By Globalaw members Oliver Foerster, Partner @ Huth Dietrich Hahn, Roberto Sparano, Partner @ Quorum Legal ,Paul Tully, Managing Director and Partner @ (McInnes Wilson) ,Tim Meng, Managing Partner @ Golden Gate ,Rory Campbell, Partner @ Hanson Bridgett ,Jose Gutierrez Partner @ Ramírez Gutiérrez-Azpe, Rodríguez Rivero & Hurtado, Andrew Chalmers, Managing Partner @ DCS Legal, Bryan Birkeland, Partner @ Jackson Walker
What is the most significant change we’ve seen in regulation in the past year?
UK: There are two key bodies that handle mortgage regulation in the UK. The first is the Financial Conduct Authority (FCA) and the second is the Prudential Regulation Authority (PRA). The FCA regulates all home-owner mortgages and lifetime mortgages such as equity release lending. Meanwhile, the PRA determines the amount of money that lenders, such as bank and building societies, need to hold, and the risk controls that they need to maintain. In October 2019, the FCA issued responsible lending rules and guidance covering borrowers who wanted to switch mortgage and were up to date with payments but did not wish to borrow any more money, by reducing barriers to such switches.
On 31 January 2020 the FCA announced a new mortgage advice and selling standards rules with immediate effect and a transition period running to 30 July 2020. These rules are intended to give consumers more choice in how they buy a mortgage and remove barriers created by earlier legislation. The rules centre around ensuring that consumers only pay for specific mortgage advice and ensuring that advisers must explain why they are not recommending cheaper mortgage options.
Germany: There were no significant changes in regulation regarding non-commercial mortgages.
US: The significant regulatory developments in the U.S. residential mortgage industry are:
- Federal Developments:
- Mortgage Underwriting: The Consumer Finance Protection Bureau (CFPB) has indicated that the “GSE Patch” (a temporary category under which loans eligible for purchase or guarantee by Government Sponsored Enterprises) will be extended beyond its pending expiration in January 2021. It will permit federally backed lenders continued underwriting leeway in addressing the 43% debt-to-income underwriting standard and is expected to preserve over $250 billion in loan originations.
- Flood Insurance Reauthorization: The National Flood Insurance Program has been extended until September 30, 2020. It preserves flood insurance for approximately 5 million insurance policies, 22,000 communities, and provides $1.3 trillion in coverage.
- CMBS Markets: The Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac’s regulator and conservator, has implemented its goal of creating a common mortgage-backed security (MBS) protocol via the “Single Security Initiative.” It is being done via a common securitization platform (CSP) which will now underpin the operations of the $4.6 trillion MBS market.
- COVID-19 Regulation: The COVID-19 Aid, Relief, and Economic Security Act (CARES ACT) applies to federally backed mortgages, which account for approximately 70% of all residential mortgages in the U.S. For borrowers under financial distress due to COVID, the CARES ACT provides for forbearance (payment delays) on mortgages for up to 12 months. Late charges, extra fees and penalties are prohibited. Limited documentation is required to prove eligibility. Multifamily loans under HUD programs also have forbearance, but under shorter forbearance periods (up to 90 days). Loan servicers on federally backed mortgages are prohibited from starting foreclosures before May 18, 2020.
- State COVID Response
- Beyond federal limitations, state and local authorities in many U.S. states have issued COVID-19 focused temporary orders restricting remedies on residential mortgages. These vary state-by-state. Examples include:
- California’s suspension of residential foreclosures state-wide through May 31, 2020;
- New York’s 90-day moratorium on the enforcement of foreclosures and prohibitions “until further order” against filing foreclosure actions and other non-essential cases; and
- Florida’s suspension of residential mortgage foreclosures through May 18, 2020.
Mexico: There were no significant changes in regulation regarding non-commercial mortgages.
China: Since August 2019, China’s central bank (PBOC) has changed the way commercial lenders set interest rates for loans. The mortgage rates will be based on Loan Prime Rate, or LPR, the new benchmark rate system, which will be linked to the PBOC’s medium-term lending facility (MLF) interest rate.
New mortgage loan rates for first-home buyers shouldn’t be lower than related LPRs. It has also been reported that the rate for second-home buyers must be at least 60 basis points higher than LPRs. Also, the loan prime rate is set on the 20th of every month, instead of daily.
Borrowers could negotiate with lenders on how to adjust their interests of mortgage loans each year based on changes of the LPR.
What impact will COVID-19 have in shaping regulations in the future if any?
UK: The FCA issued guidance on 20 March to mortgage lenders specifically dealing with COVID-19. This guidance is to be reviewed in the next 3 months. It is based and builds on two important principles binding mortgage lenders, namely, to treat the interests of its customers fairly, and to act honestly, fairly and professionally in accordance with the best interests of the customer.
The main principles of the guidance are that:
- A borrower experiencing difficulties or who reasonably expects to do so, may ask for a payment holiday and if that request is made, a 3 months’ payment holiday is to be offered, unless the mortgage lender can demonstrate that it is reasonable to do otherwise. More favourable arrangements can also be offered such as reducing or waiving interest.
- A payment holiday should be offered to anyone that indicates that they are or may be in difficulty making their mortgage payments.
- No fee or charges can be applied to any request.
- Any request for or any payment holiday agreed must have no impact on the credit rating of any person concerned as this is due to circumstances entirely outside of their control.
- No repossession should be commenced or continued at this time. This applies irrespective of the stage which any repossession proceedings have reached.
Germany: The impact of COVID-19 will most likely depend on how fast the country’s economy will recover. If the recovery materializes at a slower than expected pace, it is fair to assume that stimuluses will be introduced to promote the recovery of the economy. Instruments that reduce interest rates and an easier access to lending might be one of those stimuluses. This can lead to higher prices for real estate which – in turn – can change the ratio of equity and debt in relation to the financing of the acquisition prices. Loans are likely to be backed by mortgages. In consequence, the level of indebtedness will increase, and the solvency of the debtors will decrease, thereby also decreasing the value a mortgage can provide to secure the lender.
Another possible instrument could be a regulation differentiating the access to lending by the level of the borrower’s exposure to the COVID-19. For instance, a borrower who is more exposed to other individuals or is employed in an industry which largely depends on the contact of individuals (i.e. the hotel or catering industry) could possibly be treated differently from a borrower who has no such exposure.
Background for this differentiation would be that the more exposed borrower is more likely to be infected and therefore might be considered to present a higher risk to default on a debt. On the other hand, depending on the impact of COVID-19 on the economy, it is also a possibility that the government will guarantee to the lender to a certain extent that a mortgage-backed loan will be repaid. In this scenario, it is likely that the regulation on mortgages would be relaxed.
US: COVID-19 is disrupting every aspect of the U.S. economy and social life. It will continue to effect massive political, legal and social changes. Stop-gap regulatory responses will continue to attempt to “flatten the curve” of this disruption, but it is hard to see how the industry and the legal infrastructure can manage the fallout (it is still hobbled by lockdown in many places). With over 33 million people filing for unemployment and an unlikely V-shaped recovery, lenders will be facing a tsunami of distressed borrowers, mortgage defaults, impaired collateral, and deteriorating credit quality.
While the residential real estate market has been particularly hard hit, in recent weeks effective short-term solutions have been created for both homeowners and mortgage servicers. Depending on the length and severity of the economic impact created by COVID-19, it has yet to be seen if these temporary adaptations will result in longer-term changes for the residential mortgage market.
Lenders are likely to seek relief (and receive it) in adjusting underwriting standards and recalibrating debt-to-income and credit quality standards. It is also likely that banks may propose that the Federal Reserve and Treasury establish a credit facility for mortgage servicers, who are being hit hard by the relief provided to borrowers.
For borrowers, we expect continued stopgap measures to spread out payment regimes in the short-term. Despite major efforts to provide liquidity for the market via monetary policy and stimulus programs, borrowers are faced with a highly damaged economy, rent strikes and impaired income prospects. They will enhance bottlenecks in having loans underwritten, as lenders attempt to respond to an evolving regulatory and economic environment. However, federal, state and local temporary mortgage forbearance measures as well as moratoriums or restrictions on foreclosures and evictions, in particular, seem unlikely to continue for the long-term after the economic impact of the COVID-19 situation stabilizes.
Mexico: COVID-19 is more likely to have an impact on business practices and not so much on legislative matters, since the consequences and results of an event such as this one is already regulated. However, when drafting an agreement, the will of the parties mainly dictates the rules, and for this reason, the impact would be reflected in the clauses of the agreements when dealing with acts of God and force majeure events. For this reason, it is likely that moving forward, these types of clauses will play a greater role in all kind of agreements, including the insertion of rules and exceptions for the enforcement of a mortgage guarantee under a scenario like the one we are currently facing.
China: Since January 2020, the China Banking Regulatory Commission and other governmental agencies released a number of measures to outline the special circumstances being implemented as a result of COVID-19. Under these measures, generally, financial institutions should flexibly adjust personal repayment arrangements such as housing mortgages and reasonably postpone the repayment period. Also, financial institutions are encouraged to negotiate with borrowers and appropriately reduce the interest on individual housing loans for those who temporarily lose their sources of income due to the pandemic.
In practice, most banks should grant an extension for instalment repayments for borrowers = affected by COVID-19. For example, for those who have lost their income temporarily due to the pandemic, the Bank of China (BOC) can offer 3-6 months’ delayed repayment arrangements dependent on individual circumstance. Another example of this is if confirmed or suspected cases or their spouses are overdue in making repayment during the pandemic period, the China Industry and Commerce Bank will not consider this a breach of contract or include them in the list of defaulting customers.
During the COVID-19 outbreak, banks and other financial institutions have been encouraged to actively use online technical means to handle banking services. In the event that borrowers could not apply for the extension of the banking agreement and sign the extension agreement through traditional face to face meetings, the banks could take the form through a non-contact approach, primarily through online financial services tools such as WeChat to solve the problem.
What regulations can we expect in the future?
UK: COVID-19 is likely to have a long-term impact on the economy and so it may well be that the guidance issued and referred to above will be extended beyond its initial three-month term. If the economy returns to normal, it is unlikely that COVID-19 will result in any specific new regulations in what is already a heavily regulated sector.
Other regulation that looks likely is facilitating the ability of borrowers to switch mortgage providers more easily. Research published in March 2019 shows that borrowers are reluctant to switch even if they could get far better deals elsewhere. The FCA is looking to intervene to help borrowers who do not switch and is issuing a consultation paper on potential remedies later in 2020, which may lead to new regulations.
The PRA is expected to introduce new mortgage reporting requirements for regulated home lenders and home finance administrators effective 1 October 2020.
Germany: We’re likely to see legislation geared towards breaking the vicious circle of cheap money, high real estate prices, increase of indebtedness of the acquirer, decrease of acquirer’s solvency, and decrease of the value of a mortgage for the lender; regulation might be introduced to limit the ratio of the acquisition price allowed to be financed by loans and backed up by mortgages.
US: If a new administration is elected, especially if the majority of the Senate shifts, significant “New Deal” restructuring can be expected.
On a more pragmatic level, the need to improve logistics surrounding closings has become quite evident as a result of state and local orders that have closed businesses, including title companies, and imposed social distancing requirements that often make in-person closings difficult or impractical. While virtual closings would seem to present an answer, current laws pertaining to electronic signatures, recordings, and notarizations make closings in an online world more difficult. The SECURE Notarization Act, proposed in March—permitting remote online notarization nationally—may, if passed, be a first step in the path to a digital transformation of the mortgage industry.
Mexico: There are a number of financial institutions which have been granted grace periods and subsequently restructured under certain conditions the repayment of loans, as otherwise a high volume of lenders would default, pushing lenders to foreclose a large sum of mortgage guarantees; a situation similar to what we saw during the 2008 financial crisis, which is not a desirable outcome for lenders or providers.
As a result, the Bank of Mexico and the Mexican Bank Association have issued policies to considerably reduce the inter-bank interest rate as well as to negotiate its payments terms for four months in order to support the real estate market, which has been paralyzed to date as a result of COVID-19.
However, these conditions have developed through the will of the parties concerned and not through a binding decree or regulation. Therefore, in order to protect the interests of the parties involved, we could see future regulations of a public nature that bind financial institutions to behave similarly in the treatment of delinquency interest and in the terms of loan payments.
China: There is currently a high level of financial pressure and an increased risk of defaults. As a result of this, debt restructuring volumes will increase. It is also likely that the interest rate will be reduced for a prolonged period. Other measures such as debt relief and tax cuts may also be adopted to promote business activities.
Online technology and big data related technology will also be encouraged to use to make lending process more quickly and efficient.
Q&A with Clare George-Hilley, co-founder, Centropy PR
Clare George-Hilley is the co-founder of Centropy PR
Global Banking and Finance Magazine recently caught up with Clare George-Hilley, co-founder of fintech and financial services specialist PR agency Centropy, as the company toasts to three years of trading. We asked Clare about what life is like running an agency in the city, the trends she is seeing in the financial services space and what the future holds following the Covid-19 outbreak.
Why did you decide to set up Centropy PR?
I was looking for an opportunity to launch my own agency, both my husband and I had been in the public affairs and public relations industry for over a decade and we thought the time was right to go out on our own.
We could see that the financial services industry was surging, with challenger brands and new technology transforming traditional banks and setting new standards of customer service. There was a huge market opportunity to create and launch a PR agency that could provider first class comms support, alongside a deep understanding of complex regulations such as AML, KYC, and the GDPR. Likewise, many traditional technology firms are diversifying their offerings, to tap into the growing market opportunity posed by the fintech boom.
So, we worked on a business plan, designed a strategy for winning clients and officially launched in September 2017. Within a few months we had a growing portfolio of clients and a thriving business, since that point, we have never looked back!
How is Centropy doing now and what are you plans for growth?
The last three years have flown by and our client portfolio has grown and diversified quickly. We now manage PR campaigns for clients on everything from cryptocurrency, wealth management to payments and trading software.
We’ve also hosted parliamentary debates with key industry figures, including Members of Parliament (MPs) on topics such as the future of the financial services industry and the impact of challenger banks on traditional providers. The team is expanding quickly and we’re investing heavily in the latest training and support to ensure our team members are equipped to reach their full potential.
How do you see the next 12 months?
The Covid-19 outbreak has crippled the economy, forcing millions of people to work from home due to the very serious health risks. The knock-on effect of this crisis will lead to companies cutting costs where possible to save jobs, so tech will play a vital role in ensuring many businesses stay afloat.
We are already working with contactless payments specialists and other fintech companies that offer solutions to help companies survive and thrive despite the inevitable challenges ahead.
We aim to continue building our portfolio of expertise, testing ourselves with new challenges and delivering the best possible service to clients
This is a Sponsored Feature.
Lessons from past recessions and advice for business owners during the coronavirus pandemic
By Neil Davis, managing director and co-founder of Sterling Networks
What is Sterling Networks?
“Sterling Networks is a professional organisation founded in 2014 which facilitates networking events for businesses across the Midlands, Oxfordshire, Wiltshire and the South West. Over 300 members attend our fortnightly breakfast and lunchtime meetings.”
What is your background prior to establishing Sterling Networks?
“During the 1990s, I worked in the corporate team for Halifax. My wife, Tracey, and I went onto own a manufacturing business, which was also called Sterling, and produced a range of gifts, merchandise and promotional items.
“We soon realised tradeshows were a great way to meet distributors and clients. From there, the business grew exponentially, and we managed to build a network of around 500 distributors. Eventually, we became ground down by the manufacturing business – in part because the local manufacturing sector was being devastated by competition from China – and took the decision to sell the business and relocate to Spain.
“After spending several years living abroad, we moved back to the UK to set up Sterling Integrity (EXPO’S) & Sterling Networks (Networking) We were inspired by a desire to help businesses make meaningful connections with one another, and we haven’t looked back since.”
The UK has recently entered a recession, brought about by the coronavirus pandemic. What have you learned from past recessions and how are these experiences helping you to navigate the current crisis?
“I’ve lived through a number of recessions and have seen the pain that insolvency causes companies on a large scale. It’s taught me that there are those who win and sadly those who lose, and that businesses must adapt to a rise in demand for certain products or services at a time of financial crisis.
“Given the nature of what Sterling Networks offers [an opportunity for business owners to connect and grow together] I decided we could build upon the brand due to the demand for new business during the pandemic. We therefore moved our networking events from face-to-face to virtual via tools like Zoom and have gained a steady stream of new members in recent months, reaching an overall total of well over 300.
“On top of that, we’ve taken new staff on during the crisis and have launched a number of new regional groups across the country. I was determined that Sterling should come out of the pandemic with a head start, so my attitude to the recession has been much more positive than those who are forecasting nothing but doom and gloom.
“We can’t pretend high street retail wasn’t suffering long before the pandemic came along, and thousands of new businesses are sure to start up to meet the demand for the products and services that people require at a time such as this. In order to develop and grow businesses need to focus on where changes need to be made to meet this demand.”
Sterling Networks has been providing emotional support to its members throughout the pandemic. What advice have you been giving to members that could be useful to other business owners?
“I try not to be too opinionated and respect other people’s views when giving advice to members, as there are always two sides to every circumstance. I’ve been careful not to say to people that they should be doing one thing or another, as I don’t know their business and its needs quite like they do. The only thing that I have been telling members is the importance of setting up one-to-ones with one another. By doing so, they can listen to the needs and concerns of other, like-minded business owners and work out ways that they might be able to help one another.
“The pandemic has meant we all have a bit more time on our hands, so the advice I would give to people is to use this extra time wisely. Not having to travel physically from one meeting to another means there is a greater opportunity to connect with more people. It’s important to remember that individuals outside of your business can be just as valuable as those within it.”
What makes you hopeful for the future and are there any words of encouragement you can give to budding entrepreneurs?
“The key events that have happened to this country during my lifetime – whether wars, recessions, or the pandemic – have enabled me to take stock of things. While these experiences are certainly challenging, we all become stronger for living through them, and it gives me great confidence that the world will ultimately improve as a result of the pandemic.
“The whole world is effectively rebooting right now, as is the business community. I like to think entrepreneurs will recognise this opportunity to take better care of their peers, and this translates to greater collaboration between organisations. Speak to as many people as you can, ask all the questions that you need to and do your homework. This might well be a difficult time for us all but planning for the future must start now if it is to become as prosperous as I know it can be.”
Exclusive Interview with Ugo Loser, CEO of ARCA Fondi SGR
Arca Fondi SGR is a mid-sized Italian active asset management company. Founded in 1983 by a consortium made up of 12 regional banks, the company has grown in time, expanding its network of distributors and its client base. Nowadays Arca manages Mutual Funds, Pension Funds and Institutional Accounts with total AUM exceeding 30 € bln, reaching more than 100 banks and financial institutions and serving more than 800,000 final clients.
What are the key contributors to ARCA Fondi SGR’s success over the past 35 years?
Arca has always put clients and distributors first. That is to say we have always privileged fair pricing for funds and developing high quality products and services for our customers. This requires constant innovation as an objective and looking for people’s talent to be free to produce its effect
Why are people the founding element of ARCA Fondi SGR and how have you sustained this vision over the years?
We work in small teams, people are young and motivated and can perform duties with a high level of autonomy and responsibility. Innovation is asked to everyone, everyday
What makes Arca Fondi SGR different from other asset management firms in Italy?
Arca is a company focused on doing what it can do very well, that is to say mutual and pension funds, services for clients and banks. We never follow short term trends but always look for long lasting impact on the industry, like we’ve done may times in the past
What products/services has ARCA Fondi SGR pioneered?
Arca has been the inventor of “Arca Cedola”, fixed-horizon, coupon paying funds, which have been with no doubt the greatest product innovation of the past 12 years on the Italian market. This type of funds, at first strictly based on bonds and later as a balanced product, has encountered an enormous success both with clients and distributors due to its simple and effective value proposition. Arca is a market leader also in the “PIR” segment of funds, a range of product focused on mid and small sized companies, that have been the best performers in the Italian stock market for the last few years. In services, Arca is a leader in technology applied to asset management. Our website, app and digital services for clients and banks are award winning, state of the art combination of data, technology and channels, and the best is yet to come on this side.
What strategies do you have in place to sustain your market position and withstand professional competition in the country?
As I mentioned, we do not waste resources on projects with dubious results, instead we constantly invest on people, products and services. The high level of profitability that Arca has been able to maintain even in difficult years for the markets of the banking sector is a further testimony that this strategy works very well
How do you use technology to create meaningful experiences for your customers?
First of all, we have created a whole new division, Arca InnovAction Lab, dedicated to technology, data and processes. This ensures projects are delivered quickly and they are free to leave bad past practices behind. Arcaonline.it, Arca’s website, provides distributors with detailed information on clients’ portfolios, asset under management and subscription/redemption requests. It monitors aggregate selling data offering to our partners a suite functions and analytics to track commercial campaigns. And if the banks branches need assistance, they may ask Sara, our digital chatbot. A broad and timely multimedia production, covering exclusive reports, comments, presentations, videos, webinars and newsletters is also available on the website.
Customers, subscribing Arca’s funds through its distributors’ network, may access Arcaclick, a dedicated area on Arcaonline.it. With Arcaclick the client can easily browse through her portfolio of funds, analyze its characteristics, view transactions and historical funds’ performance in customizable views. Arcaclick is also a powerful source of information on Arca product range: Prospectus, KIIDs and other literature is easily accessible along with news, comments and reports. Arcaclick may also be accessed via Arca Fondi App, a free application for mobiles and tables, running on both iOS and Android. Available 24/7 and in mobility, Arcaclick gives clients the opportunity access information, news and details of their personal portfolio anytime and anywhere.
What key trends will drive pension growth in 2020 and beyond?
The Italian market for pension funds is still very small and therefore there is a great opportunity to grow. Arca Fondi manages the biggest open ended Italian pension fund and it’s been constantly at the top of its rankings. As people and workers are looking for yield and to weather short term volatility, the pension fund is very well poised to profit from this trend.
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