# Central Bank checking if lenders have calculated arrears properly



## Brendan Burgess (3 May 2017)

An interesting story by Joe Brennan in today's Irish Times

*Central Bank to assess if lenders broke debt restructuring rules*

This is a complex issue.  I raised it directly with the Central Bank in relation to Irish Nationwide back in 2005! They did nothing about it at the time.

I don't know if other lenders are affected, but I would say that Mars Capital may have questions to answer about the Irish Nationwide loan book.

This is what banks should do.

Johnny has a  mortgage of €100,000, €20,000 of which is in arrears.
The normal monthly repayment is €1,000 a month on the €80,000.

The lender says to Johnny: Your repayment is €1,000 per month and you owe us €20,000 arrears. Please repay the arrears and continue to pay the normal €1,000 per month.

Alternatively the lenders says to Johnny: We will capitalise your arrears, so now your mortgage balance is €100,000 and your repayments is €1,200 per month.

Irish Nationwide though calculated the repayment based on the €100,000 mortgage balance. So they said to Johnny: Your repayment is increased to €1,200 a month *and *you owe us €20,000 arrears. So they were double counting.

Johnny was paying nothing anyway, so his arrears rose to  €21,200 - i.e. an overstatement of €200 in the first month.  This ballooned and after a few years, the arrears were significantly overstated.

This was a huge issue back in 2005, because the Irish Nationwide charged 20% penalty interest on arrears.  Lenders are not allowed to charge additional interest on arrears since 2010, so this aspect of the issue has disappeared.

The problems Mars (and maybe other lenders) face are:
1) They may have charged penalty interest on overstated arrears before 2010.
2) They may have initiated legal proceedings based on overstated arrears.

I have not noticed that the other lenders are affected by this.

The capitalisation seems to me to be a bit of a red herring. If the lender capitalises the arrears, the repayments are correct.


Brendan


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## Shoomac (7 Jul 2017)

I'm trying to get my head around how this works. It sounds like the principal balance should go down by the exact amount as the arrears go up?
Does this scenario illustration reflect what the banks should do?

*Scenario*

*Month, Payment Made,* *Principal,* *Arrears
start,* 1000, 80000, 20000
*month1,* 1000, 79000, 20000
*month2,* 1000, 78000, 20000
*month3,* 0, 77000, 21000
*month4,* 0, 76000, 22000

In a real life scenario, I'm guessing as interest rate changes or is calculated each month that the new interest should be determined based on the outstanding principal only and not principal + arrears?


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