A national debt management scheme with quasi-judicial powers is welcome, says Bill Hobbs
It’s taken a long time for the penny to drop but it seems that the Government is finally responding to those of us who have been advocating for a national debt management system to deal with the enormity of the consumer debt crisis.
It appears that it’s to consider re-organising MABS (the Money Advice and Budgeting Service) into a personal debt management agency with quasi-judicial powers. If so, then the state’s response may finally mature to match the scale of the problem faced by tens of thousands of financially fragile people and their families.
How big is the consumer debt problem? No one knows. The only consumer indebtedness data published is the Central Bank’s mortgage arrears report. Its latest edition yesterday shows a worsening trend in both seriously troubled homeowner mortgages and performing restructured loans. If the second half of this year is anything like the first half, by next January there will be close to 70,000 serious cases and 45,000 restructured loans, mostly on interest only terms.
In its stress case scenario used to recapitalise Bank of Ireland, AIB, PermanentTSB and EBS, the central bank pencilled in €8.3bn in consumer home mortgage and other personal loan losses earlier this year. Since then billions in taxpayers funds have been pumped into the banks to enable them write off uncollectible consumer loans, along with €3.3bn in buy-to-let mortgages and €4.5bn in small business owner loans. All told the four state-backed banks have been funded up to realise €16.1bn in direct and indirect consumer loan losses. Other banks are likely to be expecting similar relative loss experiences. While such losses may not occur, the numbers illustrate the magnitude of response required by Government.
As many people have debts with multiple-lenders, it’s been abundantly clear for some time that an organised system would be needed through which thousands of individual multi-lender debt settlement arrangements could be managed. Many of these will have to include for property repossessions and balance write-offs.
Agitated over moral hazard and fearing a debt default epidemic, some commentators are busy scaremongering about debt forgiveness. No one is suggesting a blanket debt forgiveness programme. Rather what’s been suggested, for some time, is a transparent, independently objective, legal process which allows indebted consumers to pay what they can afford to repay and allows lenders to write off any residual balance. The Law Reform Commission’s recent recommendations included a high level design for a debt settlement system derived from its consideration of systems elsewhere.
In these other advanced countries, people who can’t pay in full enter into binding legal agreements where they agree to pay what they can over a period of time – typically between 3 and 5 years. Their lenders agree to accept these repayments and providing people stick to their part of the bargain, they write-off whatever residual balance is left at the end of the agreement. Called “earned debt forgiveness”, those that “won’t pay” but can pay are excluded through rigorous assessment processes.
While the design of these schemes differs from country to country, the underlying objective is to arrange for legally binding debt settlement and forgiveness. In many cases the service is state owned or backed, free to borrowers and funded by the taxpayer or lenders.
In this country there’s no mechanism through which a person can arrange a debt settlement repayment plan with their lenders. MABS’ voluntary arrangements with the Irish Banking Federations’ member banks are non-binding. The recent emergence of unregulated and unlicensed commercial debt management companies, many of which use abusive marketing tactics to sell unregulated, dangerous financial products called “debt management plans”, demonstrates the yawning gap in the state’s consumer protection and social financial safety net provisions. For this reason alone Government’s intention to re-organise MABS as a central component part of a national debt management scheme is a welcome development. I am not convinced that the MABS operational model is capable of morphing into a national debt manager capable of dealing with the scope and magnitude of the problem. A new model will have to be designed and built integrating MABS where and if appropriate.
What would a well designed system look like? Such a debt management scheme should be open to anyone to participate. It should be free to borrowers and could be funded by lenders/creditors and not the taxpayer. It should deal with all personal debts including mortgages and it should be independent of both borrower and lender. Accountable and responsible to Government and open to Oireachtas oversight, it should be run on a not-for-profit basis, commercially operated as a professional service provider and be fully staffed with the expertise required. It should also deploy modern technologies to administer and monitor debt settlement agreements. It might also act as payment intermediary between borrowers and their lenders. Many of its requirements or services could be delivered by commercial joint-venture partners.
Right now even though banks have been funded to write-off loans they are procrastinating as there are no clear ground rules. An independent debt manager operating along the lines of the above model would set the ground rules and provide the means to deliver on them.
A version of this article appeared in the Irish Examiner, Analysis Section, Tuesday 30th August 2011.
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