By Elias Hazou
CYPRUS may still be deadlocked over the controversial foreclosures bill, but the troika of international lenders are already a step ahead with plans on how banks are to recover delinquent and bad loans.
The recovery of non-performing loans and of distressed assets forms a key thrust of the updated memorandum of understanding (MoU) on specific economic policy conditionality, leaked to the media yesterday.
As part of financial sector reform, the updated MoU calls for a reform of the debt restructuring framework “with a view to facilitating the voluntary workout of non-performing loans, avoiding strategic defaults by borrowers.”
Cypriot authorities “will allow for lenders to obtain adequate update information on the financial situation of delinquent borrowers under sufficient safeguards, via court order if necessary.”
The government will engage an independent legal consultant to provide a report by end-October assessing required legal amendments, taking into account relevant international best practices. The authorities are to “develop a time-bound action plan by end-November, and start its implementation by December.”
And by the end of November, Cyprus must have in place a “time-bound action plan” removing impediments for lenders to file for, and obtain, an attachment [seizure] of financial assets and earnings of delinquent borrowers. The implementation of this action plan will start by December.
Cyprus must also introduce provisions in the financial sector allowing banks to transfer bad loans to third parties, without the borrower’s consent.
“In order to encourage a market for distressed assets and to facilitate the issuance of securities by securitisation vehicles, the authorities will allow and facilitate lenders to transfer existing individual loans together with all collateral and securities to third parties at minimal transaction costs without having to obtain the consent of the borrower.”
Cypriot authorities are to establish a task force, “consisting of relevant shareholders from the public and private sectors, which will finalise an assessment of existing impediments and of required legislative amendments by end-November. The assessment will include a review of the regulatory framework for non-bank third parties. The identified impediments will be removed and legislative amendments made by end-January 2015.”
According to the MoU, “all legal, administrative or other hurdles currently constraining the seizure and sale of loan collateral shall be removed so that the assets pledged as collateral can be recovered within a reasonable period deemed to be a maximum time-span of 1.5 years from the initiation of the relevant proceedings. In the case of primary residences, this time-span could be extended to 2.5 years. The authorities commit not to introduce any further impediments to the seizure of assets pledged as collateral.”
Moreover, the troika makes it clear that before it disburses the sixth bailout tranche – the fifth is currently pending – Cyprus must adopt a comprehensive reform framework establishing appropriate corporate and personal insolvency procedures.
Based on that framework, corporate and personal insolvency legislation will be adopted, which will include licensing and regulation of insolvency practitioners, by end-December.