The Banks and Covid-19

The courts in Northern Ireland are now closed , except for pressing business such as the liberty of the citizen or family matters.

All actions by mortgagees for possession of property and all disputes between individuals and banks are in suspended animation.

Many solicitors have closed and therefore little new litigation is getting under way.

There will be a considerable backlog when the courts do finally get back into action. What will the attitude of lenders be? Will they, in the light of inevitable losses be more amenable to settlement? Or will they toughen their stance?

Over the last year, significant inroads have been made into the previously impregnable attitude of lenders , towards defaulting borrowers.

This will be the subject of a second blog, dealing with Danske Bank, Ulster Bank, Cerebus, Promontoria and others.

Meanwhile, what relief , if any, are the banks offering borrowers, distressed by Covid-19?

Here is what they say.

Barclays

I’m writing today as I know that coronavirus is a source of concern for many people right now – and I wanted to let you know we’re here to help.

Whether you would like additional support with managing your money, or have faced disruption to finances or travel plans, we can work with you to look at ways to make things easier, including:

  • Mortgage Payments: Repayment holidays on residential mortgages for up to 90 days
  • Accessing Savings: Removing penalty charges to access fixed savings accounts early
  • Paying Fees: Stopping late payment and cash advance fees for the next 90 days for credit cards.

For more information on this and managing your finances during this period, you can find our latest advice by visiting our homepage and clicking ‘Coronavirus help’ – there you’ll find links to all the content referenced in this email on pages that will be updated daily.

If you need to access your banking services and are unable to get to a branch, or need to stay at home, there are also a wide range of ways that we can help you there too. I’ve outlined a number of those below which hopefully you’ll find useful.

I appreciate that the circumstances in which we find ourselves at the moment will cause worry. At Barclays we are committed to being responsive to your needs as the situation evolves, and we will continue to be in touch with information and updates.

In the meantime – with best wishes.

Matt Hammerstein
CEO Barclays UK

 

So, if a borrower is unable to work and applies for relief, what will Barclays do? Here are two relevant Q and A’s.

 

Will I be charged interest on my mortgage while the repayment holiday is in place?

Yes, we’ll continue charging interest on your mortgage, and we’ll apply it to your mortgage balance monthly. You will not, however, have to make any payments during the holiday period.

How will this affect my mortgage payment at the end of the holiday period?

We’ll be in touch before your payment holiday ends to tell you what your new monthly payment amount will be and the date when payments will begin again. The amount might be higher than before the repayment holiday started. If you’re worried about paying the new amount, our support team will be able to talk through some options, such as extending your mortgage term to ensure your payment is affordable.

In other words, a “mortgage holiday” means delaying the inevitable payments and probably incurring additional interest charges , which will increase the amount of your monthly payment and/or push out the date on which your mortgage ends.

 

This is what the Danske Bank website says.

Is a payment holiday the right option for me?

A payment holiday is a temporary break from your repayments to help you through these uncertain times.

There are a few things to consider before applying for a payment holiday, to make sure it’s right for your situation:

  • The interest on your mortgage will continue to accrue during the payment holiday.
  • If you have a fixed rate mortgage, there will be no change to your fixed payments after the payment holiday. If you move on to a reversionary rate after your fixed rate period ends, then these payments will be higher than shown in your original mortgage agreement.
  • If you have a variable rate mortgage, like a base rate tracker or if you are on standard variable rate, then the interest accrued will be added to your mortgage and the repayments after the mortgage holiday period will increase as a result.

Please be aware that if you need independent support regarding your mortgage, you can get help from Citizens Advice, Housing Rights NI or other debt counselling agencies.

So, in some circumstances, your payment may not change after the “holiday”. Like Barclays, this offer is not necessarily open to those already in arrears.

The Ulster Bank website is rather more terse.

Here are some things to consider before applying for a payment holiday:

  • At the end of the holiday your monthly payments will be recalculated and you will see an increase in your monthly payments.  We’ll give you an estimate of what that will be before setting up your break
  • The total amount of interest you pay over the term of the mortgage will increase.

 

Let’s remind ourselves of what the government  had to say about this, as the BBC reported it.

And Mr Sunak said that for those in financial difficulty due to coronavirus, mortgage lenders will offer a three-month mortgage holiday.

BBC personal finance correspondent Simon Gompertz said it was important for borrowers to remember that they would have to make up the payments at a later date. 

“The result is that you have some breathing space but when you resume payments the amount will be adjusted to be slightly higher, because the missed interest payments have been added to the loan,” he said. “This doesn’t mean the mortgage holiday is a bad idea.”

 

It would seem that the mortgage holiday is merely a temporary relief, for which the borrower will have to pay. Those already in arrears are unlikely to benefit and those teetering on the brink may find that the new repayments are beyond their reach.

Borrowers should think twice and get advice before going on  a mortgage holiday

Many borrowers have businesses. Again the government promised relief. Here is what the Times reported on 26th March.

 

The government and the banking industry are being urged to revisit the terms of emergency coronavirus loans after some directors were told that they would be personally liable for bank debts underwritten by the taxpayer.

The business department is to talk with lenders to discuss how this burden could be lightened after a backlash over the onerous terms being asked of the owners of small companies.

Yesterday, Royal Bank of Scotland, the biggest banker for small companies, said it would not ask for personal guarantees to secure the loans, putting pressure on other lenders to follow suit.

Under the coronavirus business interruption loan scheme, the state will underwrite 80 per cent of the risk of bank loans of up to £5 million. However, borrowers are liable for the entire debt, as the taxpayer guarantee is purely for the banks’ benefit, intended to give them confidence to lend to businesses that they may otherwise avoid.

Lenders including Barclays and HSBC have been asking directors of companies struggling to stay afloat to sign personal guarantees, as well as to pledge business assets as security.

Second homes and other personal assets also could be at risk. The banks point out that the terms of the scheme mean that they must exhaust all recovery action against borrowers before they can claim on the state guarantee.

The business department is aware of the anger among business owners and officials are due to consult UK Finance, the banking trade body, on the issue.

Kevin Hollinrake, chairman of the all-party parliamentary group on fair business banking, said that the government must issue “clear and direct guidance” that there will be no personal guarantees.

Gina Miller, founding partner of SCM Group, a wealth management firm, and a campaigner for fairer financial services, said: “These personal guarantees are rubbing salt in wounds.”

 

So again, all is not as it seems. Whilst the government is making money available and ‘guaranteeing’ it; the lender will be required to exhaust all steps to recover the money from the borrower before the government guarantee will be operational. Even if the business is not required to give a personal guarantee, only those with the protection of limited liability are likely to  escape proceedings potentially involving their homes and personal property. Even the directors of a limited company could be personally liable in certain situations.

Irish Legal News reported this move by the IOD.

UK: Directors urge government to relax insolvency rules to save businesses

Directors across the UK are asking the government for a temporary indemnity which allows them to keep technically insolvent firms in operation during the coronavirus pandemic without fear of legal action.

Under current legislation, company boards can be sued for failing to wind up a company if it is running out of money and facing insolvency.

The Institute of Directors (IoD) has therefore asked for such rules to be relaxed to prevent viable businesses from collapse to avoid legal consequences.

The Treasury and Bank of England are offering billions of pounds in loans to businesses to counteract the effects of the pandemic, but the IoD said that directors may hesitate to take them “if they believe that, by failing to declare insolvency now, they may face personal financial and legal liabilities at a later date”.

Under the Insolvency Act 1986, directors can be sued for wrongful trading if they do not put a company into administration or liquidation that is later declared insolvent.

Creditors also can issue winding-up petitions to get their money back if they fear it is being wasted keeping the business going.

The IoD urged that in these extraordinary circumstances, boards should be allowed to continue to run their companies even if technically insolvent as a means of maintaining employment levels and preventing a major economic downturn.

It said that firms should not hesitate to seek government support if their business was a viable concern before the onset of the crisis. In this environment, maximising the ability of creditors to recover funds from a struggling entity after a lengthy legal process is not the economic priority.

The institute said: “Of much greater importance is the need for companies right now to maintain their service levels to the general public and support the economic position of their employees.”

The IoD emphasised further, that it would be entirely inappropriate to allow previously viable companies to go under when the proximate cause of their financial distress are the measures demanded by Government – even if they are imposed for the best of reasons. 

Jonathan Geldart, IoD director-general, said: “During the current crisis, directors are facing unprecedented challenges and need to see urgent temporary measures to avert entirely preventable corporate collapses.

“We’re calling on Government to prioritise jobs and the business survival by relaxing existing insolvency obligations put on directors and thereby providing business leaders greater room for manoeuvre at this critical juncture.

“We should not allow a single viable businesses to go to the wall because of this crisis.”

 It will be interesting to see if the government grants any relief.

The present situation prompted this statement from The Prudential Regulation Authority, as reported by the Times, on 26thMarch.

 

Banks can relax procedures for booking bad debt caused by coronavirus so that they can keep lending to businesses and individuals, the regulator has said.

In a “Dear CEO . . .” letter today, the Prudential Regulation Authority said that uncertainty about the impact of coronavirus and the possibility that the economy could bounce back sharply when the pandemic subsides meant that banks did not have to follow normal rules about credit losses.

Among the areas that can be relaxed are covenant breaches and missed payments. The guidance comes as companies are beginning to ask for leeway from their banks. The shopping centre owner Intu Properties warned today that it would breach the terms on its debt commitments after a collapse in rents unless it can secure debt waivers from its lenders.

Sam Woods, the PRA’s chief executive, said in the letter to banking bosses: “These measures are aimed at ensuring that banks are able to continue to lend to households and businesses, support the real economy and provide robust and consistent market disclosures.”

The letter is the most detailed intervention yet by regulators to guide banks over how to apply the IFRS9 accounting standard, which was introduced in 2018. The standard, which requires banks to recognise losses as soon as they start to appear, was created in the aftermath of the financial crisis to force lenders to provide an accurate picture about the state of their books more quickly.

Bankers said, however, that Brexit and now the coronavirus were very difficult to deal with under IFRS9 owing to their uncertain impact. Banks should not classify customers as more likely to default on loans just because they took payment holidays on mortgages or other loans, the PRA said. Instead, banks should take “ well-balanced decisions” based on the likely positive impact of the government’s support measures for the economy and long-term economic trends.

When assessing covenant breaches on loans by businesses, banks should differentiate between “normal” breaches and those occurring because of the Covid-19 pandemic, the PRA said.

Paul Lynam, chief executive of specialist lender Secure Trust, said: “The simple fact is, the vast majority of consumers and businesses were creditworthy and viable before the crisis and will be once the storm has passed. Bellyaching about moral hazards made the last crisis worse and longer. The Treasury and the regulators are to be applauded for their decisiveness and pragmatism, which will undoubtedly make Covid-19 less damaging than would otherwise be the case.”

Mr Woods’ letter follows a communication yesterday from Rishi Sunak, the chancellor, with Andrew Bailey, the Bank of England governor, and Chris Woolard, interim chief executive of the Financial Conduct Authority, urging banks to lend. “This will require a willingness to maintain and extend lending despite the uncertain economic conditions. We must ensure that firms whose business models were viable before the crisis remain viable once it is over,” they said.

The out workings of the financial crash of 2007-08 are still with us. Will Covid-19 add another layer to the present litigation?

 

So, like Noah, we await that dove with the olive leaf.  [Genesis 8:11]

 

 

 

 

 

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