The EU Directive (EU) 2021/2167 (NPL Directive), published in the Official Journal of the EU on 8 December 2021 and regulating the sale, purchase and servicing of both consumer and commercial non-performing loans (NPLs) originated by EU banks, must be implemented by Member States by 29 December 2023. This article provides an overview of the NPL Directive and considers the potential impact of its implementation in some key EU Member States.
The NPL Directive aims at setting out a comprehensive strategy to address the issue of NPLs on credit institutions’ balance sheets, facilitating private risk-sharing across the EU, through the creation of a secondary market, simplifying and harmonizing the requirements for access to the non-performing credit market. Credit institutions should be allowed either to outsource the servicing of NPLs to a specialised credit servicer or to transfer the credit agreement to a credit purchaser that has the necessary risk appetite and expertise to manage it.
At present, there are no EU standards for the regulation of credit servicers. In particular, no common standards have been set for the regulation of debt collection. Member States have very different rules for how credit purchasers are able to acquire credit agreements from credit institutions. Credit purchasers are not regulated in some Member States, while in others they are subject to various requirements, sometimes amounting to a requirement to obtain an authorisation as a credit institution. Those differences between regulatory requirements have resulted in considerable obstacles to legally purchasing credit cross-border in the EU, mainly by increasing the compliance costs faced when seeking to purchase credit portfolios.
The NPL Directive applies to:
- credit servicers acting on behalf of a credit purchaser in respect of the creditor's claims under an NPL agreement or the NPL agreement itself, issued by a credit institution established in the EU;
- credit purchasers who acquire the creditor's rights under an NPL agreement or the NPL agreement itself, issued by a credit institution established in the EU.
The NPL Directive regulates the sale, purchase and servicing of both consumer and commercial NPLs – i.e. 90 days due or that a credit institution considers to be unlikely to be repaid loans - originated by EU credit institutions.
The Directive imposes:
- authorisation requirements on credit servicers (i.e., legal persons that, on behalf of a credit purchaser, carry out one or more of the following activities, pursuant to Art. 3(9) of the NPL Directive: (a) collecting or recovering from the borrower of any payments due (b) renegotiating with the borrower any terms and conditions in line with the instructions given by the credit purchaser, where the credit servicer is not a credit intermediary; (c) administering any complaints; and/or (d) informing the borrower of any changes in interest rates or charges or of any payments due) to be set out by the Home Member State; credit servicers will then be able to passport their licence in the EU;
- other obligations (but not an authorisation requirement) on credit purchasers (e.g. notification of appointment of credit servicer, non-EU purchasers must designate EU representatives);
- business conduct rules on both credit servicers and purchasers, including a more general duty to act "in good faith, fairly and professionally", reporting obligations toward the debtor, contractual requirements in the relationship between credit servicers and purchasers, when applicable, as well as outsourcing requirements for credit servicers;
- information obligations by the credit institution toward the credit purchasers and the relevant NCA so as to enable the prospective credit purchaser to conduct its own assessment of the value and the likelihood of recovery of the value of the NPL prior to entering into a contract for its transfer. In this regard, the European Banking Authority (EBA) published 16 December 2022 its final ITS specifying the requirements for the information that credit institutions selling NPL shall provide to prospective buyers, to provide a common data standard for the sales or transfers of NPL across the EU enabling cross-country comparison and thus, reducing information asymmetries between sellers and buyers of NPL. Having necessary information standardised by means of common templates, data fields with their definitions and characteristics as set out in the draft ITS would facilitate the sales of NPL and aim at reducing entry barriers for small credit institutions and smaller investors wishing to conclude transactions.
In order to allow existing credit purchasers and credit servicers to adapt to the requirements of the national provisions transposing the NPLs Directive and, in particular, to allow credit servicers to be authorised, the NPL Directive allows entities that are currently providing credit servicing activities under national law to continue to do so in their home Member State for a period of 6 months after the transposition deadline of this Directive. After the expiry of that 6-month period, only credit servicers authorised under the national laws transposing the NPL Directive should be permitted to operate on the market.
Summary of the potential impact of NPL Directive implementation in some key EU Member States
Credit servicing is already a regulated financial service in Ireland under the Central Bank Act 1997 (CBA 1997), and performing credit servicing activity requires authorisation from the Central Bank of Ireland (CBI).
The scope of the existing Irish regime under the CBA 1997 is significantly broader than that set out in the Directive. The current credit servicing regime applies to the performance of certain prescribed activities (including collecting or recovering payments, communicating with borrowers/hirers or managing or administering agreements) in respect of in-scope agreements. In 2019, additional activities were brought within scope of the Irish credit servicing regime, including the holding of legal title to in-scope agreements.
In-scope agreements comprise:
- Loans, hire-purchase agreements and consumer-hire agreements made to natural persons (who do not meet the criteria to be treated as a ‘professional client’ under Directive 2014/65/EU (MiFID II), and/or are not themselves authorised as a regulated financial services provider); and
- Loans made to a micro, small or medium-sized enterprise (as defined under Commission Recommendation 2003/361/EC) where the credit was provided by a lender which is authorised by the CBI or another EEA competent authority to provide credit in Ireland.
The scope of the existing CBA 1997 regime is much broader than the scope of the Directive, as the following will be in scope of the CBA 1997, but outside the scope of the Directive:
- the sale of performing loans originated by credit institutions;
- NPLs originated by credit institutions sold before 30 December 2023 (which is the deadline for implementing the Directive into Irish law);
- NPLs sold by one EU credit institution to another; or
- the sale of performing loans or NPLs originated by non-credit institutions.
Ireland has not yet published the implementing legislation for the Directive. The government held a consultation process from January to March 2023 which sought input on specific national discretions set out in the Directive.
This consultation paper notes that the existing CBA 1997 regime will be retained in respect of agreements which are within scope of the CBA 1997 regime but not the Directive. This will constitute significant and relatively unusual ‘gold plating’ by Ireland; imposing national requirements which go beyond the harmonised provisions of European Directives.
The exact nature of the revised requirements should become clearer following publication of the Irish implementing legislation for the Directive, and will hopefully clarify how firms in this space must operate under these ‘parallel’ regimes.
Italy has not yet published any draft act for implementing the NPL Directive but we would expect an impact on existing rules. In Italy, credit servicing activity is regulated in the context of the Italian securitisation transactions and can be performed by credit institutions and Italian financial intermediaries enrolled in a dedicated register kept by the Bank of Italy. However, activities of credit recovery are usually delegated to debt collection agencies, licensed pursuant to Art. 115 of Royal Decree 773/1931 (TULPS) but not subject to the supervision of the Bank of Italy.
With respect to the NPLs originated by credit institutions, the NPL Directive introduces requirements for servicing of NPLs more stringent than those currently applicable under Italian law to debt collection agencies. The additional requirements may be problematic for current relatively unregulated debt collection agencies acting in Italy. This may provide opportunities for more structured financial entities to enter the Italian market.
As to credit purchase, the purchase of receivables is per se a financing activity in Italy subject to relatively more onerous supervisory requirements. The current Italian rules will need therefore need to be modified upon the entry into force of the NPL Directive carving out these activities.
Germany has not published a draft of the act implementing the NPL Directive yet. Many of the rules laid down in the NPL Directive are already in place under the current rules. The scope of credit servicing activities that are covered by the Directive for credit services are, however, arguably broader than under the existing rules (e.g. outsourcing of complaint handling).
Depending on the scope of services, services may already be required to be registered as a collection agency under the German Legal Services Act. Requirements for registration are similar to the authorisation rules in Article 5 NPL Directive (e.g. reliability of senior management). However, no passporting is available so far.
Collected funds must be segregated in an insolvency-remote escrow account (see Article 6(2) lit. c. NPL Directive). Depending on the implementation, collection agencies may have to prepare (and submit) more detailed documentation on their governance and compliance arrangements.
As concerns business conduct, there are already existing rules for the collection by collection agencies. A gap analysis should be prepared to update any debtor-facing documentation in line with the NPL Directive (e.g. template letters).
Note that outsourcing rules will apply in addition to any regulation of the service provider, e.g. concerning control and audit rights, information security etc. A gap analysis will be required to identify any additional governance and risk management requirements that are no covered under the bank's existing NPL policies.
With regard to credit purchases, we note that the NPL Directive does not govern authorisation for credit purchases. Under German regulatory law, authorisation requirements apply to factoring as well as lending. Exclusion from the authorisation requirements are available for refinancing purposes for SPV as clarified in the relevant regulatory guidance of the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht; BaFin). We understand that this is in line with Recital 40 to the NPL Directive which expressly states that there are no prudential concerns if only existing debt is purchased without creating new credit.
The Netherlands has not yet published a draft of the act implementing the NPL Directive.
Currently, in relation to the acquisition and/or servicing of loan portfolios, credit servicers and credit purchasers are subject to an authorisation requirement when the credit agreement (such as NPL agreements) is entered into with a consumer (i.e. a natural person not acting in pursuit of a business), unless an exemption applies. For example, such exemption applies to entities to which claims under the credit agreement have been transferred that they have not entered into themselves as counterparty, if the servicing and performance of those agreements is carried out by a credit servicer.
This currently takes most credit servicers and credit purchasers out of the regulatory perimeter as set out in the Dutch Financial Supervision Act (Wet op het financieel toezicht). In respect of consumer credit, the regulatory regime is usually only applicable to the consumer credit servicer or the consumer creditor (kredietgever) (and not the credit purchaser, unless it is itself a regulated entity).
This is expected to change after implementation of the NPL Directive which introduces a new authorisation obligation on credit servicers, certain other obligations on credit purchasers and business conduct rules on both credit servicers and credit purchasers (including for non-consumer credit).
Belgium has not yet published any draft act for implementing the NPL Directive. It should, however, be a priority to have a thorough reflection on how this Directive can best be implemented in Belgium, because for a number of reasons the current regulatory framework for lending, servicing and selling loans is at odds with some of the principles set out in the Directive. At least the following items will need to be addressed upon implementation:
- Requirements in relation to licencing, sale/mobilisation and servicing are currently essentially the same or similar for loans granted by credit institutions or other financial institutions or lenders generally. Will implementing changes be made only for loans granted by credit institutions or for all lenders?
- Belgian law does not have a licensing and supervision framework for credit servicers, only a limited, general statute on consumer debt collection. Belgian loan sale transactions, including securitisations, are typically serviced by either the seller or a third party servicer. Licensing requirements and supervision will need to take market considerations into account.
- Today the collection of debt payments by a debt collector or servicer does not include an obligation to effectively segregate the collection from other moneys held by the collector or servicer. In many loan sale transactions, including securitisations, the servicer is not immediately required to segregate collections. Such requirement is often triggered only by rating or default events.
- A sale of a loan receivable can currently be perfected without giving notice of the transfer to the borrower. Almost all loan sale transactions, securitisations and covered bonds are structured without giving upfront notice to borrowers. This seems to be an essential commercial characteristic in a market where very high volumes of mortgage loans and consumer loans have been securitised and/or included in covered bonds programmes.
- Purchasers of consumer loans or residential mortgage loans must be licensed as a recognised credit provider. Can or should this requirement be maintained upon implementation, or only for loans not covered by the Directive?
- Legislation enacted to facilitate the sale of loan receivables excludes set-off and certain defences after the sale, where the set-off or defences would relate to the relationship of the borrower with the original lender/seller. Implementation might have an adverse effect on these statutory protections.
Belgium currently has very efficient frameworks (legal, tax and supervision) for securitisation and covered bonds. When implementing the Directive care must be taken not to upset these markets.
Spain has not yet published a draft of the act implementing the NPL Directive, but we would expect an impact on the existing regulatory framework. In this connection, the Spanish Ministry of Economy launched a public consultation at the end of 2022 on implementation of the NPL Directive in order to gather the opinion of potentially affected persons and entities on aspects of the future Spanish regime such as its purposes, the possible alternative regulatory and non-regulatory solutions or the necessity and timeliness of its endorsement.
One key issue here is that Spain has no defined regulations on credit servicers, nor on credit purchasers at present. None of them are therefore subject to administrative authorisation or control by a regulatory authority, hence their activity (i.e. managing and purchasing credit agreements) is mainly regulated by private law. So far only mortgage loan purchasers are required to obtain administrative authorisation, and this requirement was introduced just a few years ago.
The implementation of the NPL Directive into Spanish law is thus of utmost importance. Implementation in Spain should provide credit servicers with a specific regulatory status, and we presume they will be supervised by the Bank of Spain. Likewise, credit purchasers will have to review their agreements with credit servicers and introduce the reasonable forbearance principle – forbearance to be shown before initiating enforcement proceedings against certain borrowers or lenders, including a number of forbearance measures.
In addition, the NPL Directive allows EU Member States to decide whether credit servicers are entitled to receive payments directly from debtors or not. If, when implementing the NPL Directive in Spain, the choice is made to allow credit servicers to receive payments, this would prove to be somewhat disruptive in Spain. At the moment, except for credit institutions in securitisations (which fall outside the scope of the NPL Directive), credit servicers do not collect payments from debtors, but usually have powers to act on behalf of credit purchasers.
In light of the above, we think that the Spanish legislator's aim when implementing the NPL Directive in 2023 should be to consolidate its NPL sales market and provide enough safeguards and flexibility to make it attractive to investors and, in particular, to capital from other EU Member States, thus enabling the balance sheets of Spanish credit institutions to be cleaned up.
The law n° 2023-171 of 9 March 9 2023 on various provisions for adaptation to European Union law in the areas of economy, health, work, transport and agriculture has authorised the French Government to implement the NPL Directive by means of an Ordinance (i.e., a normative text presented by the Government in an area which is in principle governed by the law and adopted without going through the ordinary legislative procedure). Article 17 of the law provides that the Government has nine (9) months from the date of publication of the law to adopt the appropriate implementation measures, meaning that the NPL Directive should be implemented in France by Ordinance by the end of this year at the latest.
The Government has not yet published any draft Ordinance for implementing the NPL Directive but we would in particular expect an impact on the following aspects:
- Banking monopoly rules: In France, the purchase of receivables is per se a financing activity which is subject to the banking monopoly rule, i.e. this activity can only be carried out by duly authorised credit institutions or financing companies. French law already provides for several exceptions to this rule, in particular to the benefit of certain special purpose vehicles (SPVs). This is, however, limited to French SPVs (FCT) but can also be extended to other EU/EEA SPVs subject to compliance with additional specific conditions such as the fact that the initial borrower must not be a consumer. The NPL Directive/the new credit purchaser regime (which is not strictly limited to forfeited loans - prêts déchus du terme) should therefore have an impact on the existing French banking monopoly regime, with it being likely that existing exceptions would be extended.
- Amicable debt collection regime: The activity consisting of debt collection by a third party on behalf of a creditor is subject to the French amicable debt collection (ADC) regime provided under the French Enforcement Proceeding Code (FEPC). As opposed to the judicial debt collection procedure (which only concerns debt collection carried out through judicial procedure/by a public authority), the ADC is defined as "the activity performed by individuals or corporate entities, which are not subject to a professional status (e.g., court bailiff) and which carry out amicable debt collection services on a regular basis". As a general principle:
- ADC activity is not subject to any licensing requirement and the French banking authority (Autorité de Contrôle Prudentiel et de Résolution - ACPR) has no jurisdiction over entities carrying out ADC activities. However, such activity is subject to a notification obligation to be sent in writing to the French Prosecutor prior to the commencement of the ADC activities in France. In this respect, French law is unclear concerning the possibility for a company established in another EU/EEA Member State to register as an ADC company on a cross-border basis.
- ADC companies are subject to limited obligations such as insurance coverage or good practices requirements.
- The interaction between the payment services regime and the ADC regime is unclear as the ACPR considers the activity consisting of collecting funds on behalf of a third party to be a payment services activity. However, it is generally agreed that the payment services regime does not apply where this activity is carried out in relation to another regulatory regime.
- Based on the above, we expect that the NPL Directive/the new credit servicer regime will have an impact on the existing French ADC regime.
If you would like to discuss the potential impact of the NPL Directive on your business, please contact anyone listed above or your usual Hogan Lovells contact.