New draft law on credit servicers and credit purchasers

1. Publication of the draft law on credit servicers and purchasers: an overview of the draft

• The Ministry of Economy has just published the Draft Law on Servicers and amending Law 16/2011, of June 24, on consumer credit contracts, and Law 5/2019, of March 15, regulating real estate credit contracts ("Draft Law"). The Draft Law transposes Directive (EU) 2021/2167 on credit servicers and credit purchasers ("Directive"). The deadline for comments is open until May 31, 2024.
• The Draft Law aims to address the management of non-performing loans (NPLs) and establish a harmonized framework for credit servicers and purchasers in EU Member States.
• The Draft Law applies to servicers and purchasers of NPLs originated by credit institutions and financial credit establishments.
• The Draft Law extends the application of the Directive to both acquisition of credits and credit contracts, treating them in the same way. Notwithstanding this, the Explanatory Memorandum reminds that Supreme Court case law requires the debtor's consent for the assignment of a contract.
• A complete authorization procedure is established for credit servicers. Any purchaser who is not an servicer will need to appoint a credit servicer.
• Information obligations are established regarding the details of the operations.
• A European passport is granted, allowing European servicers to provide services in Spain without Spanish authorization and vice versa.
• The Draft Law does not apply to credit servicing carried out by certain entities such as SGIICs, SGEICs, and SICAVs, nor to the servicing of credits not originated by a credit institution or a financial credit establishment.

2. Purchasers and servicers of credits in the Draft Law

2.1 Purchasers

• The Draft Law defines credit purchasers as natural or legal persons who acquire credits or rights derived from credit contracts, whether directly or indirectly, for valuable consideration or free of charge, and on an occasional or habitual basis.
•  If the credit purchaser is not authorized as a credit servicer, they are required to hire a credit servicer whenever the loans to be acquired have been entered into with natural persons, including consumers, self-employed individuals, and microenterprises and small and medium-sized enterprises (SMEs) as defined in Article 2 of Annex to Commission Recommendation 2003/361/EC" (art. 17)

2.2 Servicers

Unlike credit purchasers, servicers are required to carry out their activity "in a professional and habitual manner" and must be legal persons.

• Authorization and registration: The Draft Law establishes an authorization and registration procedure by the Bank of Spain to carry out the activity.
•  Credit institutions and financial credit establishments (EFCs) can act as credit servicers without the need for additional authorization. Only legal persons can be credit servicers. Those who were already carrying out credit administration activities must apply for authorization from the Bank of Spain within three months from the entry into force of the Law and may continue to carry out their activities until their authorization is expressly resolved.
• Credit servicers register: the Bank of Spain will create a register in which credit servicers - except credit institutions and EFCs - their members of the management body, and the persons who manage them will be registered.
• Activity of credit servicers consists of :

• Providing services for the management, collection, or recovery of credits or rights derived from credit contracts, whether on their own account or on behalf of others. They do not need to do it themselves: they can outsource credit administration activities to credit administration service providers, but they remain responsible for compliance with all legal obligations
• It is expressly established that credit servicers, as responsible for managing the collection of credits, can - among other things - initiate legal or extrajudicial actions.
• In addition, if their bylaws so provide, they can receive and hold funds from borrowers to send them to credit purchasers, provided they are authorized to do so and comply with the established requirements. This activity will not be considered a payment service under Royal Decree-Law 19/2018.
• They can also provide advisory, consultancy, or intermediation services in relation to the acquisition or sale of doubtful credits or credit contracts.

3. Information obligations

3.1 To the Bank of Spain:

• The draft requires purchasers of NPLs to notify the Bank of Spain of the acquisition of credits or rights derived from credit contracts within one month from the date of the transaction, indicating the amount, type of credit, identity of the transferor and transferee, and the date of the transaction. These obligations can be fulfilled by the credit servicer on behalf of the purchaser.
• Periodic reporting obligations to the Bank of Spain are also established for statistical purposes.

3.2 To the assigned debtor:

It also requires notifying the assigned debtor, after each sale or upon request, of the identity of the purchaser, the amount of the credit, the outstanding balance, the applicable interest rate, and the contact details of the credit servicer. The draft states that "information about the sale that has taken place, including the date of the sale," must be provided. Nothing is said about whether this information includes the price or not. It is common for assigned debtors to inquire about the price for the purposes of Article 1535 of the Civil Code. Article 1535 provides that when a litigious credit is sold, the debtor has the right to extinguish it - within nine days from when the assignee demands payment, as established by the same provision - by reimbursing the assignee the price paid, the costs incurred, and the interest on the price from the day it was paid. Traditionally, it has been considered that this rule does not apply to bulk sales, and this has been used as an argument for not disclosing the overall price of the transaction. It remains to be seen how the implementing legislation and the courts interpret this obligation of "information about the sale" provided for in Article 22.2 (a).

4. EU passport and rules applicable to purchasers of credits from outside the European Union

• EU passport: credit servicers authorized in Spain may carry out their activities in another Member State of the European Union after notifying the Bank of Spain of the information established in Article 11 of the draft, which will in turn be communicated to the authorities of that Member State and to the authorities of the Member State in which the credit was granted if it is a different Member State. Similarly, a credit servicer authorized in another Member State may start providing services in Spain when the Bank of Spain receives the relevant communication from its regulator and acknowledges receipt of it (or two months have elapsed since it was submitted to the Bank of Spain by the competent authority of the Member State of origin of all the information referred to in Article 11.1).
• Purchasers from outside the EU: Purchasers domiciled outside the European Union must appoint a representative with a registered office in Spain. This representative, who will be fully responsible for complying with the obligations imposed on the purchaser of credits by Spanish legislation, must appoint a credit servicer (unless the representative itself is a credit institution, a financial credit institution, or a credit servicer) when the loans to be acquired have been entered into with natural persons, including consumers, self-employed individuals, and micro, small, and medium-sized enterprises (SMEs) as defined in Article 2 of the annex to Commission Recommendation 2003/361/EC.

5. Conclusions and possible effects on the NPL market

The draft law may imply the following changes for the NPL market:

• The fact that the law expressly grants the power to enforce the acquired credits to credit servicers may facilitate enforcement in certain cases.
•  Barriers to free entry are established since, prior to this, the purchase of credits was not a reserved activity and therefore could be carried out by anyone, Spanish, European, or non-European. The establishment of greater regulation/supervision and reporting obligations with the Bank of Spain, and more communications with debtors, will result in higher costs for servicers, which may be reflected in higher servicing fees.
• It is foreseeable that purchasers of credits will designate the servicer itself as their representative, given that the purchaser must be from the EU or have a representative here who assumes these obligations. It will be important to analyse the tax consequences that this may have.
• The existence of a community passport (combined with reserved activity) should allow the market to professionalize and internationalize.