Ruling forcing Pepper to offer low-cost fixed mortgage rate welcomed by McGrath

The Minister for Finance, Michael McGrath, has welcomed a court ruling forcing a financial services company to halve the mortgage rate it was charging a distressed borrower.

Pepper Finance will be locked into a fixed rate of 2.5 per cent for the next 25 years on the loan of more than €280,000 after Judge Mary O’Malley Costello gave the green light to a personal insolvency agreement (PIA) for a couple at a sitting of Tullamore Circuit Court.

The decision offers hope to as many as 32,000 homeowners with distressed mortgages of a “roadmap” towards a degree of financial security, campaigners say. Personal insolvency specialists are expected to use the judgment as precedent when negotiating with lenders.

“I believe that loan owners and mortgage providers should be offering fixed-rate options to their borrowers,” Mr McGrath said. “This is an issue I’ve raised directly with them and also with the Central Bank.”

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He said that under the code of conduct on mortgage arrears, lenders are only required to consider alternative repayment arrangements and are not required to look at other options including fixed rates.

“We know for example that Pepper has not been offering fixed-rate product solutions to borrowers and I do think for some customers that certainty of knowing how much they will have to pay over the years ahead is very valuable,” Mr McGrath said.

He also called on the State’s main banks to look again at current practices that effectively close the door for people “currently in the non-banking sector” over loan arrears switching to more attractive mortgage rates.

“I do believe that the main retail banks should be welcoming and should be open to customers switching from the non-banking sector back into the mainstream retail banking sector where they may get a better deal depending on the particular product that may be suitable for them,” Mr McGrath said.

The Tullamore court ruled against Pepper Finance – which had objected to the PIA and had previously vetoed it, saying it could not “countenance” a fixed rate at that level for such a lengthy period – after hearing arguments from barrister Keith Farry, who represented the personal insolvency practitioner and the borrowers.

[ Pepper to hike some mortgages to 8% after ECB moves ]

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A key part of the case saw Pepper Finance asked for detailed figures outlining how much the loan its client had acquired had cost it and how much it was costing into the future. Pepper declined to give the figures to the court.

In an affidavit, Seamus Dowling of Pepper Finance said it was prepared to “countenance” a writedown of the mortgage from close to €290,000 to €280,000 as well as an extension of the loan to 25 years and a rate reduction from 5.5 per cent variable to 3 per cent variable.

Mr Dowling said that 25-year fixed rates “are practically unheard of in the Irish market and it is fundamentally unfair to use the machinery of personal insolvency to foist such a rate on Pepper”.

He added that Pepper Finance currently offers no fixed rates so the personal insolvency arrangement “would therefore require the implementation of a bespoke product for these debtors”.

He also expressed concern that the fixed rate took “no account of the fluctuating environment” in which Pepper operates.

However, in the absence of detailed information about the cost of the loan, the court ruled in favour of the PIA and the debtors.

“It is very important and gives a bit of relief to people under a huge amount of pressure,” said David Hall of the Irish Mortgage Holders’ Association.

He said that when so-called vulture funds entered the Irish lending market and took over distressed loans – which are serviced by companies including Pepper Finance – there were assurances that borrowers would be treated the same as if they were still with the banks selling the loans. Now we see they have customers who are paying variable rates of 8 per cent and only going up.”

He said as many as 32,000 people who are struggling to keep their heads above water and paying very high interest rates could benefit from the court ruling.

“This could be the difference between being able to stay on track with your repayments and staying in your home long term or building up a mountain of arrears that you may never be able to get free from,” he told The Irish Times “It will be the difference between keeping your home and not keeping your home.”

[ ‘Mortgage prisoners’ being forced to pay dearly by vulture funds ]

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Mr Hall stressed that the ruling had not changed the process for people in difficulty and they would still be using personal insolvency practitioners and the Money Advice and Budgeting Service (Mabs) as well as the Irish Mortgage Holders’ Association which he heads

However, he added that the court ruling had established a precedent that he would be using in future dealings with all funds managing the mortgages of borrowers in distress.

“We always use precedent and say this now exists so let’s have a sensible conversation rather than having to go through the formalities,” he said.

But he warned that not everyone in arrears or financial distress could expect a rate of 2.5 per cent over 25 years.

“Capacity to repay remains very much relevant,” he said. “The intention is to try and keep someone in their home So people might be able to pay only 2.5 per cent, others might be able to repay 3.5 per cent.”

He said the “elephant in the room is the lack of transparency. Pepper decided to go into a court in Ireland and give two fingers to the entire system. They came in and said we’re not telling you how much we paid, we’re not even telling you who owns the damn thing. There is zero transparency and they wouldn’t even lift the veil of secrecy in front of a judge.”

Legal sources said that while Pepper Finance may seek to appeal the ruling, the absence of details of the cost of the loan would be a significant stumbling block.

“I suspect the 2.5 per cent interest rate is actually profitable for Pepper,” the source said, adding that, unless Pepper Finance and other financial service providers can bring detail breakdowns of the cost of the loans before the courts, they will have difficulties.

“It will give legal teams representing distressed borrowers a roadmap,” the source said.