On 29 June 2021, the European Council sent a proposed compromise text of the draft Directive on Credit Servicers and Credit Purchasers (the Credit Servicers Directive) to the European Parliament Committee on Economic and Monetary Affairs. This follows various amendments proposed earlier this year by the European Council and the European Parliament to the European Commission text. The proposed compromise text has been approved by the Permanent Representatives Committee of the European Council, and has now been sent to the European Parliament for first reading. An outline of the legislative process and copies of the latest proposal are available here.
Prior versions of the text caused concern over possible unintended impacts on market participants, such as security agents and facility agents. However, as the proposed compromise text has emerged, these concerns have faded. The proposed is much more focused on credit purchasers, credit servicers and non-performing loans.
A new pan-European market for credit servicing?
The Credit Servicers Directive aims to foster a professional secondary market for non-performing loans (NPLs) – classified as non-performing exposures in accordance with Article 47a of the Capital Requirements Regulation (EU) No 575/2013. The aim is for European credit institutions to be able to access a pan-European market for NPLs, allowing for their sale to credit purchasers. While these credit purchasers would not require authorisation, they:
- would have to comply with certain borrower protection rules; and
- could appoint authorised credit servicers to undertake operational actions in relation to the NPLs.
What is covered?
The Credit Servicers Directive would only apply to "credit agreements" that are classified as NPLs and made with a European "credit institution" – i.e. an undertaking whose business is to take deposits or other repayable funds from the public and to grant credits for its own account.
A "credit purchaser" is any person, other than a credit institution, which purchases the creditor's rights under an NPL in the course of their trade, business or profession. It is also assumed that credit purchasers will outsource some or all of the operational functions relating to servicing the NPLs to "credit servicers".
A credit servicer is defined as a legal person who, in the course of its business, manages and enforces the rights and obligations related to the creditor's rights under an NPL on behalf of a credit purchaser, carrying out at least one or more of the following activities:
- collection or recovery from the borrower;
- renegotiating terms with the borrower;
- administering complaints relating to the credit agreement; and
- informing the borrower about changes of interest or payments due in accordance with the credit agreement itself.
What is not covered?
There are carve-outs to ensure that the Credit Servicers Directive does not impact national laws regarding:
- the transfer of creditors' rights under NPLs that are not past due, are less than 90 days past due or are not terminated in accordance with national civil laws, or the transfer of such NPLs; or
- the servicing of credit agreements when the credit purchaser is a securitisation special purpose entity as defined in the Securitisation Regulation (EU) 2017/2402, provided that the provision of information to competent authorities and consumer protection is not compromised (see Article 2(3a and 3b)).
There are also carve-outs that the Directive does not apply to credit servicing by European credit institutions, alternative investment fund managers, and certain management and investment companies, as well as other entities already subject to regulatory supervision (see Article 2(4)).
The Credit Servicers Directive has been a proposal now for some years and has been given added impetus by a concern that the COVID-19 pandemic will result in an increase in the volume of NPLs on the books of European credit institutions. The Directive aims to mitigate excessive build-up of NPLs in credit institutions "by improving conditions to sell the credit to third parties. Moreover, when credit institutions face a large build-up of NPLs and lack the staff or expertise to properly service them, one viable solution would be to either outsource the servicing of these loans 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." (Recital 6)
Authorisation and passporting of credit servicers
While credit purchasers are not themselves required to be registered or authorised as they are not creating new credit, credit servicers are required to be authorised due to the nature of their interaction with borrowers (with key requirements with regards to the relationship and interaction between credit purchasers and credit servicers with borrowers being set out in Article 8a and, in terms of required information to be provided to borrowers, Article 8b).
If a credit purchaser intends to perform the credit servicing operations themselves, then they will need to be authorised and registered as a credit servicer. If they intend to engage a credit servicer, such engagement needs to be formally documented in a credit servicing agreement with certain minimum content requirements, as set out in Article 9. From the perspective of the credit servicer, it is worth noting that the directive text forbids complete outsourcing of all roles (Article 10(1)(ba)) and, in particular, if the authorisation includes a permission for a credit servicer to hold and receive funds from borrowers, that permission cannot be outsourced. Individual member states may determine whether it is appropriate to permit credit servicers in their jurisdiction to hold and receive borrower funds, so the permission to hold and receive borrower funds may only be passported from a home member state which includes that permission, to a host member state which also includes the permission to hold and receive borrower funds.
One of the aims of the proposed legislation is that by making the role of credit servicing an authorised business, with requirements for a public register of credit servicers to be maintained by the competent authority of each EU member state, and a process for the passporting of such authorisation from a home member state to host member states, a pan-European, cross-border market in credit servicing will develop, accompanied by a reduction in credit servicing fees reflecting greater competition in the credit servicing market.
Consumer protection and information requirements
Some of the key debates during the various legislative text proposals to date concern the need to ensure protection for borrowers' rights, especially where those borrowers are consumers. Recital 20 provides that "[a]s a general principle, it should be ensured that borrowers are not worse off following the transfer of their credit agreement from a credit institution to a credit purchaser. This Directive should not restrict Member States from applying stricter provisions in order to protect borrowers." See also Article 2(3).
Where the borrower is a natural person, or a micro, small or medium-sized entity (SME businesses), Article 15 contains provisions to ensure that a non-EU credit purchaser must appoint both: (i) an EU-domiciled representative; and (ii) an EU-domiciled credit servicer or other EU-supervised entity in accordance with Article 2(4)(i) to (iii). The intention of this requirement is to ensure there is no weakening of consumer protection for natural persons or SME businesses as a result of a transfer of the credit agreement to a non-EU credit purchaser.
Another key element of the directive is the requirement for credit institutions to provide information to their relevant competent authorities, relating to the identity of credit purchasers and information about the NPLs transferred.
As a Directive, the Credit Servicers Directive would need to be implemented via national legislation of EU member states. The proposal would require adoption of such national legislation within 24 months from the date the Directive enters into force, with a further six-month transitional period for entities already providing credit servicing at such time to allow them to apply for authorisation.
Accordingly, while adoption and implementation of the Credit Servicers Directive may not be quite here yet, the final destination is becoming much clearer.