Sub-prime lenders here have three months to apply to the Financial Regulator for authority to operate, under the terms of new legislation coming into force today. Once they are authorised, the Regulator's Consumer Protection Provision will apply to all lenders in the sector.
In the Irish market, sub-prime lending is the process by which non-deposit taking institutions lend to people who want mortgages, but can not get them at mainstream banks.
This practice has taken off in Ireland in the last four years. Irish sub-prime lending differs from prime lending (mainstream retail banks) because usually there is a greater risk associated with a sub-prime customer, so the interest charged is higher. It is estimated the market potential is €4 billion by 2010. It is worth about €1.5 billion now.
There are about six companies in the Irish market - generally local Irish businesses backed by international banks with the access to funds. But with the credit crunch in the US, brought on by the practice of sub-prime lending there, those funds are less available, and Irish firms are having to consolidate.
Because these lenders do not take money on deposit they have not to date come under the umbrella of the organisations supervised by the Financial Regulator. From today that changes.
The Consumer Director at the Financial Regulator, Mary O'Dea, said this morning that once the Consumer Protection Code is applied to these lenders, there will be three main particular provisions that they have to comply with.
They will have comply with a suitability provision and will have to carry out checks to make sure that the loan is actually suitable for the borrower.
There is also a provision in relation to arrears. The lender will have to have a policy in relation to arrears and recalculating repayments, rather then favouring repossession through court cases.
In relation to the consolidation of loans, all lenders will have to point out the additional cost of that credit, so borrowers can then make an informed choice as to whether or not they want that product.
Michael Cullotty, director of the Money Advice and Budgeting Service, said this is a great day for sub-prime borrowers, but that regulation may have come too late for some.
Mr Cullotty said people have been given loans that were unsuitable and unaffordable and they now find themselves in court. He said the new code, if enforced, will provide great protection to customers in the future and that the introduction of rules for the sector marks a huge cultural change in the credit industry in general.
On enforcement, Mary O'Dea said the lenders will be subject to inspection. Where the Regulator finds serious and significant breaches of the Code it has the power to take sanctions, such as the issuing of directions to a firm and financial penalties of €5m.
