The Covid-19 pandemic brought about an unprecedented shutdown of the Irish economy. The unforeseen and sudden disruption to national economic and social activity has had a significant and ongoing negative impact on employment and income levels. This has the potential to create affordability issues for individuals and households in respect of existing financial obligations including residential mortgages, especially after a decade in which the indebtedness of home-owners was a topic of ongoing policy discussion.
Emergency measures introduced by the Irish government have sought to lessen the income shock and support employment retention through the Covid-19 unemployment payments and temporary wage subsidy scheme. These schemes are broadly responsive to the economic impact of the pandemic on individuals, households and business. However, the issue of eligibility and duration of these schemes, and the extent to which the quantum of any payment mitigates lost income, is central to the financial status of borrowers whose employment has been affected by the lockdown and the ongoing restrictions.
Apart from the government response to loss of income, financial service providers are offering payment breaks or reduced payments for borrowers who are encountering difficulties as a result of the Covid-19 crisis. The scheme is not a legislative measure, but rather a voluntary industry initiative, which per representative body, the Banking and Payments Federation Ireland (BPFI), is offered by retail banks, non-bank lenders and credit servicing firms to mortgage, personal and business loans. At present, the maximum duration of the payment break is six months: borrowers apply for an initial three month period and can then make a further application for an additional three months.
The provision of a payment deferrals and reductions is a pragmatic response in light of the unprecedented breadth of the economic impact of the pandemic. In functional terms, it takes a reduction in income and thus repayment capacity into account and prevents potential default which can have implications for both borrower and lender.
However, the legal core of the borrower/lender relationship is contractual and these Covid-19 payment breaks are not intended to, and do not in legal terms, reduce the extent of the financial obligations undertaken by the borrower under the loan contract. The facility amounts to a variation in the payment schedule for a temporary period, not a reduction in the amount payable under the loan agreement. This is reflected in the fact that although relevant borrowers may apply for a payment deferral, the borrower is required to discharge costs arising from this deferral of payment i.e. where the deferral of payment leads to increased interest payable.
Recent discussions between Minister for Enterprise, Trade and Employment Leo Varadkar and representatives from the five main banks have sought to clarify the status of interest charges and to delineate between recouping costs directly linked to the extension of the payment break and contribution to profitability through increased margin. The Central Bank has emphasised the requirement for consumers to be informed of the financial consequences of availing of Covid-19 related deferral or reduction in payment. They need to be told if this will be addressed through an increased monthly payment over the original loan duration or whether the lender will facilitate an extension of the term of the loan. While the breaks are facilitated by the lender, the financial consequences are ultimately borne by the borrower.
Crisis often breeds reform and the decade since the financial crisis has seen the overhaul of regulation of retail financial services around the provision of credit. Measures have addressed such vulnerabilities exposed by pre-crisis mortgage lending as the suitability of products offered to consumers, an increased focus on transparency and provision of information, the imposition of requirements to support responsible lending through a focus on the borrower's ability to repay, restrictions on the amount of the loan relative to asset value and income level. We have seen the introduction of legislation and statutory codes of conduct such as the Consumer Protection Code and the European Union (Consumer Mortgage Credit Agreements) Regulations 2016.
The reforms have sought to mitigate risk on the part of both borrower and lender by predicating the initial extension of credit on a sufficient assessment of its affordability with reference to the repayment capacity of the borrower. Notwithstanding that this assessment may encompass stress testing in respect of interest rate variation and factoring of differential employment patterns, it is underpinned by the consistency of the circumstances on which it is premised.
Consequently, significant and sudden changes in employment status and income are inherently problematic. When changes in personal or financial circumstances lead to payment difficulties within the term of a mortgage, another financial crisis related reform, the Code of Conduct on Mortgage Arrears, comes into play. This provides a statutory framework within which to assess the capacity for loan restructuring or variation to facilitate ongoing performance before lenders exercise their legal right to seek an order for repossession of a property. Currently, borrowers who avail of Covid-19 related payment deferrals or reductions but are unable to resume payments thereafter would fall within the scope of this framework.
The difficulties which may arise as a result of the Covid-19 pandemic are not unusual to the extent that they reflect the dynamic between income and affordability. They highlight the economic risk which is inherent in lending and, in particular, the economic vulnerability associated with long term loan contracts.
However, what is arguably distinct about the current situation is the unprecedented, unforeseen, universal, and extrinsic nature of the event, which is the catalyst to the loss of employment or reduction in income and the nature of the economic uncertainty moving forward. It remains to be seen what the scale of impact will be for borrowers and if there is any scope for a Covid-19 imprint on the regulatory framework in terms of risk mitigation.