision is that the unregulated
loan owner does not require authorisation
to do any of these things, provided that
it does not take such actions in a manner
which if taken by a regulated entity would
constitute a breach of Irish financial
services law.
In turn those servicing firm’s have to obtain
CBI’s approval of its management and
owners as suitable persons to be involved in
the provision of regulated financial services.
So having established the above, what are
the Pros and Cons of dealing with these
funds?
The Pros
• As outlined above, the Consumer Protection
(Regulation of Credit Servicing Firms)
Act 2015 gives protection to consumers.
In addition, the full range of Personal
Insolvency and other legal debt resolution
mechanisms remain fully in place.
• They are fiercely commercial and
pragmatic, and can arrive at quick
decisions.
• The biggest pro, from a borrower’s
perspective, is that they are prepared to
actually write-off debt, close the file and
move on.
The Cons
• This fiercely commercial and pragmatic
approach means that whilst a borrower
of, say, 25 years, with a mainstream bank
might be given some credit for being a
loyal customer, absolutely no credit is
given for such loyalty by a vulture fund.
ACCOUNTANCY PLUS. ISSUE 04. DECEMBER 2016
IN PRACTICE
BY
Advising clients on how to deal with Vulture Funds
Tom Murray
How to deal with a vulture fund
At the outset it is important to manage
client expectations. One of the issues
facing professional advisors is that some
debtors feel that the funds should accept
what they actually paid for the loans, with,
say, an added 10% for a profit margin.
Unfortunately, the funds do not operate
on that basis. Funds work debt down, not
purchase price up!
In our experience advising in this area,
Irish vulture funds can be categorised into
two types:
• the “short haul” who have purchased
commercial debt, and
• the “long haul” who have purchased
“home” property mortgages.
In our experience, the “long haul” funds act
very similarly to the mainstream banks,
given the constraints imposed by the
Mortgage Arrears Resolution Process. They
have been further constrained by the recent
amendments to the Personal Insolvency Act
2012, whereby the creditors’ previous “veto” to
Personal Insolvency Arrangements (“PIA”) has
been considerably weakened. The number
of borrowers and professional advisors
who are simply unaware of the benefits of
Personal Insolvency Arrangements when it
comes to dealing with the banks and funds
never ceases to surprise us.
“Short haul” funds act very differently
from mainstream banks. They have a
tighter timeframe and are less patient. By
definition, most of the loans bought are
already in default, which enables them to
“call in” the loans almost immediately.
Both types of funds adopt a systematic
approach to collecting their debts. Borrowers
with home mortgages will have to complete
a Standard Financial Statement, and other
borrowers will be asked to submit a sworn
Statement of Affairs.
Any proposal to a fund should address any
tax advantages to be had. For example, we
frequently have cases in which a capital
gains tax liability arising on the sale of one
property can be sheltered by a capital loss
on the sale of another property.
One of the first steps that any personal
borrower should consider is whether they
are eligible for a “no veto” type PIA where
the debtor was in mortgage arrears on
the family home as at 1 January 2015. The
new legislation allows debtors to utilise
examinership-type voting principles in a PIA.
Conclusion
If the borrower has no unencumbered
assets and does not have a relatively high
level of earnings, then it should be possible
to negotiate a quick settlement with the
“short haul” funds.
The “long haul” funds will keep the
borrowers on a tight leash, and request, at
a minimum, yearly SFSs. Very few of the
“long haul” funds will do debt forgiveness
on a family home: unless the borrowers
are prepared to sell the family home. This
is another area where clients may have
unfounded expectations which need to be
managed carefully.
Borrowers with non-encumbered assets
and/or a high level of income will face a
tougher battle!
Many of these cases are resolved by
presenting a proposal to the fund that
shows the fund will achieve a better
realisation from the proposal than from a
bankruptcy of the borrower. On the basis
that that the fund acts commercially, they
should accept such a proposal.
In summary - as a direct consequence of the
Act - Irish individuals and SMEs continue
to have the same protections against the
Vulture Funds as they had against the
traditional lenders including the enjoyment
of rights under the CBI Codes of Conduct
including the Code of Conduct on Mortgage
Arrears, the Consumer Protection Code and
the Code of Conduct for Business Lending
to SMEs. Furthermore, they also retain the
right to refer any concerns or disputes to the
Financial Services Ombudsman.
In this scenario, commercial decisions and
legal reality will be brought to bear.
It is then up to the individual and SME ‘s
working with their advisors to endeavor
to avoid scenarios where funds reject
“reasonable” proposals and go down the
costly enforcement route resulting in a
lesser realisation for the fund.
In this regard, it is important to act early,
act honestly and transparently and to
formulate and present a clear and concise
proposal. It is important to assist the
decision maker by ensuring they have a
full understanding of the complexities
of the security documentation and the
importance of the borrower’s co-operation
in selling the assets.
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ACCOUNTANCY PLUS. ISSUE 04. DECEMBER 2016
Call us today for more information!
Tel: 1890-CLOSED (1890-256733)
Email: [email protected]
90 YEARS OF CPA
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