Non-Performing Loans: EU publishes the ‘NPL Directive’

What is it?

On 8 December 2021, the EU published Directive (EU) 2021/2167 on Credit Servicers and Credit Purchasers relating to ‘Non-Performing Loans’ (NPLs). The ‘NPL Directive’, as it is known, will take effect on 28 December 2021. This has paved the way for the development of a more regulated secondary market for the sale and purchase of NPLs throughout Europe.

Background

NPLs are loans with payments of interest or capital that are more than 90 days past due and/or loans where it is deemed by the lender that the borrower is unable or is unlikely to be able to make scheduled payments. The trading of NPLs became a staple of the years that followed the global financial crisis of 2008 (GFC), as banks looked to offload impaired loans from their balance sheets.

The European Commission has acknowledged that these NPLs make banks less profitable, increase staff costs and reduce banks’ ability to lend.  Therefore, to make the EU more competitive and enable banks to lend and support the Covid-19 recovery, the European Commission has created a regulatory framework which imposes rules on purchasers and servicers of NPLs, allowing for a more transparent NPL marketplace.

What does this mean?

“Credit Purchasers” are those who acquire NPLs from banks (the NPL Directive is not intended to apply to loans originated by non-bank lenders) or other Credit Purchasers. “Credit Servicers” are those who offer credit servicing activities to Creditor Purchasers, thus managing and enforcing NPLs that have been acquired. The NPL Directive establishes a new licensed status for Credit Servicers – they must obtain a licence for their activities and comply with the requirements in the NPL Directive for authorisation. Importantly, Credit Purchasers do not need to be licensed, but will need to engage a Credit Servicer to carry out loan servicing activities on their behalf.

Once licensed, Credit Servicers will need to comply with various requirements in carrying out their activities, both towards borrowers (for example, acting in good faith and professionally, ensuring they provide clear and accurate information) and towards the Creditor Purchasers who engage them. The overriding requirement of the NPL Directive is that the borrower should not be worse off as a result of the sale of an NPL.

The NPL Directive also imposes obligations on banks looking to sell NPLs; for example, to provide sufficient information to enable prospective Creditor Purchasers to diligence the relevant NPLs, to supply data to their Member States on NPL disposals, including providing purchaser details and borrower data.

When?

The Directive will enter into force on 28 December 2021, and member states are expected to adopt measures implementing the Directive by 29 December 2023.

Comment

The market in which NPLs were traded post-GFC was not quite the ‘Wild West’ but it was not far off. There was no uniform approach and there was no regulatory framework within which banks, NPL purchasers and servicers were required to adhere to. As the years immediately following the GFC passed, the market developed and the process for buying and selling NPLs became more streamlined. Throughout the late 2010’s, NPLs did continue to trade in certain jurisdictions, but not quite in the volumes experienced in the years that immediately proceeded the GFC.  However, it is apparent that we could be entering a new period of NPL trading as loans default and banks seek to free up their balance sheet. The European Central Bank has recently advised that the economic crisis caused by the Covid-19 pandemic is likely to trigger a sharp increase in NPLs, warning that, under a severe but plausible scenario, NPLs held by banks under the ECB’s direct supervision could reach levels as high as €1.4 trillion by the end of 2022.

The NPL Directive will need to be adopted by EU Member States across the next few years and it remains to be seen whether the UK legislature seeks to introduce similar measures. However it seems inevitable that the market for trading NPLs is going to become increasingly active in coming years. The development of a more structured framework in which banks, purchasers and servicers of NPLs can operate in is unquestionably a welcome development.

Edwin Coe acts for buyers, sellers and servicers of loans and loan portfolios, dealing with both the due diligence and sale/acquisition process, as well as providing all post-acquisition legal requirements, including advising on enforcement and recovery strategies. If you are interested in learning more about our experience in this area, please contact our Banking & Finance team.

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