CORONAVIRUS – payment holidays for borrowers and the implications for private banks
Banks have been offering payment holidays or more accurately payment deferral periods for mortgage loan repayments to borrowers in line with FCA guidance. This reflects the general requirement for lenders to treat customers fairly and exercise forbearance. In this article, we set out the requirements that lenders need to follow and the factors that need to be borne in mind by the banks when the payment deferral period comes to an end and the customer is still in financial difficulties.
In the FCA’s updated guidance for mortgage lenders in relation to coronavirus, “payment deferral” means an arrangement under which a firm permits the customer to make no or reduced payments under a regulated mortgage contract for a specified period without being considered to be in payment shortfall. A ‘full payment deferral’ is where the firm permits the customer to make no payments. A ‘partial payment deferral’ is where the firm permits the customer to make reduced payments of any amount.
Where a customer is experiencing or reasonably expects to experience payment difficulties as a result of circumstances relating to coronavirus and wishes to receive a full or partial payment deferral period, a firm should agree to this for 3 monthly payments, unless the firm agrees with the customer a different option that the firm reasonably considers is in the customer’s best interests. The guidance does not prevent firms from providing more favourable forms of assistance to the customer, such as reducing or waiving interest, extending the term or agreeing an alternative product with the customer. The FCA has acknowledged that a payment deferral may not be in the customer’s best interest if the customer is already in payment shortfall.
Customers must not be liable for any default or arrears charge or other fees in connection with the granting of the payment deferral although the loan can continue to accrue interest.
Customers who have already been struggling to meet loan repayments and who are already in payment shortfall may request a payment deferral and lenders should offer the same treatment as set out in the guidance to such customers.
A firm should ensure that the manner in which it will seek to recover any sums covered by a payment deferral and any increase in the total amount payable under the mortgage contract once the payment deferral has ended is compatible with the FCA’s Principles for Business and in particular Principle 6 (A firm must pay due regard to the interests of its customers and treat them fairly).
The guidance also requires lenders to follow the same guidance in relation to unregulated agreements secured on land (for example, an agreement that falls within the exemption for investment property loans and buy-to-let loans).
The guidance only applies in the specific circumstances of the coronavirus and is currently intended to expire on 31 October 2020.
A firm should give customers adequate information to understand the implications of any support offered to enable them to make an informed decision. This should include personalised information on the impact on the term of the mortgage contract and the amount of contractual monthly instalments (this can be a reasonable estimate). The lender should explain that while a worsening status will not be reported to the customer’s credit file in respect of any payment deferral taken under this guidance, lenders may take into account other information when making future lending decisions, including, for example, the information provided by applicants or bank account information.
At the point of granting a payment deferral, firms may signpost customers to sources of free money guidance and debt advice. Where the firm believes a customer might benefit from taking self-help steps, firms may also wish to:
- Explain that self-help options are open to customers who want to deal with their debts;
- Provide the customer with a link to the FCA’s information page ‘Dealing with financial difficulties during the coronavirus pandemic’
- Signpost to the Money Advice Service coronavirus landing page
- Suggest the customer work out a budget. Firms may find it helpful to refer customers to resources mentioned in the FCA information page referred to above;
- Explain to the customer that, for most people, it makes sense to pay essential expenses and priority debts before any discretionary expenses or non-priority debts. To see if this is right for them customers can refer to online guides such as the Money Advice Service ‘How to prioritise your debts’; and/or
- Recommend the customer contacts all their creditors to discuss their repayments.
Before capitalising any sums covered by the payment deferral, the lender should give the customer personalised information on the impact of doing so on their monthly payments or the term of their mortgage, and the option to choose an alternative means of repaying the amount. The information given should be provided in good time before the capitalisation takes place, and should make clear that the customer could pay more over the lifetime of the mortgage as a result of capitalisation, compared to an alternative means of repaying these amounts, such as in a lump sum. MCOB 13 includes specific provisions about the capitalisation of payment shortfalls, including that a firm must not automatically capitalise a payment shortfall where the impact would be material. However, the FCA has clarified in the updated guidance that this does not apply where a firm is only capitalising sums covered by a payment deferral.
Implications on the agreement
The implications of the payment deferral period will depend on the type of loan it is (a regulated mortgage or an unregulated agreement). It will also depend on the rights of the lender as set out under the terms of the agreement. Many lenders are treating payment deferrals as a waiver of their rights to interest under the agreement for a set period. Other lenders may vary the terms of the agreement for the purposes of forbearance which, if the loan is regulated, will require certain disclosures to be made. If a new agreement is entered into, the standard requirements will apply, including the issuance of a new illustration.
Firms should consider the impact of any deferral period on the enforceability of guarantees and review their terms. In certain circumstances, a guarantor’s obligations may be discharged; for example, if changes are made to the underlying agreement without the guarantor’s consent. However, a term allowing such variation without having the effect of discharging the guarantor may be included in the terms of the guarantee.
What happens at the end of the payment deferral period?
Firms should take reasonable steps to contact customers in good time before the end of the payment deferral about resuming payments and to discuss options for when it expires.
If a customer can afford to re-start mortgage payments after the deferral period, it is in their best interests to do so.
If a customer cannot resume payments after the 3-month period (which many borrowers who requested the 3-month payment deferral at the start of this are now approaching), lenders should offer them a further 3-month payment deferral unless the firm agrees with the customer a different option that the firm reasonably considers is in the customer’s best interests.
If after a 6-month payment deferral, the borrower indicates that they continue to face payment difficulties as a result of the coronavirus, the firm should work with the customer to resolve these difficulties in advance of payments being missed. The firm should consider the need to agree a tailored plan leading to a sustainable outcome for the customer, for example, by extending the mortgage term, changing the mortgage type, or deferring payment of interest or capitalisation.
If, following the end of the payment deferral period, a customer fails to respond to further communications from the lender after missing the first resumed payment, the lender may treat the customer as being in payment shortfall in respect of the missed payment and proceed in accordance with MCOB 13.
Can lenders start repossession proceedings?
Given the unprecedented uncertainty and upheaval customers face, and Government advice on social distancing and self-isolation, firms should not commence or continue repossession proceedings against customers before 31 October 2020 (unless there are exceptional circumstances such as a customer requesting that proceedings continue). This applies irrespective of the stage that repossession proceedings have reached and to any step taken in pursuit of repossession. Where a possession order has already been obtained, firms should refrain from enforcing it.
Firms should also ensure that their customers are kept fully informed, and discuss with them the potential consequences of their suspending any moves towards repossession. For example, the effect of remaining in the property (and the loan continuing to accrue interest in the meantime) on the customer’s remaining equity should be explained.
Repossessions are a last resort for lenders and in the last few years, the UK has seen historic lows of repossession activity. However, the number of repossessions is likely to increase if customers continue to have payment difficulties once the payment deferral period comes to an end.
These measures apply to mortgages only. They do not apply to consumer credit products, such as credit cards and loans. Consumer credit products are covered by separate guidance that the FCA will be updating in due course and may be different from the guidance for mortgage payment holidays.
Practical guidance on potential default scenarios
Firms should carefully identify and monitor customers who have a potentially high risk of default or where any banking relationship displays indicators of financial distress. Customers will not always explain issues to firms and therefore credit recovery teams and relationship managers should be proactive in this regard.
For customers identified as experiencing financial distress, there will be practical benefits to firms undertaking the following as early as possible, in anticipation of a potential distressed recovery scenario:
- Collating all relevant security documents (including guarantees), facility documents, ancillary documents and relevant correspondence with customers in order to understand the firm’s options in a distressed recovery scenario.
- Considering the wording of any guarantees and the potential impact on them of amendments to the underlying facility documents (for example, whether acquiescence by the firm could result in the unenforceability of a guarantee).
- Undertaking revised due diligence/market appraisals on (i) any secured assets; and/or (ii) the covenant strength of guarantors.
- Identifying any potential gaps in the physical documentation held or legal deficiencies in those documents (i.e. in execution and/or completion formalities). This can ensure that enforcement action and/or strategy planning can proceed more quickly.
Where a lending structure is more complex, collating all relevant information early on in the process and understanding the security structure and outstanding position can be invaluable in preparing a clear recovery strategy.
Taking these proactive steps early could save a firm significant time and costs in the event that action is subsequently required to enforce a firm’s rights (e.g. enforcing security rights, obtaining possession and/or appointing a receiver). The options open to firms will vary between customers and depend upon the facts of each case.
If you need any further information, please contact Daniel Moore in our Litigation and Dispute Resolution team or Vanessa Walters in our Financial Services Regulatory team.
Alternatively, visit our COVID-19 hub page for the latest on planning for and coping with the impact of Coronavirus.
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