Into the breach: Bridging the gap between legal and social realities?

14 May 2009

Presentation by Noeline Blackwell, Director General, FLAC

to Respond! conference, 7 May 2009

It surprises few people, if anyone at all, that those who have fewest resources are hardest hit in the current economic downturn. Those who are most vulnerable are the first to suffer and will probably have most to lose. This is normal, and expected. However what is somewhat more remarkable is that the protections for consumers were so weak and that, even when they have been exposed, there is little effort currently underway to try to balance the previous lack of protection.

In its work promoting access to justice, including justice relating to financial and consumer rights, FLAC regularly encounters evidence that those who are most vulnerable are the most likely to suffer. The apparent equality of the law turns out - yet again - to favour those who are better resourced, and near to the seats of power and influence. This is particularly evident in the area of housing.

When the sub-prime housing market collapsed, those who became immediately and visibly victims were those whose jobs were the least stable, and those who had been given loans and taken on commitments including mortgage commitments which government itself now sees as irresponsible and reckless. Many of the most irresponsible loans were issued by lenders in the sub-prime market, a market which was not even subject to regulation until June 2007.

What looked like neutral and equal legal provision in commercial relationships between lenders and borrowers now shows up as an entirely unequal and biased relationship where the incentive of ever increasing credit clearly outweighed the obligation to ensure that vulnerable consumers were protected. Sophisticated sales techniques were used to sell money to people under pressure.

This is why FLAC now hopes that the current economic down will lead to a more realistic assessment of the harm that has resulted to vulnerable sectors of society from a failure of financial consumer protection. We hope that an assessment, such as is happening at this Respond conference, will lead to recognition of the obligation to protect those that should have been protected at an earlier time. At the same time, the reflection on the gap between the previous level of oversight, and the reality of society today is also an opportunity to put a framework in place for a fairer society in the future.

As this conference is hosted by an organisation which addresses one of the most basic needs in society, the need for shelter, my focus will be on how the need for housing finance, and the lack of fairness between the treatment of lender and borrower has led to a legal framework which protects the lender, at the expense of the borrower.

I will use an example. Philip and Joan have a particular set of circumstances in my example. But as I think of them, I think of many others. In my example, Philip is a self-employed tradesman. However, he and Joan could be both employees of a major multi-national company which has shut down, leaving little other employment in a small town. He could have become ill. They could have had another child. [He could be you. Joan could be me]

In this case, while details have been changed to protect anonymity, the problem has become an all too common situation that we encounter in our information and advice work in FLAC. It is a problem which many others - MABS advisors, politicians in clinics, Community Welfare Officers - all come across on a daily basis too.

Philip and Joan are married to each other. They are in their late thirties, with a school going young family and a house with a mortgage which was 1/3rd repaid. Philip is a tradesman. In 2003, he left his employment to start his own business, with his wife's help on the administration. By 2005, the business was doing nicely and expanding. To finance the expansion, they borrowed money from a number of sources and put it all into the business. By 2006, it was hard to keep track of all the loans and repayments and indeed, they were beginning to miss some repayments. Having met a mortgage broker at a neighbour's wedding, the couple decided to bunch all their loans together and pay them all off with a new mortgage organised through the broker. In order to get enough money to pay all the loans and buy a new van, the broker explained that they would have to be very "positive" about the income from the business - and they were. The ensuing sub-prime mortgage issued in early 2007, at about the same time as business started to decline.

By 2008, the couple were beginning to miss their payments. They applied for mortgage interest supplement but were refused supplement on part of their mortgage because the Community Welfare Officer decided that the loan had been unrealistic in the first place. The lender issued High Court proceedings for the repossession of their home when the arrears were at €14,000. They had never been in court before, but they did turn up for the proceedings. While the judge was sympathetic, they did have to concede that the house was now worth less than the mortgage. A repossession order has been made against them. They are still in their house, still owing the lender the full mortgage, and the costs of the high court, and waiting for the day when they are told to leave. Even if they leave, and the lender sells the house, they may still owe the lender a vast amount of money which can chase them down through the years, and which could end up in their imprisonment as well as well as their homelessness.

I am not saying that this couple were smart, resourceful and well organised. I am not even saying that they handled their business well. Quite the opposite, many would say.

But what I am saying is that there was more than one party to the transaction. The borrower tended to only conduct this piece of business once. The sub-prime lenders made a living out of it. They understood how to sell, and who would buy their product. The lender was at least as irresponsible as the borrower in this case.

But who carries the can? Only the borrower is punished. The sub-prime lender at the time of this loan was not subject to regulation. At the time that it took the couple to court, it was not subject to any code of conduct relating to mortgage arrears. When the couple was refused mortgage interest supplement, there was no obligation on the lender to reduce the rate of interest or re-schedule its loan. And when the court looks at the application for re-possession its only option is to grant the application or adjourn it. If their house is sold in the future, they may still owe the lender any shortfall in the debt after the sale price is taken into account. If the couple do not pay that short fall, and do not convince a judge that they cannot pay, they may end up being punished by a jail sentence in addition to having the debt as a weight around their necks.

That lack of equality, that gap between the apparent protection of the lender and the borrower has to be addressed. Many have already suffered unduly and continue to suffer. According to figures released by the Court Services, there was a doubling of mortgage repossession cases brought in the High Court in 2008 from 2007. In June 2008, 14,000 residential mortgages were in arrears of 3 months or more. According to the Central Bank statistics, personal debt has risen faster here than in most other euro-area countries and between 2004 and 2006 mortgage debt in Ireland increased at approximately three times the annual rate in the euro area and the proportion of personal debt secured on mortgages is higher than anywhere else in the euro- zone area.
As an organisation which has focussed on the legal rights of consumers in debt and credit matters for many years, FLAC has concluded through various analyses including Paul Joyce's "An End based on Means" that a fundamental change is needed to address the realities of an Irish society where credit is offered by extremely wealthy multi-national organisations to people who need it to survive, or who want it in order to advance. Such a review would probably take the collection of debts outside of the courts in general, and, like many other European countries, set up debt-rescheduling structures to try to deal in a holistic way and in a way that was fair to lender and borrower with collection of due debts. While we are waiting for that review to take place, and as an interim measure, much could and should be done. I want to outline some of the suggestions that FLAC has recently made which would hopefully help to improve the society of those at most risk of inequity.

First and foremost, the situation where people who cannot pay their debts can end up spending up to 3 months in jail for non-payment of that debt should be brought to an end. In 2008, 276 people spent an average of 20 days in prison for what the state calls "debt related offences". These people have committed no crime at all and sending them to jail has been criticised internationally as well as within the State as a failure to comply with fundamental human rights law.. To add insult to their very real injury, the debt that they owe is not even purged by a jail sentence and in a 5 year period, 10% of those jailed on "debt related offences" were in jail for the second time for the same debt.

Secondly, the courts should be empowered to enquire into the fairness of the debt incurred. Where a court finds a loan to have been reckless, it should have the right to re-schedule the loan and impose a fairer set of terms. Where a court accepts that the loan was fair, but also that the borrower's circumstances have so changed that s/he cannot now repay the loan, the courts should have the power to grant moratoriums on loans.

Thirdly, if Community Welfare Officers are allowed to conclude that loan interest should not be supported now because the loan was reckless, then there must be some mechanism to put pressure on the reckless lender to forego the reckless interest, rather than refusing Mortgage Interest Supplement and thus putting a borrower's home at risk.

Fourthly, the current code of conduct on mortgage arrears issued by the Office of the Financial Regulator needs serious review. It was concluded in a hurry and was to be the antidote to the rescue deals being offered to the banks. However, even between its drafting in January 2009 and its publication in February 2009, it had lost some of its few teeth. The current version, which really applies the Irish Bankers Federation Code to all lenders, is entirely inadequate to protect borrowers and consists mainly of sound advice which those lenders with manners will heed.

Depending on lenders to have manners and to behave with consideration has led to much of the inequity we see today. It is not good enough. We must do better.

"The law will punish the man or woman
Who steals the goose from off the Common;
But lets the bigger villain loose
Who steals the Common off the goose."