In our last update on the draft EU Directive on credit servicers and credit purchasers (the “Credit Servicing Directive”), we noted that negotiators on behalf of the European Parliament had agreed with the Council of the European Union on common standards regulating the transfer of non‑performing loans (“NPLs”). A compromise draft (the “Compromise Draft”) of the Credit Servicing Directive agreed to by representatives on behalf of the European Commission, the Council of the European Union and the European Parliament was recently published. This article discusses the features of the Compromise Draft of the Credit Servicing Directive.
Scope of Credit Servicing Directive
The initial draft of the Credit Servicing Directive published in March 2018 extended to all credit agreements issued by a credit institution or by its subsidiaries. The scope of the Compromise Draft of the Credit Servicing Directive is more limited, applying only to NPLs issued by a credit institution established in the EU. The Compromise Draft of the Credit Servicing Directive does not apply to performing loans nor does it apply to:
(a) the servicing of NPLs carried out by a credit institution established in the EU or an “AIFM” authorised under AIFMD or a non‑credit institution subject to supervision by a national competent authority;
(b) the servicing of NPLs that were not issued by a credit institution established in the EU (ie non‑bank lenders);
(c) the purchase of NPLs by a credit institution established in the EU; or
(d) loan transfers completed before the transposition deadline for the Credit Servicing Directive (expected to be 24 months after the date that the Credit Servicing Directive enters into force).
The initial draft of the Credit Servicing Directive published in March 2018 also contained proposals for minimum harmonisation rules on accelerated extrajudicial collateral enforcement (“AECE”) with respect to non-consumer loans. The AECE proposals do not feature in the Compromise Draft of the Credit Servicing Directive. It is understood that work is ongoing in the European Parliament to incorporate the AECE proposals into law as part of a standalone piece of legislation.
Credit servicing activities falling within the scope of the Credit Servicing Directive are limited to:
(a) collecting or recovering from the borrowers any payments due under NPLs;
(b) renegotiating with borrowers any terms and conditions of the NPLs in line with the instructions given by the credit purchaser;
(c) administering any complaints relating to the NPLs; and
(d) informing borrowers of any changes in interest rates or charges or of any payments due under the NPLs.
This list of activities is similar but not identical to the original list of “credit servicing” activities specified in Part V of the Central Bank Act 1997 which was introduced by the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 (“2015 Act”).
A credit servicer must obtain an authorisation in its home EU member state (ie the place where its registered office or head office is situated) before commencing its credit servicing activities within that state. The Credit Servicing Directive sets out certain requirements which a credit servicer must satisfy in order to obtain an authorisation from the competent authority in its home EU member state, including requirements regarding the reputation of its management team and significant shareholders, the knowledge and experience of its management team, its corporate governance arrangements, its policies on the treatment of borrowers and the adequacy of its AML / CTF policies. The relevant EU member state competent authority to which an applicant for a credit servicing authorisation applies must notify the applicant within 90 days of receipt of a completed application whether the authorisation is granted or refused.
One of the most important features of the Credit Servicing Directive for credit servicers is that it provides credit servicers authorised in their home EU member state with the right to provide the services that are covered by that authorisation in other EU member states without needing to obtain an authorisation in other EU member states.
The competent authorities of EU member states, which in Ireland is expected to be the Central Bank of Ireland, must establish and maintain a publicly accessible list or national register of all credit servicers authorised to provide services within their territory, including credit servicers passporting their credit servicing authorisation into that EU member state from another EU member state.
A credit purchaser domiciled or established in the EU must appoint a credit servicer to perform credit servicing activities in respect of NPLs where the borrowers are consumers. Where a credit purchaser is not domiciled or established in the EU, it must designate in writing a representative who is domiciled or established in the EU and the representative must appoint a credit servicer (unless the representative is itself a credit servicer) to perform credit servicing activities in respect of NPLs where the borrowers are natural persons or SMEs. EU member states also have discretion to extend this requirement in relation to credit agreements other than NPLs. These provisions are similar to existing legislation in Ireland where unregulated purchasers of Irish consumer and SME loans originated by regulated entities were obliged following the introduction of the 2015 Act to appoint an authorised credit servicing firm to service these loans.
A representative domiciled or established in the EU designated by a credit purchaser not domiciled or established in the EU will be addressed in addition to or instead of the credit purchaser by the relevant competent authorities of EU member states on all issues related to the ongoing compliance with the Credit Servicing Directive and will be fully responsible for compliance with the obligations imposed on the credit purchaser under the national legislation transposing the Credit Servicing Directive in an EU member state.
Credit purchasers shall not be subject to any additional requirements for the purchase of NPLs, other than as provided for by the national legislation transposing the Credit Servicing Directive in each EU member state, or by provisions of applicable consumer protection law, contract law, civil law or criminal law (emphasis added). In Ireland, the Consumer Protection (Regulation of Credit Servicing Firms) Act 2018 (the “2018 Act”) introduced an additional regulatory requirement for, inter alia, legal title holders of Irish consumer and SME loans originated by regulated entities (“Legal Title Holders”). It is not entirely clear whether the regulation of Legal Title Holders introduced in Ireland by the 2018 Act falls within the above-mentioned exceptions to the general “no authorisation” principle for credit purchasers of NPLs. Any attempt to remove the regulation requirement for Legal Title Holders introduced in Ireland by the 2018 Act may face political opposition, whether or not it is required in order to make the Irish regime compatible with the Credit Servicing Directive.
EU member states that already have in place equivalent or stricter regulatory regimes for credit servicing activities than those established in the Credit Servicing Directive have discretion to allow entities already carrying out credit servicing activities under those regimes to be automatically recognised as authorised credit servicers by the national legislation transposing the Credit Servicing Directive in that EU member state. It is hoped that the Irish legislation which transposes the Credit Servicing Directive in Ireland will utilise this discretion to ensure that entities already authorised under Part V of the Central Bank Act 1997 to carry on the business of a credit servicing firm may continue to do so following the transposition of the Credit Servicing Directive into Irish law.
Regulation of relationship with borrowers
National legislation transposing the Credit Servicing Directive in each EU member state must include a requirement for credit purchasers and credit servicers to act in good faith, fairly and professionally in their relationships with borrowers, to provide information to borrowers that is not misleading, unclear or false, to respect and protect the personal information and privacy of borrowers, and to communicate with borrowers in a way that does not constitute harassment, coercion or undue influence.
Regulation of relationship between a credit servicer and a credit purchaser
National legislation transposing the Credit Servicing Directive in each EU member state must regulate the contractual relationship between a credit purchaser and a credit servicer. The Credit Servicing Directive sets out that the credit servicing agreement appointing the credit servicer must include the following provisions:
(a) a detailed description of credit servicing activities to be carried out by the credit servicer;
(b) the level of remuneration of the credit servicer or how the remuneration is to be calculated;
(c) the extent to which the credit servicer can represent the credit purchaser in relation to the borrower;
(d) an undertaking by the parties to comply with EU and national law applicable to the creditor’s rights under the NPLs, including in respect of consumer and data protection;
(e) a clause requiring the fair and diligent treatment of the borrowers; and
(f) a requirement according to which the credit servicer notifies the credit purchaser prior to outsourcing any of its credit servicing activities as credit servicer.
Credit servicers will be required to maintain records of relevant correspondence with both the credit purchaser and the borrower and relevant instructions received from the credit purchaser in respect of NPLs that it manages and enforces on behalf of that credit purchaser for up to 10 years.
Credit servicers will also be required to make the credit servicing agreement available to competent authorities upon request.
Regulation of outsourcing by a credit servicer
National legislation transposing the Credit Servicing Directive in each EU member state must ensure that where a credit servicer uses a credit service provider to perform any of the credit servicing activities, the credit servicer remains fully responsible for complying with all obligations under the national legislation transposing the Credit Servicing Directive in that EU member state. A credit servicer will be required to inform the competent authorities of the relevant EU member states prior to the outsourcing of credit servicing activities.
Right to information regarding NPLs
National legislation transposing the Credit Servicing Directive in each EU member state must ensure that a credit institution provides prospective credit purchasers with necessary information regarding the NPLs and any collateral so as to enable prospective credit purchasers to conduct their own assessment of the value of the NPLs and the likelihood of recovery of the value prior to entering into the relevant NPL transfer agreement. The European Banking Authority is required to develop draft implementing technical standards that specify the formats to be used by credit institutions for the provision of this information to credit purchasers. The data formats are to be used for transactions relating to loans issued after 1 July 2018 which become non-performing after the date that the Credit Servicing Directive enters into force. The Credit Servicing Directive states that these implementing technical standards shall be proportionate to the nature and size of the NPLs and NPL portfolios. The recitals to the Credit Servicing Directive clarify that in the case of “securitisations” within the meaning of the EU Securitisation Regulation, which require the use of certain templates in respect of the reporting on the performance on the portfolio of loan being securitised, any double reporting as a result of the Credit Servicing Directive should be avoided.
Credit institutions selling NPLs and credit purchasers on-selling NPLs will be required to inform the relevant EU member state competent authorities about the identity of the credit purchaser or new credit purchaser (as the case may be) and details about the NPLs sold on a biannual basis. However, the relevant EU member state competent authorities will be allowed to require credit institutions or credit purchasers provide this information on a quarterly basis whenever deemed necessary, including for the purposes of monitoring high numbers of NPL transfers that may occur during a crisis period.
The Compromise Draft of the Credit Servicing Directive has been sent to the European Parliament for its approval. If passed in its current state, the Credit Servicing Directive will enter into force on the twentieth day following the day of its publication in the Official Journal of the EU. The transposition deadline will be 24 months after the entry into force of the Credit Servicing Directive.
The ultimate impact of the Credit Servicing Directive on the existing credit servicing regulatory framework in Ireland remains somewhat unclear. For example, it is not clear:
- whether Legal Title Holders or persons who hold strategic control over Irish consumer NPLs and Irish SME NPLs originated by regulated entities will continue to be required to be authorised to carry on the business of a credit servicing firm;
- whether Ireland will seek to continue to apply the existing credit servicing regulatory framework to performing loans;
- whether Ireland will seek to continue to apply the existing credit servicing regulatory framework to loan transfers completed before the transposition deadline for the Credit Servicing Directive; or
- how the requirements of the Credit Servicing Directive will be implemented within the existing broader credit servicing regulatory framework in Ireland.