Update: The NPL Directive nears implementation across the EU

As we have discussed in a previous blog, in December 2021 the EU published the ‘Directive on Credit Servicers and Credit Purchasers’ which is intended to regulate the sale, purchase and servicing of ‘Non-Performing Loans’ (NPLs) originated by EU banks. Member States are required to adopt measures implementing the so-called ‘NPL Directive’ by 29 December 2023.

Background

The Directive is complex, although the primary intention is to create a harmonized and regulated framework in which NPLs originated by EU banks can be traded between credit institutions and ‘Credit Purchasers’, and in which NPLs can be managed/administered by ‘Credit Servicers’.

At present, there are no EU standards for the regulation of Credit Servicers. Member States have very different rules governing how purchasers are able to acquire NPLs from EU banks. In some Member States, purchasers are not regulated, while in others they are subject to various requirements which could include compliance with an authorisation/licensing regime. These differences have made cross-border trading of NPLs difficult.

Summary of Directive

The Directive imposes a whole plethora of obligations on these credit institutions, Credit Purchasers and Credit Servicers and applies to both consumer and corporate NPLs. For example:

• EU banks who are selling NPLs are required to disclose to prospective purchasers’ certain information about their rights under the loan and the supporting collateral to enable the purchaser to assess the likelihood of recovery.
• Credit Purchasers must adhere to certain requirements – if they are a non-EU entity, they must appoint an EU entity to act as its representative and in certain situations they must appoint a third party servicer to service certain types of NPL.
• Those parties who provide ‘Credit Servicing Activities’ (for example, collecting payments) must, subject to certain exemptions, be authorised to act as a Credit Servicer by an EU national supervisory authority. Credit Servicing Activities is broadly defined in the Directive, and could be interpreted as including activities that facility agents and security agents ordinarily perform in an enforcement or distressed loan situation, for example renegotiating loan terms with borrowers and/or taking enforcement action.

The new framework will not apply to the sale of performing loans originated by credit institutions, or to the sale of NPLs originated by credit institutions which take place before 30 December 2023. Nor will it apply after 30 December 2023 to the sale of an NPL by an EU credit institution to another EU credit institution, or to the sale of a performing loan or NPL originated by non-credit institutions.

Implementation

EU Member States have been slow to publish their draft legislation setting out how they intend to implement the Directive. However, legislation is now starting to emerge, with Germany leading the way.

On 20 July 2023 the draft Credit Service Institutions Act (CSIA) was published in Germany. The draft CSIA provides that credit institutions, and certain non-credit institutions that are authorised to provide loans, comprise Credit Servicers and require a license for the provision of Credit Servicing Activities. Further, debt collection agencies will need to be authorised under and supervised under the draft CSIA. Firms who are negotiating any terms and conditions with borrowers of NPLs will be seen to be carrying out a Credit Servicing Activity; there are certain exemptions but this may bring advisory practices, and not just traditional ‘loan servicers’, within the ambit of the legislation. The draft CSIA also permits Credit Servicers to hold funds from borrowers on behalf of Credit Purchasers, a measure which was left to each Member State’s discretion under the terms of the Directive.

Other EU Member States will no doubt catch up with Germany in the coming months as the clock ticks towards 29 December 2023.

The UK position

Since we published our previous blog on this topic, a UK-based measure mirroring the EU Directive has not yet emerged. The latest data suggests that NPL volumes in the UK are not yet on the rise. However, there is a widely held view that this data is yet to catch up with what is happening on the ground, particular across certain sectors. As NPL volumes increase, and the UK legislature observes the impact of a more regulated environment in which EU bank originated NPLs are traded, the UK legislature will no doubt look to implement their own framework allowing for a more transparent NPL marketplace.

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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