●        This would mean that CarVal potentially did not acquire first ranking priority over those mortgage assets.

●        A first ranking charge warranty is being provided by the Seller.

UTCCR – the Temple DD Report identifies certain provisions of the borrower files that could be deemed to be unfair under the Unfair Terms in Consumer Contracts Regulations.

The UTCCR provides that an unfair term will be unenforceable against the borrower.

●        This is a typical issue across all standard form bank documents.

●        In any event, a challenge under the UTCCR would not generally affect the general enforceability or otherwise of the underlying loan (just the unfair term in question).

UTCCR – the Deenish DD Report identifies certain provisions of the borrower files that could be deemed to be unfair under the Unfair Terms in Consumer Contracts Regulations.

The UTCCR provides that an unfair term will be unenforceable against the borrower.

●        9 of the 22 standard loan documents / terms and conditions (i.e. c.41%) do not provide an express ability to charge default interest.

●        3 of the 13 standard mortgage documents (i.e. c.23%) do not provide an express ability to charge default interest.

This is unusual however affects a very small proportion of the standard loan documents. We suggest asking Carval for information as to how many loan assets were originated pursuant to those specific documents. We further note that the power of sale will become enforceable upon “(i) default made by the mortgagor for 1 month in payment of some instalment payable under the mortgage; (ii) breach by the mortgagor of some covenant on his part in the mortgage or some covenant in statute or implied in the mortgage”. Given the Deenish portfolio consists of non-performing or re-performing loans, it is presumably likely that the power of sale, and thus power to transfer, has already been triggered.

Position regarding Deenish securitisation and possible exclusion of these loans to be determined.

●        This would mean that CarVal potentially did not acquire first ranking priority over those mortgage assets.

●        A first ranking charge warranty is being provided by the Seller.

●        We have sought advice from Pepper in relation to the affected mortgage assets. Pepper advised that they were unable to comment on specific assets and broadly noted that, “In terms of remediation, we don’t target EDD issues/flags post migration. This would be expensive and in some cases would not add value. For example, while there might be an issue with the title borrowers might continue to pay, perform to terms and we have no reason to engage in remediation. If we are forced to look at alternative solutions (enforcement, sale, litigation) we would look at the issues at that time and in conjunction with borrower engagement, resolution strategy, etc.“

UTCCR – the Skellig DD Report identifies certain provisions of the borrower files that could be deemed to be unfair under the Unfair Terms in Consumer Contracts Regulations.

The UTCCR provides that an unfair term will be unenforceable against the borrower.

Variability of Interest

Arthur Cox note that:

“the reviewed residential offer letters do not contain an express right for the Lender to vary interest rates. Condition 14(a) provides that “all Loans are subject to the Bank’s Mortgage Rate at the date the Loan is drawn down”.

The Banks Mortgage Rate is defined as the “interest rate as may from time to time be applicable to the Loan”. Condition 15 (The Monthly Payment) goes on to say that “[t]he Monthly Payment may be increased or reduced so as to take account of any provide for any increase or reduction in the Bank’s Mortgage Rate…”.

The Offer Letters reviewed by us contain a front page warning that “[t]he Payment Rates on this Housing Loan may be adjusted by the Lender from time to time”. The reviewed Offer Letters also set out the impact of an increase in rates and further s state that the Monthly Payment Amount is based on the current variable rate.]

The definition of Banks Mortgage Rate is a little unclear and circular and ideally the Conditions would make clear that the Banks Mortgage Rate can be varied by the Lender from time to time. However, the combination of Condition 15 and the Warning on the front page of the Offer Letter appear clear to us that the Borrower should be aware that the interest on a variable rate may be adjusted from time to time. However, an argument can be mounted by a Borrower that the variable rate was set at the date of drawdown, although we do not think this should succeed.

This issue is relevant to the Resi Loans that have always been on the Bank Mortgage Rate, those that started on a fixed rate provide more clarity on the rights of the Lender to to vary the rates. The reviewed Offer Letters and the Loan Conditions do not provide that references to the Bank or the Lender include its successors and assigns and hence does not state that any assignee specifically has the right to set the variable rate or adjust the Bank’s Mortgage Rate. However, for the reasons set out above in our view the rights of the Sellers under the Loans are assignable and that should include all the rights of the Seller including the right to set the variable rates. There is however a risk that a borrower will argue that any such rate should be linked to the Seller's Rate (i.e. the Bank’s rate) from time to time.

In the current high interest rate environment there is always a risk that a Court (or the Central Bank under its conduct of business rules) could take a view that even where a loan is assignable the right of an assignee to set the variable rates is not an entirely unfettered right particularly in circumstances where the rate being charged by an assignee is significantly more than the rate historically charged by the Sellers or in the market generally. See further below (Appendix 5 section 2.5 ) for a general commentary on SVRs and the current environment.

It is hard to say how a Court or the Central Bank would approach a situation where the original lender has exited the market, the documents do not contemplate this. As set out above in those circumstance the Court (or the Central Bank) may require variable rates to be set by reference to the market rates or may take a different approach in construing what is meant by the Bank Rate in these circumstances.”

This appears to be a reasonable view based on the description provided by Arthur Cox.

Arthur Cox note that the residential loan offer letters reviewed do not contain an express prohibition on transfer. However, they also note that:

“Reference is made in the Offer Letters (save for Data Room reference 11.3.3.4.1.1.2) to the Borrower being required to specifically confirm and understand that the loan and security is freely transferable as part of a “loan transfer and securitisation scheme” by signing a specific acceptance.

The language “loan transfer and securitisation scheme” in the Offer Letters is cumulative. Therefore, it is arguable that, for those Offer Letters, the clause will be limited to a specific type of loan transfer i.e., a loan transfer that is part of a securitisation scheme. The provision refers to a “loan transfer and securitisation scheme” rather than a “loan transfer or securitisation scheme” and, therefore, suggests the transfer is part of the scheme. Although this clause could then subsequently apply when the mortgages are securitised in any event.

To the extent an offer letter with this language was signed by the borrower, there is specific acceptance of a transfer in a loan transfer and securitisation.

We do not consider that an acceptance by a borrower of a transfer in the context of a securitisation precludes the Seller assigning its interests in the Resi Loans in the context of an outright sale as in this case in this transaction. Similarly, where the acceptance is unsigned, we do not consider that this would constitute an agreement that the Resi Loan is non-assignable.

We have raised a Q&A with the Seller on whether anyone has actively struck through or contested the transfer language in an offer letter. In such circumstances there would be a strong risk that such Resi Loans could be considered to be not capable of assignment. The Seller confirmed to us “The bank are currently finishing an exercise to confirm 3rd party assignability and note nothing out of the ordinary, which is consistent with previous loan book sales”.

The Seller has confirmed to us (and the Mortgage Sale Deed provides) that loans where the borrower has contested the assignment will be excluded.”

There are a number of remediation issues identified in respect of Project Skellig (for example, miscalculation of interest, miscalculation of interest period etc.). It seems that the majority of these issues have now been remediated in full but the Skellig DD report does note that “there is residual risk that notwithstanding the fact that Ulster Bank considered these remediation projects as completed, a borrower could make a future claim for compensation or remedial action”. The primary issues we identified in this regard are set out below:

(i) Hawthorn – this was the result of two complaints to the FSPO in respect of “Mortgage Manager” issues.

1.       FSPO Decision: Ulster Bank believes that the FSPO is fundamentally incorrect in the legal analysis underpinning the decisions and as a result, appealed these decisions to the High Court. The decision was handed down on 22 June 2023 and the High Court refused Ulster Bank’s appeals and affirmed the decisions of the FSPO. The High Court found that Ulster Bank did not establish that the FSPO had made a serious or significant error in their decisions  In particular, the court upheld the decision of the FSPO that UB had breached the Consumer Protection Code in failing to make it clear to the notice parties that the tracker rate they had been on may not be an “alternative available product” once the fixed term rate came to an end or when the parties chose to move off it. 

2.       Current Status of Litigation: Ulster Bank appealed the decision to the Court of Appeal on a question of law. The appeal was heard in February 2024 in front of [REDACTED], [REDACTED] and [REDACTED]. Judgment on the matter is awaited. While the appeal is pending, the decisions of the FSPO do not take effect and may not be implemented. 

3.       Impact on current loan sale: Ulster Bank have conducted an internal investigation to identify mortgage assets which may be impacted by the matters referred to above. As of 8 May 2024, Ulster Bank have identified 220 loans within the Skellig portfolio.

Note: an indemnity in respect of Hawthorn is being provided in the Mortgage Sale Deed.

(ii) Offset Mortgages (OFMs)

These are mortgage products which were historically provided by Ulster Bank as originator and as a result of the acquisition of First Active. The key aspect of the products is that a customer can benefit from a reduced interest payment on their mortgage by virtue of holding funds in one or more linked / associated accounts held with the Originator which can be offset against the outstanding mortgage balance in determining the interest payable on the customer's mortgage. In essence, the amounts held in the relevant accounts are offset against the mortgage balance, resulting in lower interest payments.

●        The remediation proposal (the OFM Proposal) is to remove / ‘turn-off’ the offset feature and the closure of the associated current accounts and (in the case of OFM's) the deposit accounts and to send customer communications informing the customer of the removal of the offset features and / or closure of the relevant accounts and, where relevant, loss of payment card functionality.

●        In our view, there are a number of regulatory risks with the OFM Proposal and if any of these risks crystallised they could potentially ultimately force Ulster Bank to unwind the change and put the borrower back on an OFM (and provide compensation for the borrower). 

●        The key risks are:

Ø  the borrowers could challenge the removal of the features and functionality of the accounts by the Seller on a unilateral basis as unfair under the Consumer Rights Act 2022 or the UTR;

Ø  a borrower refuses to engage in the customer communication process and/or accept the goodwill payment (and therefore not consent to the changes);

Ø  the Seller commits a breach of the general principles of the CPC 2012 and/or the Central Bank could deem the Seller’s conduct during that process as a breach;

Ø  the Central Bank launches a future investigation in respect of OFM’s and/or the OFM Proposal; and

Ø  a future servicer may also have to assist the Seller in a remediation process/regulatory investigation which would result in an additional administrative burden for the servicer and additional costs.  

Note: an indemnity in respect of OFMs is being provided in the Mortgage Sale Deed.

(iii) Pay and Redraw feature (in respect of offset mortgages).

We have carried out some further diligence on this. The Pay and Redraw feature is contained within Section F of Offset Mortgages conditions. The key term is “Available Facility”, which is defined “as any monies where there is a difference between the Facility and the Total Borrowing and represents the amount the customer may withdraw at any time subject to Ulster Bank’s approval”. Clause 2.3 then provides that the customer is not able to instruct Ulster Bank to make payments from their Account unless the customer has an Available Facility. Therefore, where a customer has an Available Facility, it appears that they are able to request a drawdown of an amount equal to the Available Facility.

Clause 18 of the terms and conditions goes on to provide that Ulster Bank may write to the customer to require immediate repayment of all or part of the Total Borrowings and forbid any future withdrawals from the Account if: (note: below is non-exhaustive, we have set out the most relevant):

o   without Ulster Bank’s prior approval, the Customer exceeds the Facility and the excess is not repaid within one month of notice;

o   the customer fails to make the equivalent of two Monthly Payments;

o   the customer fails to make any other payment due to Ulster Bank and such payment is outstanding for more than one month;

o   the customer breaches any requirement contained or referred to in the loan offer letter, the terms and conditions and the mortgage conditions; or

o   the customer defaults under any loan agreement or other agreement or obligation relating to borrowing from Ulster Bank or under any guarantee to Ulster Bank.

This does on its face allow Ulster Bank to refuse to provide an advance where the customer breaches a term. However, while the contract may provide for this, it is important to note that there would be a consumer overlay to this, which is why we expect Ulster Bank adopted the policy of allowing redraws if a customer that had previously defaulted to draw if it had no arrears for two years and this would in general terms make sense to us.

Two similar errors that resulted from operational process failures when managing customer arrears processes:

●        A process error of capitalising and/or adjusting the mortgage level arrears on GMS, whereby a manual arrears adjustment is keyed to one subaccount or across multiple subaccounts, that leaves the mortgage in a credit/debit arrears position at sub-account level at the end of the day on the date the adjustment transactions were keyed.

●        A process error whereby a recalculation of a customer’s Normal Monthly Repayment (‘NMR’) was not completed upon expiry of a forbearance deal or payment break.

This project specifies that “Remediation of these customers will be complete by 31/10/2023. There is no expectation that any support or follow up activity will be required by the sold loan purchaser”. Confirmation should be sought to confirm that UB have completed the Project Spruce remediation project.

Three errors were grouped together and remediated under Project Magenta, which identified and remediated all customers impacted by these errors on the GMS mortgage application:

●        MUB 118 – this error identified that some customers who had an Alternative Repayment Arrangement (‘ARA’) recorded on the Flex database and managed on GMS or CMS, and who later had that ARA expired earlier than the original end date may have continued to have the ARA reported as a live deal until the original end date.

●        MUB 123 – this error identified that some GMS mortgage customers had a duplicate or multiple payment expectation recorded on their account in error.

●        MUB 128 – this error identified that some accounts subject to certain ARAs did not:

1. revert to the required interest rate on the date the ARA had been agreed to expire or was broken (the “End Date”), resulting in a higher or lower interest rate being charged after the End Date than should have been charged and / or

2. revert to Capital & Interest repayments on the End Date.

Majority were remediated by July 2019. There was a small volume of accounts added to the population since then which were remediated as and when impact was confirmed. Accounts that were “Address not Verified” were remediated by June 2021.

Confirmation required re tail activities.

In 2021, UBIDAC identified that the pre 2012 COF interest rates provided by UBIDAC Treasury for the Project Willow remediation programme, and the Forward Fix introduced to charge the pre 2012 COF rate to Willow-impacted accounts that were still open, were not rounded down to the nearest one twentieth of one per cent (0.05%)). As a result, refunds paid by Project Willow were understated by up to 0.05% worth of interest; and the COF interest rates charged to customers in the Forward Fix may have been overstated by up to 0.05%.

This project specifies that “Remediation of impacted accounts is planned to be completed on 26 May 2023. No account adjustments were required but payments were made to customers via cheque or account lodgement where appropriate in line with customer treatment decisions. There is no expectation that any work or support will be required by the sold loan purchaser.” Confirmation should be sought to confirm that UB have completed the Project Java remediation project.

There are a total of 11 cases listed on the inward side for the Deenish portfolio. There is a mixture of Circuit Court and High Court cases. The Seller will retain control of all Defendant Litigation post-closing. The live cases are as follows:

i.        [REDACTED] v Pepper Finance Corporation [REDACTED]: RDJ acting. This case is active and relates to, inter alia, a claim by a discharged bankrupt that he has been defamed on foot of certain reports made to the CCR.

ii.       [REDACTED] v Pepper [REDACTED]: Plaintiff was unhappy with the delay in issuing title deeds and issued proceedings in relation to same.

iii.     [REDACTED] [REDACTED]: Beauchamps acting. Relates to an interest rate dispute between the borrowers and Ulster Bank that migrated to Pepper with the loan. No further information provided.

iv.     [REDACTED] v [REDACTED] and Pepper ([REDACTED] and [REDACTED]): RDJ acting. There are two cases here. Entry of an Appearance is the only step taken in this case since late 2022. Plaintiff claiming family home rights over one of the mortgaged properties. She is not named on any of the loans or facility letters.

v.      [REDACTED] v Pepper [REDACTED]: Beauchamps acting. Plaintiff lodged HC proceedings questioning the validity of the charge in a receivership case.  

vi.     [REDACTED] [REDACTED]: Lavelle Acting. Proceedings against Pepper for defamation

vii.   [REDACTED] v Pepper [REDACTED]: Eversheds acting: Spouse claiming family home rights.

viii.  [REDACTED] v Pepper [REDACTED]: Beauchamps acting. Summary Summons issued. Borrower disputing Receiver appointment. Await service of proceedings on Pepper.

ix.      [REDACTED] v. Ulster Bank [REDACTED]: Beauchamps acting. Plaintiff claims alienation from the property, negligence, breach of contract, breach of duty, damages, interest and costs. Defence delivered February 2018. Currently dormant.

x.       [REDACTED] v Ulster Bank and Pepper [REDACTED]: Claim for damages against Pepper re incorrect Central Credit Reporting post UK bankruptcy.

Obligation in the MSD for the Purchaser to substitute into all Plaintiff Litigation. The Purchaser will have discretion as to which of these cases they wish to take forward. There are 2 sets of proceedings due to issue by Pepper and the Receiver against the following individuals:

i.        [REDACTED] & [REDACTED]: Special Summons due to issue for possession. Receiver appointed over 3 BTL's, occupants not engaging, and Borrowers continue to impede access/interfere.

ii.       [REDACTED] (HC): Beauchamps acting. Injunction issued against occupant & third party illegally collecting rent from the secured property and placing occupants in the property. Ex-parte application seeking injunctive relief listed 25 July 2024.

Temple

There are a total of 5 cases listed on the inbound side for the Temple portfolio. There is a mixture of Circuit Court and High Court cases. The Seller will retain control of all Defendant Litigation post-closing.

i.        [REDACTED] and [REDACTED] v Pepper, [REDACTED] [REDACTED]: Lavelle acting. Civil Bill. Borrowers disputing validity of transfer from KBC to pepper and Receiver appointment.

ii.       [REDACTED] v Pepper and [REDACTED] [REDACTED]: Beauchamps acting. Plenary Summons. Borrowers disputing Receiver validity.

iii.     [REDACTED] v Pepper and [REDACTED] [REDACTED]: Beauchamps acting. Plenary Summons. Borrower disputing debt and authenticity of signature on the Facility Letter.

iv.     [REDACTED] v [REDACTED] and KBC [REDACTED]: Lavelle acting. Injunction. On hold. Borrower challenged receiver appointment due to an alleged issue with the mortgage documentation. Proceedings were adjourned and settlement discussions took place. Bank subsequently indemnified the Receiver.

v.      [REDACTED] v [REDACTED] and the PRA and [REDACTED] [REDACTED]: Lavelle acting. Proceedings issued by Borrower after property sold. Next court date 30/07 to have case struck out for case for failure to deliver a Statement of Claim.

There are a total of 6 cases listed on the outward side for the Temple portfolio, all of which are active. Obligation in the MSD for the Purchaser to substitute into all Plaintiff Litigation. The Purchaser will have discretion as to which of these cases they wish to take forward. Cases are as follows:

i.        Pepper and [REDACTED] [REDACTED]: Eversheds acting. Order for possession granted on 16 July 2024.

ii.       KBC Bank and [REDACTED] and [REDACTED] [REDACTED]: Beauchamps acting. Order for possession being sought. Pepper to substitute into possession proceedings.

iii.      Pepper and [REDACTED] v [REDACTED] and [REDACTED] [REDACTED]: Beauchamps acting. Possession proceedings against occupants and borrower who is interfering with occupants.

iv.     [REDACTED], [REDACTED], Pepper and [REDACTED] v [REDACTED] [REDACTED]: Beauchamps acting. Order for summary judgment.

v.       Pepper and [REDACTED] (reps of [REDACTED]): Plenary Summons for possession proceedings against occupant. Estate is engaging with Pepper and has agreed to consent to order.

vi.     [REDACTED] and Pepper and [REDACTED]: Proceedings due to issue against occupants and borrower for possession.

There is 1 case in which Pepper are a notice party:

●       [REDACTED] and [REDACTED], Tailte Eireann & Pepper [REDACTED]: Lavelle acting. Relates to a solicitors’ undertaking. Pepper are notice party to proceedings issued by the solicitor against Borrowers in an attempt to rectify and perfect our security.