In light of the recent developments in the banking sector following the financial measures imposed, arrears management is an area which attracted particular interest as it has greatly affected natural and legal persons with credit facilities in Cyprus.
As a response to the emerging call for restructuring, the Central Bank of Cyprus issued, pursuant to section 41 of the Business of Credit Institutions Laws of 1997 to 2015 and the powers conferred to it, the Directive on Arrears Management of 2015 which was published in the Official Gazette on 3/4/2015 (R.A.A. 107/2015). The provisions of the Directive aim at the development of a robust arrears management strategy and a restructuring process based on efficient and effective strategies which will facilitate reducing credit risk and reinstate the ability of borrowers to meet their obligations. As such, adherence to the Code of Conduct on the Handling of Borrowers in Financial Difficulties which is attached as Annex 2 to the Directive, is imperative and aims at achieving a voluntary restructuring, the ultimate goal being the avoidance, where possible, of taking court measures against borrowers in financial difficulties.
The Directive applies to all credit institutions licensed by the Central Bank and to all branches of credit institutions of other Member-States operating in the Republic (unless provided otherwise by the regulating authorities of the said Member-State).
The Directive provides for the development of an operational plan covering portfolio segmentation, policy, debt restructuring solutions etc. The strategy includes various measures such as analyzing arrears, nominating cohorts according to the level of arrears, analyzing the key risks, the viability of borrowers and the collection score, defining specific-term restructuring options, performing scenario/sensitivity analysis, conducting reviews on a systematic manner etc. Credit institutions shall establish an independent and centralised Arrears Management Unit, distinct from the Debt Recovery Unit, in order to monitor arrears and conduct restructurings.
Viable borrowers are offered sustainable restructuring solutions, assessed on a case-by-case basis. Out-of-court restructuring of credit facilities is clearly embraced by the Directive in order to promote efficiency, restore growth and minimize costs. Credit institutions shall take into consideration the macroeconomic forecasts and the adverse impact from failure in agreeing to a restructuring option, which may lead to the commencement of legal proceedings before the courts.
The Directive provides for “temporary” and “permanent” solutions, the former relating to restructuring options of duration of less than two years and the latter relating to restructuring options of duration of two years and above and for the construction of commercial property or project finance, of over one year. The options that may be incorporated during the restructuring process are the payment of interest only, arrears and/or interest capitalization, the agreement for a grace period, the reduction of interest rates, extension of maturity, the provision of additional security, debt consolidation etc.
The aforesaid Code of Conduct applies to natural persons granted credit facilities up to €1.000.000 including guarantors and third parties and to micro and small enterprises, as defined in the Commission Recommendation 2003/361/EC, granted credit facilities up to €1.000.000. The Code of Conduct does not apply to persons for which an application for bankruptcy was filed by another creditor, persons for which a receiver or administrator was appointed by another creditor and persons for which a dissolution decree was issued.
According to the Code of Conduct constant communication with the borrowers is the key towards voluntary restructuring. Credit institutions are required to implement a uniform communication approach, performed in a proactive and timely manner, ensuring compliance with privacy and confidentiality principles and making available all relevant resources and information in a clear and informative manner. Various stages of communication are provided; the pre-arrears consultative communication, the early arrears consultative communication, the mid arrears communication, the serious arrears communication and communication due to a classification of a borrower as “non-cooperative”. A borrower is regarded as non-cooperative when he/she fails to disclose material information or fails to do so in a prescribed time and manner.
Credit institutions are obliged to be fully informed as to the particular financial circumstances of the borrower and his/her guarantor(s) in order to develop appropriate restructuring solutions. Therefore, natural persons are required to complete and sign the Personal Financial Statement along with a declaration of accuracy of the information provided and legal persons are required to provide their audited financial statements or management accounts, along with any supporting documentation that may be requested. The time limits for the provision of the above is set at 14 days from the maturity date for action for natural persons and two months in case audited financial statements will be submitted or one month in case management accounts will be submitted for legal persons.
Restructuring shall be based on the financial information provided as well as on the particular circumstances of the borrower, the borrower’s financial strength, the total amount of credit facilities, the borrower’s current, forecasted and projected repayment capacity and the borrower’s credit history. Where the repayment ability of the borrower depends on the repayment ability of his/her guarantor(s) the credit institutions shall assess the repayment ability of the guarantor(s) on the same basis. The total assessment procedure on behalf of the credit institutions shall not exceed one month from the date all relevant information is provided as regards natural persons and two months as regards legal persons.
The decision of the credit institution shall be communicated to the borrower within fourteen days since the initial oral communication of the decision in an arranged meeting, whereby a “Letter of Offer” is handed to the borrower or sent by post. The letter shall include a clear explanation and the reasoning of the decision, the new terms and conditions, an analysis of all costs, the next steps for the official acceptance of the order or the procedure that must be followed in case the proposal is declined by the borrower. In case the borrower declines the offer, he/she shall notify the credit institution within twenty-one days from the date of receipt of the letter and the credit institution shall respond within seven days, either expressing its willingness to convene again or explain the procedure that the borrower has to follow in order to apply to the Appeals Committee or the right of the credit institution to commence legal proceedings against the borrower.
The Appeals Committee is established by credit institutions as an internal independent appeals process which shall handle claims and complaints of borrowers with respect to restructuring. Credit institutions shall ensure the impartiality of the Appeals Committee and the strict adherence to the provisions of the Code of Conduct. Credit institutions are required to ensure that the processes for making claims, appeals and complaints are easily accessible to all borrowers.
Mediation is a further procedure offered to borrowers whom their obligations towards credit institutions do not exceed €350.000 and are secured with a charge over property. Borrowers may accordingly choose to submit a written request to the Commissioner of Financial Disputes Resolution for the appointment of a Mediator.
The newly implemented measures aim at providing a fair treatment of borrowers, minimising the level of repossessions and achieving the social objective of keeping borrowers in their primary residences. Maintaining sustainability is at the heart of the aforesaid provisions towards supporting and advancing the economy of Cyprus.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought on your specific circumstances. For further information, please contact Constantina Zantira at c.zantira@kyprianou.com.cy.
