The European Commission (“Commission”) has recently published a set of measures designed to combat non-performing loans (“NPLs”). These include a proposed Directive, which, if adopted, could have significant implications for credit servicers, credit purchasers and banks.
The NPL Problem
NPLs are proving to be one of the most intractable problems of the global financial crisis. While the average EU level of NPLs is slowly decreasing, it is still higher than in other major developed countries. Moreover, the distribution of NPLs is unequal among EU member states with several countries reporting NPLs of greater than 10%. In Ireland, the NPL ratio stood at 11.4% as of 30 September 2017.
High NPLs reduce profitability, increase funding costs and tie up bank capital. This in turn negatively impacts on banks’ ability to lend to the real economy and ultimately on growth.
Over the past few years, the EU institutions have taken a number of measures to tackle NPLs. In particular, the EU’s Council of Ministers published an action plan in July 2017, outlining a mix of policy actions to help reduce stocks of NPLs and to prevent their future emergence.
In October 2017 the European Commission published a Communication on completing the Banking Union in which it announced that it would propose a comprehensive package of measures to address NPLs by spring 2018. On 14 March 2018 the Commission presented its package of measures, comprising:
- a proposed Regulation amending the Capital Requirements Regulation introducing common minimum coverage levels for newly originated loans that become non-performing;
- a proposed Directive on credit servicers, credit purchasers and the recovery of collateral (here); and
- a non-binding technical blueprint for member states on the set up of National Asset Management Companies.
For its part, on 15 March 2018, the European Central Bank published the final version of its Addendum to the ECB Guidance to banks on non-performing loans, which sets out the supervisory expectations for the prudential provisioning of non-performing exposures (“NPEs”). Moreover, on 8 March, the European Banking Authority published a consultation on its Guidelines on how to effectively manage NPEs and forborne exposures, which runs until 8 June 2018.
Overview of the Directive on Credit Servicers, Credit Purchasers and the Recovery of Collateral
The proposed Directive aims to tackle NPLs through two interconnecting mechanisms. First, it seeks to encourage the development of secondary markets for NPLs by establishing an EU wide-framework for both purchasers and servicers of credit agreements issued by credit institutions. This framework will not apply to the servicing or purchase of a credit agreement carried out by a credit institution established in the EU or its EU-established subsidiaries. Borrowers’ rights under a transferred credit agreement will continue to be those arising from the initial credit agreement.
Secondly, the proposed Directive seeks to increase the efficiency of debt recovery procedures in the case of a business borrower, through the availability of a distinct common accelerated extrajudicial collateral enforcement procedure (“AECE”). This procedure will not apply to credit agreements secured by financial collateral arrangements or immovable residential property which is the business borrower’s primary residence, or which is a financial collateral arrangement. Nor will it apply to secured credit agreements where the business borrower is a non-profit making company.
EU-wide Framework for Credit Servicers/Purchasers
The proposed Directive provides for a standardised regulatory regime for credit servicers and credit purchasers.
Credit servicers must be authorised as such and the proposed Directive sets down authorisation requirements, the procedure for granting or refusing an authorisation as well as requirements regarding the contractual relationship between a credit servicer and a creditor and regarding outsourcing arrangements.
Among other things, credit servicers must have appropriate governance arrangements and internal control mechanisms, as well an appropriate policy ensuring the fair and diligent treatment of the borrowers. They are also subject to certain information requirements vis-à-vis borrowers and must establish complaints handling procedures.
An authorised credit servicer will have the ability to passport its services to other member states, subject to notifying certain information to the competent authority of its home state.
Creditors must provide all necessary information to a credit purchaser before entering into a contract. Where a credit institution (or its subsidiary) transfers a credit agreement to a credit purchaser it must inform the relevant competent authorities.
The proposed Directive requires a credit purchaser to:
- inform its competent authorities of the identity and address of the credit institution or credit servicer that it has engaged to perform credit servicing activities in relation to the transferred credit agreement;
- appoint a representative in the EU, where the credit purchaser is not domiciled or established in the EU; and
- inform its competent authorities where it intends to directly enforce a credit agreement and/or where it intends to transfer a credit agreement to another credit purchaser.
Accelerated Extrajudicial Collateral Enforcement (AECE)
AECE will allow a creditor and a business borrower to contractually agree upon an extrajudicial enforcement mechanism for movable and immovable assets posed as collateral, which will allow collateral to be realised through a public auction and/or private sale. “Business borrower” is defined as a natural or legal person, other than a consumer, who has concluded a credit agreement with a creditor.
The proposed Directive sets down the conditions for using AECE. Specifically, the creditor and borrower must agree to use AECE in writing and the relevant agreement must specify the enforcement event and the period of time in which the business borrower may execute payment following that event in order to avert the execution of AECE. It must also include a directly enforceable title.
Within four weeks of the enforcement period, or such later time as agreed by the creditor, and borrower, the creditor must notify the borrower in writing of:
- its intention to realise assets through AECE;
- the type of enforcement measures to be applied;
- the time period for the execution of payment before the use of the AECE; and
- the default amount of the secured credit agreement due.
The AECE cannot be used where the business borrower has paid the default amount. Moreover the business borrower must be given a reasonable period of time for execution of payment and the creditor must make reasonable efforts to avoid the use of AECE.
Member states must ensure that the business borrower is under a general duty to cooperate and to furnish all relevant information where the AECE is exercisable. Moreover the business borrower must not be permitted to dispose of the assets pledged as collateral once it receives a notification of the enforcement event.
Next Steps and Comment
The proposed Directive must now be considered by the European Parliament and by the Council of Ministers and may be subject to change. The Commission is seeking to have the proposed Directive adopted by mid-2019. It will apply for the most part from 1 January 2021, with some exceptions.
There are a number of differences between the requirements set out in the proposed Directive and Ireland’s domestic regime regulating credit service providers. Most fundamentally, the main purpose of the proposed Directive is to facilitate credit institutions in selling their NPLs (to enhance the availability of credit and to protect financial markets from systemic shocks) while that of the Irish regime is on consumer protection. These purposes are not always compatible and measures in place to achieve one objective could ultimately undermine achieving the other.