Jim Daly calls on Minister for finance to clampdown on Banks raising interest rates for struggling mortgage holders.

Jim Daly (Cork South West, Fine Gael)

I wish to bring to the attention of the Minister the current situation that borrowers of term mortgages in the commercial sector are experiencing if they have some temporary difficulty in making the scheduled repayments set out when they originally availed of the facility. I have been made aware of a number of cases. The Minister will appreciate it is sensitive information and I will not disclose the specifics at this stage.

I am informed that the financial institutions concerned have no difficulty in converting capital and interest-type repayments to interest-only type but they are demanding large increases in the interest rate on the entire sum borrowed. To add further insult to injury, the by now almost fully State-owned banks are not only taking advantage of small businesses that are struggling to meet repayments in the challenging economic climate but are essentially defrauding the customers by charging the increased rate of interest on the entire sum of moneys borrowed and not on the amount of capital in question during the proposed capital repayment holiday of 12 to 24 months.

I believe that any person who is making a real effort and fighting to allow his or her business to survive over the next few years must receive a level of co-operation from his or her banks when the pressure is on him or her to make scheduled repayments that were agreed and negotiated in an entirely different economic environment.

This House will also recognise that every business person who is making a genuine effort is aware of the reckless lending that went on between banks and the borrowers, with some banks lending up to €2 billion to individuals to speculate on the property market. These same business people will also be aware that the institutions which carried out this type of reckless lending will most likely never see the return of either capital or interest on these larger accounts. Instead the Irish taxpayers, including every business person in the State and many more, will foot the bill for years to come.

To consider the subject of interest-only repayments on borrowings in general, I cannot see what difficulty the banks would have with any customers who are making a genuine effort and are in good communication with their bank to convert to interest-only repayments in the short term. After all, there is absolutely no loss of revenue to the bank. The only revenue the institution concerned will make from a particular account is the interest element of that account so, in essence, by deferring some of the capital for a prolonged period the bank will earn more interest on that account than it would by sticking to the original agreement.

At present, many people are so worried they cannot sleep at night, they cannot enjoy family life at home, and they cannot concentrate on making their business the success it used to be because the banks are their biggest nightmare and fear. I am aware that in many cases, computer-generated letters are the first thing to reach borrowers who find themselves in difficulty, which can be very intimidating and distracting to borrowers, even making them afraid of doing the right thing, which is to communicate with the bank. The banks need to review their methods of handling these situations and I firmly believe the House should have a role in introducing such legislation.

I respectfully ask the Minister to take on board my request to review the manner in which the two pillar banks in the State deal with persons requiring to move to interest-only payments for a period of time to allow for the drastic changes in economic circumstances which have befallen so many business people throughout the State. I do not accept that raising the interest rate for the duration of the holiday in capital repayments is just, moral or helpful in these times when we are all trying to reignite the engine of our economy. At a time when we as legislators proposed to ban upward-only rent reviews in the property sector, perhaps it is time the House also considered similar action to prevent the two State pillar banks from upward-only interest reviews for struggling businesses throughout Ireland.
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Michael Noonan (Minister, Department of Finance; Limerick City, Fine Gael)

I thank Deputy Daly for his contribution. One of the difficulties in replying to the Adjournment debate is that one works from a prepared script and I had no previous sight of the Deputy’s views. I will read out what I have and then comment on what he stated.

The Deputy will appreciate that a balance must be achieved by the Government between influencing the banks through the bank guarantee scheme and other financial support incentives, while at the same time staying out of the day to day running of these institutions. Banks must operate on a commercial basis. In recent years, Ireland had very low mortgage rates but now it is clear this era is coming to an end for both owner-occupiers and commercial mortgage holders.

The decisions financial institutions operating in Ireland make on the mortgage interest rates they charge to customers are commercial decisions for the institutions concerned. The Department of Finance has no direct function in an individual institution’s decision on the matter. I understand the public anger when a financial institution increases its variable mortgage interest rates. Unfortunately these increases reflect market realities, including the cost of accessing funds.

As described by the Financial Regulator, Mr. Matthew Elderfield, when he appeared before the Joint Committee on Economic and Regulatory Affairs last year, part of the reason for low mortgage interest rates was that the banks’ business models were fundamentally flawed. They were chasing unsustainable profits through risky property and development lending. These profits effectively subsidised aggressive campaigns for mortgage market share and unsustainably low interest rates. This business model is now being fundamentally recalibrated. Banks’ costs of funding are significantly higher. Interest rate increases for borrowers are an unfortunate but inevitable consequence of these factors.

The State has a duty in this area to prioritise its efforts and resources to assist owner-occupier mortgage holders. Unfortunately the financial crisis has created conditions in which many home owners, through no fault of their own, now find themselves in arrears with their mortgage repayments and at risk of losing their homes. Through its agencies, the State is assisting mortgage holders in arrears in a m easured and proportionate manner. I set out below some details of this assistance.

The mortgage interest supplement scheme, managed by the Department of Social Protection, provides assistance where the mortgage relates to a person’s principal private residence. It supports approximately 18,500 mortgage holders. The Money Advice and Budgeting Service, MABS, provides a national, free, confidential and independent service operating from 53 offices nationwide. I understand that MABS devotes a substantial amount of its resources to dealing with client mortgage difficulties.

The report of the expert group on mortgage arrears and personal debt also made a series of recommendations designed to help as many people as possible save the family home. Many of these recommendations were implemented through the revised Central Bank code of conduct on mortgage arrears while the deferred interest scheme, or a variation of it, proposed by the expert group will be adopted in 2011 by lenders representing the majority of the market.

One of the main recommendations of the expert group was that a deferred interest scheme should be put in place. This was intended to allow borrowers, subject to certain criteria being satisfied, to pay at least 66% of their mortgage interest, but less than 100%. Payment of the balance may be deferred for up to five years. Mortgage lenders have been requested to commit to the scheme. Lenders representing the majority of the market have already indicated their willingness to implement the expert group’s proposals for a deferred interest scheme or a variation of it, including AIB, AIB Mortgage Bank, Bank of Ireland, ICS Building Society, EBS, Haven Mortgages, Permanent TSB and Irish Nationwide Building Society.

Much of the material I am reading was already put on the record in response to the Private Members’ debate. I listened carefully to Deputy Daly and I do not think my reply meets the case he made. If he provides me with a copy of his script I will raise it with the appropriate authorities to see whether something can be done. He spoke about commercial mortgages which are moving to an interest-only repayment scheme where the lending institution is doubling the interest rate and the extra tranche is being justified because capital repayments are not being made. This is a particular area that needs examination.

As I stated at the beginning, it is difficult to reply to an Adjournment debate in realistic terms because one does not know the case that will be made when the script is being drafted. I was very interested in what the Deputy stated and if he provides me with a copy of his script I will ensure the regulatory authorities get sight of it and see whether something can be done.