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Opinion: Sound the alarm - a proposed EU directive on bad loans will give vulture funds a free rein

A proposed new EU Directive aims to develop a secondary market for non-performing loans and poses a serious threat to the rights of borrowers and consumers, writes Matt Carthy.

Matt Carthy

IN ALL THE recent discussion about how banks and vulture funds treat their customers in this state – a major new proposal from the EU has been almost entirely overlooked.

It is time to sound the alarm on a proposed European Commission Directive, which aims to develop a secondary market for non-performing loans, and poses a serious threat to the rights of borrowers and consumers.

This proposed EU Directive is designed to promote the use of vulture funds and mortgage securitisation vehicles. (Mortgage-backed securities are created when individual mortgages are sliced up and bundled together into packages that can be traded on by investors, the idea is that betting on the return of the bundled, securitised vehicle is less risky than betting on a single mortgage.)

The directive aims to move this bad debt off the banks’ balance sheets and into the opaque and unregulated shadow banking sector. It will also restrict the right of EU Member States to impose their own regulations on vulture funds.

Following the ugly scenes in Roscommon, it is clear that we need stronger protections in place for households against forcible eviction and the repossession of family homes.

We also need a step-change in our approach to vulture funds.

Sinn Féin’s bill to prevent mortgages being sold without the consent of the borrower, which we expect to come before the Dáil in the coming weeks, would be a major step forward towards ensuring that the borrower has the legal right to refuse the sale of their loan, to a third party.

But unfortunately, all of our attempts to regulate the debt vultures at the domestic level may amount to nothing, if the proposed EU Directive on non-performing loans sees the light of day.

The Commission’s proposals

Now we are dealing with a major new proposal from the European Commission aimed at ‘developing a secondary market’ for loans – whether they are performing or not.

Moving hundreds of billions of euros of bad debt into the shadow banking sector through the securitisation of non-performing loans is incredibly misguided, and will cause major new risks to financial stability.

Mortgage-backed securities, in particular, played a key role in the 2007-2008 crisis.

This was because banks pushed mortgages onto customers without verifying whether or not they could repay them, and then bundled the mortgages into mortgage-backed securities to be traded on.

Instead of making the sub-prime loans that formed part of these securities safer by mixing them with higher quality loans, the sub-prime loans infected the rest of the sector, until major investment banks could no longer put a price on certain securitisation vehicles.

The new proposals will also empower banks to seize some of their customers’ collateral through an out-of-court recovery mechanism.

It seems to me that the Commission is trying to replicate the Irish model in reducing non-performing loans and impose this model across the EU.

That’s why it is so important that Irish campaigners highlight the massive problems that we have experienced – from the NAMA debacle to the mass sell-off of distressed loans to unregulated vulture funds.

It is not a model to follow but a lesson in what to avoid.

The debt vultures will be encouraged to spread their wings and move from operating mainly in Ireland and Spain, where they are currently concentrated, to operating across the EU.

A private equity fund will be able to register in one member state and get a ‘passport’ to operate in any EU state, while only being bound by the regulations in place in the state where it is registered.

A second bank bailout

This EU proposal is nothing less than a second bailout for the banks.

The non-performing loan problem is a legacy of the 2008 financial crisis. This problem was not caused by ordinary people and they should not be forced to bear the brunt of resolving it.

The Commission says the new Directive is necessary in order to allow banks to lend to small businesses once again.

But all of the evidence shows that the ongoing economic problems in the EU are not caused by a lack of lending, but a lack of demand in the economy. The only way to boost demand is to increase public investment and foster real wage growth.

The real goal of this proposal is not to ensure banks lend again but to ensure they return to making massive profits again.

Restrict regulation

Suggesting that the Irish model is a success story that should be replicated across the EU is bad news for borrowers in the rest of Europe.

But the worst part of this proposal is that it will put major restrictions on all future attempts to regulate vulture funds at the Irish level. Our hands will be tied behind our banks.

Say, for example, that public pressure forces the government to finally act to put in place measures to regulate the vultures in a meaningful way.

Unless these laws comply with the EU Directive – which, let’s not forget, is designed to promote the sale of debt to vulture funds – the legislation won’t see the light of day because it will amount to an infringement of the “right of establishment” or “right to provide services” of these private equity funds.

Join our campaign

The Commission has clearly not taken consumer protection issues or fundamental rights into consideration when conducting its impact assessment for this proposed Directive. The flaws in the impact assessment process are so serious that I believe the Commission should withdraw its proposal on this basis alone.

Together with other progressive forces and consumer protection organisations, I will be working to organise an EU-wide campaign against this Directive. The Directive should be scrapped, and the European Parliament must block its progress.

I hope that all those campaigning here in Ireland for better protections for homeowners and farmers, against evictions and vulture funds, will also get involved in this campaign at  EU level.

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About the author:

Matt Carthy

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