Principles and guidelines for out of court consumer mortgage workouts

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PRINCIPLES AND GUIDELINES FOR OUT OF COURT CONSUMER MORTGAGE WORKOUTS

These guidelines have been prepared in cooperation with World Bank experts as part of a Technical assistance program, having regard of the best international practice as well as practice currently used by Latvian banks. The guidelines contain general principles for out of court mortgage workouts.

As it is in the interest of both parties to act fairly and reasonably with each other in resolving financial problems to resolve any payment arrears without resorting to judicial action as well as taking into account the nature of financial services, it is recommended for any lender (a bank, credit union or any other lender from non banking sector) to evaluate carefully the cooperation with any financially troubled borrower and to apply principles defined in these guidelines in the process of loan restructuring.

General principles of ensuring of out of court mortgage contract performance should be applied only to mortgage contracts concluded with consumers and in cases, when concrete physical person is in a financial trouble, that could burden or cause impossibilities to execute a mortgage contract.

Guidelines do not affect the binding effect and application of legal acts and the loan agreement concluded.

Principle 1 – The borrower as early as possible contacts the lender to discuss mortgage payment problems for the best opportunity of reaching quick resolution.

1. The borrower as early as possible contacts the lender to discuss any payment arrears which he is currently having or expecting to have and to avoid the possibility of interest accruals and penalties being added to the account for late payment.
2. The lender and the borrower (hereinafter – contracting parties) discuss with each other or their authorised representatives the cause of the arrears, the borrower’s financial position and proposals for repayment of the arrears (for example, parties should consider whether the causes of the arrears are temporary or long term and whether the borrower will be able to pay back the arrears in a reasonable time).

Principle 2 – The lender provides the borrower with detailed report of the mortgage contract payments

During discussion on the present payment arrears, the lender provides the borrower with detailed report of the mortgage contract payments, including at least the following information:

(a) the total amount of the arrears; 
(b) the total outstanding of the mortgage loan; and
(c) whether late-payment interest or contractual penalty will be added, and if so and where appropriate, details or an estimate of the late-payment interest or penalty that may be payable.

Principle 3 – An informal workout should only be commenced if the circumstance of a financially troubled borrower appears
An informal workout should only be commenced if the circumstance of a financially troubled borrower appears that may make difficult or render impossible execution of loan contract.

A workout is a voluntary agreement on both parts and does not alter the contractual rights of either party under the loan agreement.

The borrower is offered a possibility of loan repayment by establishing a loan and applicable late-payment interest or contractual penalty repayment schedule which is both affordable and maximum sustainable.

Principle 4 – Good faith
All negotiations between the lender and borrower take place in good faith with the objective of finding a constructive solution.

Principle 5 – Clear Communication
Contracting party without mistake and fraud provides the other contracting party with clear and sufficient information

To the extent possible the lender should document any agreement on any changes to the payment schedule or other aspects of the loan repayments.

Principle 6 – The Borrower will provide the lender with all necessary information, including information relating to income in order to enable proper evaluation to be made of his financial position.
The borrower provides the lender till the date established by the lender with all necessary information (data on regular income and other sources of financing (savings accounts, investments etc.), current employment circumstances, sources of household income, future employment prospects etc., in order to enable proper evaluation to be made of his financial position.

Principle 7 – All possible restructuring solution should be considered and discussed prior to any steps to enforce the collateral.
1. Contracting parties consider and discuss all possible loan restructuring solution prior¬ to any activities to enforce the collateral.

2. The lender does not start a foreclosure procedure when a settlement is still actively being explored or the borrower is able to persuade the lender on the steps taken to market the property at a reasonable price. 

3. Contracting parties discuss possible solutions to resolve arrears, in particular the alteration of the terms and conditions of the mortgage loan, for example:

3.1. extending of the term of the loan, if the borrower would remain under 65 years of age at final payment date;
3.2. alteration of the loan interest rate type (for example, moving from a fixed loan interest rate to a variable loan interest rate), if this may provide a reduction in the monthly payment;
3.3. possibility to reduce the interest rate level to further the repayment of the loan;
3.4. deferral of the payment of interest due;
3.5. capitalisation of the arrears. The arrears may be capitalised by adding them to the principal amount of the loan or agreeing on a new loan without incurring contractual penalty or late-payment interest; Accrued interest may be capitalized for a limited time period, if the lender deems that the borrower’s payment difficulties are temporary in nature or if the borrower has a good prospect of redressing the situation at some future point.
3.6. capitalisation of debts, to agree on new loan amount, where debts may be capitalized as a part of new loan, without incurring contractual penalty or late-payment interest;
3.7. freezing of a part of the loan, as a temporary solution, suspending of repayment of the principal loan amount for a time and setting the loan interest rate to 0%;
3.8. possibility for the lender with the consent of the borrower to purchase the property and rent it back to the borrower, defining the rights of the borrower to  repurchase the property at a certain price if his financial position improves.
3.9. possibility for the borrower to sale the property voluntarily, if a borrower can persuade the lender on his activities carried out or to be carried out to sale the property at an appropriate price in accordance with reasonable professional advice. The lender does not start foreclosure action and the borrower continues to take all reasonable steps to sale the property.

Principle 8 – Prompt response to any borrower proposal

The lender responds promptly to any written proposal for payment made by the borrower. If the lender does not agree to such a proposal he should give reasons in writing to the borrower within 15 business days from the day of receipt of the proposal.

Principle 9 – Application of a reflection period for any new proposal

1. The lender gives the borrower a time period of not less than 15 business days, in which to consider any proposal for a new payment schedule should be considered, to give the borrower the opportunity to get advice and discuss the proposal.
2. The lender should set out the proposal in a clear and unambiguous way to enable the borrower to understand the implications of the proposal.
 
Principle 10 – Realistic and Achievable Restructuring of loans
The loan restructuring proposal should be based on an achievable and reasonable payment schedule, where the loan servicing payments do not exceed 40% of household income.

Principle 11 – The lender will not initiate any new court proceedings to foreclose the property whilst the borrower is complying with the terms agreed for the loan restructuring
The lender does not initiate any new court proceedings to foreclose the property if the borrower and lender agreed on the loan restructuring proposal and the borrower complies with all the terms of the loan restructuring.

Principle 12: Confidentiality

The lender will respect the confidentiality of the borrower and unless there is agreement from the borrower, will not disclose any information about the borrower’s circumstances to a third party, unless the law provides otherwise.
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