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Bill amendment could strike blow to debt sellers and purchasers

This week the House of Lords will debate an amendment to legislation that would write down the total amount owed by customers on certain debts sold by banks to debt purchasers.

Lords will be debating an amendment, tabled by former Green Party leader baroness Natalie Bennett, to the Financial Services Bill. The amendment focuses largely on the new statutory debt repayment plans and has the backing of the Centre for Responsible Credit.

 

The amendment calls for a "fair debt write-down" of debts that have been sold on the secondary market, particularly those which are appearing in statutory debt repayment plans. The amendment, if passed, would make it a requirement for debts sold by banks to be written down to a reasonable level.

 

The text of the amendment itself states that any debt appearing in a repayment plan, that has been sold either prior to the plan starting or while it’s still running, should be subject to "what is to be known as a fair write down."

 

The amendment goes on to state that "the level of the fair debt write-down must be calculated by the amount paid by the debt purchasing company for the debt plus no more than 20% of the value of the debt."

 

It also states that at the end of an individual’s debt repayment plan, any "outstanding amount in respect of debts to which a fair debt write-down has applied, is unenforceable against the debtor and must be treated as if fully discharged."

 

According to the Centre for Responsible Credit, this fair debt write-down could be expected to reduce the collection rate and therefore depress the price for non-performing loans (NPLs) on the secondary debt market.

 

In a briefing note on the subject, the centre added: "The secondary debt market has a role to play in ensuring a continued supply of credit in the economy as it allows originating lenders to move non-performing loans off their balance sheets which in turn ensures they can create new loans in accordance with prudential requirements set by the Bank of England.

 

"However, there is an obvious need to constrain the extent to which non-performing loans are off loaded and replaced by new lending to prevent future cycles of credit boom and bust. Fundamentally, this comes down to the price that is paid for debt by purchasing firms which is in turn determined by their expected collect out rate on non performing loan portfolios."

 

 

 

 

 

 

 

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