Irish banks rely on legal threats to hit debt targets - MPs

* AIB, Ulster Bank hit majority of targets via legal means

* Bank of Ireland (Other OTC: IRLD - news) splitS offers between legal, restructuring

* Banks "fiddling the figures" with legal threats -lawmaker

By Padraic Halpin

DUBLIN, Sept 4 (Reuters) - Ireland's largest banks have relied too heavily on threatening legal action against mortgage borrowers to meet central bank targets on bad debts, rather than agreeing debt restructurings, lawmakers said on Wednesday.

The central bank has been pressing lenders to get to grips with mortgage arrears, describing them as the main domestic policy issue with one in five Irish home loans, worth 25 billion euros ($32 billion), not being fully repaid.

Allied Irish Banks Chief Executive David Duffy said it had proposed 8,600 solutions by end-June versus a target of 6,200, but was criticised by lawmakers for including almost 6,000 letters threatening legal action among those offers.

The central bank had in March set binding targets to tackle the crisis, but lawmakers said simply posting letters did not achieve anything concrete and was not the kind of action authorities had in mind.

"By including repossession letters as sustainable offers he is fiddling the figures and clearly AIB are not on board with the plan to deal with mortgage arrears in a sustainable way," Pearse Doherty of the opposition Sinn Fein party said.

State-owned AIB told parliamentary hearings that letters were sent to "non-engaging" customers in long-term arrears and warned that unless they began to engage with the bank, they would be subject to full legal process, including repossession.

Repossessions are set to increase from nearly zero after recent law changes handed more powers to the banks.

Lenders, including the Irish units of KBC Bank and RBS (LSE: RBS.L - news) , have been told to offer solutions to 20 percent of distressed borrowers by the end of June and 50 percent by the end of 2013, when Ireland is due to exit its EU/IMF bailout.

Banks will be have write down the value of the loans if measures proposed are deemed unsustainable by the central bank.

LEGAL PROCEEDINGS

Bank of Ireland (BoI), the only Irish lender to avoid majority state ownership, said that it had offered solutions to 53 percent of its 11,774 mortgage holders 90 days or more in arrears during the second quarter.

These were split almost evenly between legal measures and offering to restructure loans, BoI Chief Executive Richie Boucher told the committee, adding he did not expect most legal proceedings to end in repossession.

Royal Bank of Scotland's Ulster Bank said it had also exceeded the central bank's target for the second quarter, offering solutions to 32 percent of its struggling customers, with three out of every four relating to legal action.

"It's a matter of some concern to us that that's the proportion in which the targets are being met," said Ulster Bank Chief Risk Officer Stephen Bell. "(But) where there are serious financial consequences, boards of directors will do what they need to do to hit the targets."

Bell (Swiss: BELL.SW - news) added that the central bank had confirmed that the issuing of legal threats constituted a binding solution.

Ulster, Northern Ireland's No.1 bank and the third largest in the Republic of Ireland, said 20 percent of those sent legal letters had re-engaged with the bank to seek an alternative.

Permanent TSB, the smallest of Ireland's three remaining domestically-owned lenders, which will appear before committee on Thursday, said last week it had met the central bank's second-quarter target and was on track to meet future goals.

Some economists have predicted that a recent fall in the unemployment rate and a rise in house prices - both firsts since Ireland's 2008 housing crash - could start to ease pressure on some mortgage holders.