In these challenging times, the reality of regulatory obligations and expectations do not disappear and they can be hard to juggle in the face of human need. In a series of briefings focussing on areas of key relevance for lenders at this unique moment in time, we set out some of our thoughts on the central issues lenders need to be thinking about.
FORBEARANCE, WAIVERS & MODIFYING AGREEMENTS
There are a number of options available when offering forbearance to customers. Lenders may choose simply to enter into a new agreement. Alternatively they may choose to vary the existing agreement by entering into a modifying agreement or simply provide forbearance by waiving their contractual rights on a temporary basis.
If new credit agreements are the preferred option, careful thought will need to be given to the basis on which they are done and the processes that sit around them. If those new agreements involve paying off existing agreements and refinancing them over a longer term, they may require different drafting treatment under the Consumer Credit Act (CCA) drafting rules from those agreements lenders already have prepared. New creditworthiness assessments will be needed and the procedures set out by the CCA for executing regulated credit agreements will need to be followed. Similarly, modifying agreements will require adherence to the complex drafting rules, the rules around executing credit agreements and the provision of copies.
Modifying agreements can be tricky but they are certainly more common that they used to be and, if lenders are aware of the issues and take appropriate steps to navigate the process correctly, they can be a sensible option. The real risk posed by modifying agreements is when they arise inadvertently through discussion with a customer without the lender intending to create a modifying agreement. This can easily occur in the context of discussions around repayment plans and forbearance. As the effect of a modifying agreement is to revoke and replace the original credit agreement, a lender can end up with an unenforceable credit agreement simply because they did not structure discussions around a repayment arrangement properly and did not document it in a way so to mitigate the risks of a modifying agreement arising.
KEY ISSUES TO CONSIDER
- Payment holidays
- Whether to structure these as a modifying agreement or a waiver / forbearance?
- Are there any associated fees or charges and does this impact the assessment of it being a modifying agreement or a waiver?
- How will interest be treated during the payment holiday?
- How long will the payment holiday last?
- What will happen at the end of the payment holiday if the customer is not able to resume contractual repayments?
- What, if anything, do your terms and conditions say about payment holidays?
- Rescheduling the payment term. This may include allowing the customer to make lower payments over a longer term
- Is there a risk that this treatment could bring an exempt agreement into the regulatory framework of the CCA?
- Can this be done by way of waiver / forbearance or is a modifying agreement required?
- Can this be done by simply entering into a new credit agreement? If so, does the categorisation of the credit provided change and do you have the relevant agreement templates?
- Is the customer wanting to consolidate loans or combine a rescheduling of an existing loan with new borrowing?
- Notice of Sum in Arrears (NOSIAs)
- It is imperative that you carefully consider how you treat reduced repayments for the purposes of triggering NOSIAs. Should they be calibrated to and track the reduced payment amount or the original contractual repayment amount? This is a complicated and technical issue and can have significant consequences in terms of rendering an agreement unenforceable, loss of interest and remediation costs if the system is not set up correctly.
- It is important to consider the figures that are pulled into NOSIAs and how the system treats the effect of any forbearance for the purposes of those figures.
- Care is needed in how you manage customer communications around NOSIAs when a customer is keeping up payments under a payment arrangement.
- If using a modifying agreement, you need to make sure that your system is set up to populate future section 77A CCA statements in accordance with the modified agreement.
- Credit Reference Agency (CRA) reporting
- Consideration must be given to how missed payments are reported to the CRAs and how any lower payments agreed by way of forbearance are treated for these purposes.
- It will be necessary to check whether the system can flag accounts subject to a payment plan / forbearance.
- Repayment plans and affordability
- It will be important to establish a customer's ability to afford any repayment plans put in place and that this is kept under review.
- It is vital to treat customers fairly in your discussions with them at all times, including if they are struggling to keep up with repayment plan payments.
- Communications with customer
- All communications with customers are clear, fair and not misleading.
- When documenting a repayment plan by way of a waiver, it is vital to avoid creating a bilateral agreement to vary the agreement. This would risk creating a modifying agreement with all the consequences that would entail.
- Have telephone staff been appropriately trained in the key legal and regulatory issues surrounding forbearance and rescheduling?