Keeping people in their homes: EU law offers relief to victims of predatory lending
This post was written on publication of the Keeping People in their Homes Bill in 2017.
In Ireland today, 28,000 households face losing their homes due to mortgage arrears spanning more than two years. In such cases, lenders can apply to the Circuit Court for an order of possession under the Land and Conveyancing Reform Acts 2009-2013. At repossession hearings, borrowers who have been victims of predatory lending have the opportunity to introduce evidence attesting to that fact, and the courts have considerable discretion in relation to making, suspending, or executing court orders for possession.
Keeping People in their Homes
The introduction of the Keeping People in their Homes Bill 2017 demonstrates an effort to give the courts’ discretion a procedural basis that would be beneficial to borrowers facing repossession--particularly for those who may not be aware of, or have the ability to raise, arguments concerning their status as victims of predatory lending. The bill creates a statutory framework for Irish courts to effectively conduct proportionality assessments that take into consideration a range of factors relating to the position of the borrower over the life of the loan and the effect granting the order would have on the household. The bill proposes substitution of section 97 of the Land and Conveyancing Law Reform Act 2009 with a range of considerations to be made before an order for repossession will be granted, including:
(d) examination of all of the circumstances surrounding the execution of the mortgage contract, including the level and extent of information provided, the position of the parties, legal advice given in relation to the mortgage contract, vulnerability of the consumer, the extent to which original lending decisions, made at the time of granting the mortgage application, were reasonable and responsible, and an evaluation of the application of—
(i) any unfair terms and any appropriate adjustments, and
(ii) Consumer Protection Codes of 2006 and 2012 (where applicable)
If the bill becomes law, a court will be required to examine all circumstances surrounding the execution of the mortgage contract before granting an order for repossession, with particular attention given to unfair terms and the application of relevant consumer protection codes.
The new legislation is responding to a spike in the number of repossession orders granted in the past three years. There are several reasons for the initially slow rate of repossession orders granted by the courts. The 2009 High Court Case Start Mortgages v Gun revealed a lacuna in the law that put a halt to claims for possession of registered property under Section 62(7) of the Registration of Title Act 1964.
The Land and Conveyancing Law Reform Act 2013 closed the legal loophole, making it much easier for lenders to repossess properties. The reform of the law combined with the recent increase in property value has prompted financial institutions to pursue house repossessions much more vigorously. The CEO of the Irish Mortgage Holders Organization predicts as many as 25,000 repossessions will take place over the next two years saying, “the banks weren’t showing compassion, they were waiting for an increase in property prices.” Legislation specifically designed to keep people in their homes provides counterbalance to these legal and economic pressures.
The Unfair Terms in Consumer Contracts Directive (UTCCD)
Developments in the jurisprudence of other EU Member States, on the subject of predatory lending, are also influential in the language of this bill. The Unfair Terms in Consumer Contracts Directive, transposed into Irish law in 1995, has been invoked in a flurry of recent European cases. The remarkable surge has led to academics calling the directive a “sleeping beauty” that has been awoken by the courts. It is worth restating the aims of the Directive before examining some relevant case law.
According to Europa.eu, Directive 93/13 introduces a notion of "good faith" in order to prevent “significant imbalances in the rights and obligations of consumers on the one hand and sellers and suppliers on the other hand.” This general requirement is supplemented by a list of examples of terms that may be regarded as unfair. Terms that are found unfair under the Directive are not binding for consumers. The directive also regulates the provision of information to the consumer with an aim to increase transparency. Terms must be drafted in “plain and intelligible language”, and where ambiguities arise, the interpretation favourable to the consumer will prevail. EU countries are obliged to provide effective enforcement of these rights under national law.
Since 2008, national courts have referred 21 cases to the CJEU under Directive 93/13. In Mohamed Aziz v. Caixa d’Estalvis de Catalunya, Mr Aziz, who had obtained a mortgage from the defendant bank to purchase a home, experienced difficulties making payments and the bank initiated proceedings for repossession. After the conclusion of the mortgage enforcement proceedings but before his eviction from the home, Mr Aziz complained in separate, declaratory proceedings that a term in the mortgage agreement was unfair. Due to procedural rules in Spanish courts, Aziz was unable to raise his complaint about the unfair term in the mortgage enforcement proceedings. Mr Aziz lost his home as the judge in the declaratory proceedings had no power to stay repossession pending his ruling.
The Aziz case established and re-affirmed a number of important rules and principles that can be used to enhance protections for victims of predatory lenders. Firstly, state mortgage enforcement systems (the Circuit Courts and sometimes High Court in Ireland) must take into account the fact that the consumer is in a weak position vis-à-vis the seller or supplier, as regards both his bargaining power and his level of knowledge. Secondly, a national court is required to assess of its own motion at any point in the proceedings whether a contractual term falling within the scope of the directive is unfair, compensating in this way for the imbalance which exists between the consumer and the seller or supplier. Thirdly, in the mortgage enforcement context, subsequent, compensatory relief would be “incomplete and insufficient” and does not offer an adequate or effective means of preventing the continued use of that term as required by the directives. Finally, loss of the family home warrants additional consideration by the court.
Aziz in Ireland
In December 2016, the “Europeanization of Contract Law” gained solid footing in Ireland. In a case where AIB was seeking summary judgement against a Dublin farmer and his wife, Barrett J held that European consumer regulations on unfair terms should apply. Citing Aziz, he said Irish courts facing summary applications should identify whether any of the terms of the loan agreement at issue might be unfair for the purposes of the EU regulations. As reported in the Irish Times, Barrett J said the CJEU “appeared to contemplate a court, even in an adversarial system such as Ireland’s, acting in an inquisitorial manner.” Barrett J refused AIB’s application and now the matter will go to a full hearing.
The application was made just two months after another couple was granted leave to bring judicial review proceedings of a home repossession order made in Co. Laois. The High Court was told the County Laois Registrar failed to consider whether the Grants mortgage contract with Pepper Finance Corporation was fair when granting a repossession order, and failed to consider if the remedy was proportionate given the borrowers’ circumstances.
Facially, the circumstances of the loan raise serious doubt that the mortgage contract was negotiated in good faith. In 2004, the couple took out a loan for €70,000 to pay for insulation and new heating. At the time Ms Grant was earning about €400 a month and Mr Grant was involved in community employment schemes. In 2006, the Grants were having difficulties meeting the repayments. In 2007 they were cold-called by a broker and on foot of this refinanced the original loan and consolidated other debts, and this was also secured on the home. The loan for €130,500 was to be paid over 22 years. The total repayable would be €255,063.60 and monthly repayments would be €966.15. By May 2009 the Grants were in default and their loan with GE capital was sold to Pepper Finance Corporation. In 2014 they were served with a civil bill for repossession. A repossession order was granted in July 2016 with a stay of nine months.
EU Directives and County Registrars
The lesson of Aziz is that where consumer protections have failed to save borrowers from unaffordable mortgages, they may still provide relief from repossession orders. Unfortunately, county registrars who grant the majority of repossession orders in circuit courts rarely have the legal expertise to conduct the kind of assessment required by EU law. In January, Master of the High Court Edmund Honohan said that county registrars, “should not be dealing with these cases at all… The rules and procedures of the Circuit Court need to be updated to allow for a hearing with regard to EU legislation on unfair contract terms in every possession case”.
The Keeping People in their Homes Bill may provide the necessary amendment to the rules and procedures of the Circuit Court if enacted. However, the thousands of repossession orders already granted in the Circuit Court may be open to judicial review because these courts have not been applying EU law. The cost of the 2008 banking crisis, estimated to be around 60 billion, would increase significantly if the state is found liable for damages related to illegally granted repossession orders. Cognisant of the potential cost to the taxpayer, The Irish Centre for European Law has been conducting workshops around the country encouraging legal practitioners to utilise Aziz and Directive 93/13 to tackle repossession orders.
Caveat Emptor and Personal Insolvency
Supporters of the government’s efforts to aid borrowers will no doubt cite the introduction of the Personal Insolvency Act 2012 as an appropriate means for tackling unaffordable debt. The act introduced reforms to the Bankruptcy Act 1988 together with non-judicial debt settlement arrangements which allow the write-down or restructuring of debt owed by certain eligible individuals. Unlike the Keeping People In Their Homes Bill, the Personal Insolvency Act does not oblige lenders to comply with codes of conduct nor does it include language that acknowledges the inequality of bargaining power between lender and borrower as required by EU law.
The main criticism levelled at the Personal Insolvency Act is the “bank veto”. Any deal must have the agreement of creditors representing at least 65% of the total debt. In 2015 the Act was amended to give the courts the ability to overturn a secured creditor’s decision to reject a borrower’s proposal for a Personal Insolvency Arrangement (PIA); the veto was vetoed. However, the number of PIA approvals remains low, increasing to just 30.8% after the government changed the rule in May 2015. At the end of Q2 2015, 1,163 insolvency arrangements had been approved. Considering that around 30,000 households are currently in arrears for more than two years, the Personal Insolvency Service is a slow and costly process for dealing with of the problem of unaffordable debt. The concern with “strategic defaulters” taking advantage of the scheme has resulted in a piece of legislation that once again places the interests of banks before the interests of the general public.
Conclusion
In Ireland, the legal and regulatory response to predatory lending in mortgage contracts has yet to offer real relief for victims of this practice. It has also failed to keep pace with our obligations under EU law. The Keeping People in their Homes Bill is an effort to rebalance the scale and keep pace with European jurisprudence.