EU Directive on credit purchasers and credit servicers

The EU Directive on credit servicers and credit purchasers has been published in Official Journal. The Directive regulates the sale, purchase and servicing of non-performing loans (NPLs) originated by EU banks. Likely be transposed during 2023, it will lead to a number of disclosure and reporting requirements for EU banks selling NPLs, as well as obligations for other participants in the NPL market.

The scope of the Directive has been watered down since the original European Commission proposal (which proposed application of the regime to all credit agreements issued by EU credit institutions) to only cover NPLs. So, initial concerns about the scope of the regime have reduced. However, questions still remain as to the application of the regime and how certain requirements concerning non-EU credit purchasers will impact investments in the distressed debt market. Non-EU credit purchasers will be required to designate an EU representative. So-called credit servicers will be subject to a host of new requirements including an authorisation regime.

We take a look at the key issues below.

WHY?

• Existing regime in EU member states consists of varying national restrictions on non-bank institutions buying loans from banks, as well as national licensing regimes for credit servicers.
• Regime designed to introduce a comprehensive strategy for addressing NPLs in the EU via the creation of a secondary market.
• Measures designed to aid EU Banking Union and Capital Markets Union by helping to free up banks' balance sheet so that they can continue to finance the economy. Regime designed to improve resilience of financial system at the EU level by preventing build-up of NPLs.
• Complements CRR Amendment Regulation (EU) 2019/630). This amended the CRR to require banks to put aside sufficient resources when loans become non-performing and introduces a definition for NPLs (also used in this Directive).

HOW?

Scope

The following entities are in scope:

• credit servicers acting on behalf of a credit purchaser in respect of a non-performing credit agreement issued by a EU-established credit institution; and
• credit purchasers of non-performing credit agreements issued by an EU-established credit institution.

Non-performing credit agreement

Defined as a credit agreement that is classified as a non-performing exposure in accordance with Article 47a of the CRR.

Credit purchaser

Any natural or legal person, other than a credit institution, that purchases a creditor’s rights under a non-performing credit agreement/non-performing credit agreement itself, in the course of its trade, business or profession.

Credit Servicer

A legal person that, in the course of its business, manages and enforces the rights and obligations related to a creditor’s rights under a non-performing credit agreement (or to the non-performing credit agreement itself), on behalf of a credit purchaser, and carries out at least one or more credit servicing activities:

• collecting or recovering from the borrower;
• renegotiating with the borrower any terms and conditions related to a creditor’s rights under a credit agreement (where the credit servicer is not a credit intermediary for Consumer Credit Directive or Mortgage Credit Directive purposes);
• administering any complaints; and
• informing the borrower of any changes in interest rates or charges or of any payments due related to a creditor’s rights under a credit agreement or to the credit agreement itself.

Exclusions

The Directive does not apply to:

• servicing of NPLs not issued by an EU established credit institution (that is non-bank lenders or non-EU established banks);
• purchase of NPLs by EU-established credit institutions;
• transfers of NPLs before the transposition deadline of the Directive;
• servicing of NPLs by: a credit institution established in the EU; an AIFM established under AIFMD; a UCITS management company established under the UCITS Directive (note, there is no express carve out for investment managers that are MiFID investment firms, as suggested by some); a non-credit institution subject to supervision under the Mortgage Credit Directive or the Consumer Credit Directive; and
• servicing by public notaries, bailiffs, lawyers when conducting credit servicing activities as part of their profession.

The Directive also provides that its provisions are not intended to affect: national laws concerning the transfer of a creditor’s rights under a non-performing credit agreement/the non-performing credit agreement itself where it is not past due or less than 90 days past due or is not terminated; servicing of credit agreements when the credit purchaser is a securitisation special purpose entity as defined in the Securitisation Regulation (where laws do not hinder the level of consumer protection provided by the credit servicers and credit purchasers Directive or information provision to competent authorities from credit servicers).

Sale of NPLs: obligations of banks

Credit institutions will be required to give a prospective credit purchaser necessary information in relation to the creditor’s rights under a non-performing credit agreement/ the non-performing credit agreement itself, as well as the collateral (so that credit purchaser can make its own assessment of the value of the creditor’s rights and the likelihood of recovery of the value of that agreement before entering into a contract). These disclosures are to be made using templates to be developed by the EBA.

On a biannual basis (i.e. twice a year), credit institutions selling NPLs to credit purchasers will be required to inform their home member state competent authority and host member state competent authority details of sales of NPLs including:

• the legal entity identifier (LEI) of the credit purchaser or, where applicable, its designated representative designated (where an identifier does not exist, the identity of the credit purchaser or of the members of the credit purchaser’s management/administrative organ and the persons who hold qualifying holdings in the credit purchaser);
• aggregate outstanding balance of the creditor’s rights under the non-performing credit agreements or of the non-performing credit agreements transferred;
• number and size of the creditor’s rights under the non-performing credit agreements or of the non-performing credit agreements transferred; and
• whether the transfer includes NPLs concluded with consumers and the types of assets securing the NPLs.

Credit purchasers' obligations

• Where a credit purchaser is domiciled or established in the EU, it must appoint a credit servicer (or an EU-supervised consumer credit or mortgage creditor) to perform credit servicing activities in respect of NPLs concluded with consumers. The credit servicer will be required to comply with the obligations imposed on the credit purchaser under the Directive.
• Credit purchasers that are not established in the EU/not domiciled in the EU must designate an EU-domiciled or EU established representative responsible for the performance of the obligations of a third country credit purchaser (the rationale for this is given in the recital 41 to the Directive: the EU wants to ensure that the rights of borrowers can be relied on and that competent authorities can supervise the enforcement of non-performing agreements). The representative will be required to appoint a credit servicer (unless the representative is a credit servicer itself) in respect of NPLs where the borrower is a natural person or SME. The Directive gives EU member states the option of extending this requirement to other credit agreements; hence we may see "gold-plating" by some member states which wish to regulate credit servicing in their jurisdictions more widely.
• Member states are also required to impose "conduct of business" type obligations on credit purchasers and credit servicers, including a duty to act "in good faith, fairly and professionally" and to provide information to borrowers that is not misleading, unclear or false. These obligations are new in the credit markets and it remains to be seen how member states will choose to implement them.

Credit servicers' obligations

• Credit servicers will be required to obtain authorisation in home member state before starting activities and will need to fulfil certain criteria before being granted authorisation. Credit servicers will need to follow the authorisation procedure set out in the Directive and submit relevant forms.
• Criteria for authorisation includes: having a management or administrative organ of sufficiently good repute (as further detailed in the Directive); and management/administrative organ as a whole having adequate knowledge and experience to carry out the business.
• Credit servicers that are deemed entitled to receive and funds from borrowers (so as to transfer these to credit purchasers) will be subject to extra requirements, such as the requirement to have a separate account in a bank where all funds from borrowers are to be received before being sent to the respective credit purchaser.
• The Directive outlines the procedure for passporting of credit servicing and the conditions that must be fulfilled by the credit servicer. These include providing the home member state competent authority with: details of the host member state where the credit servicer plans to provide services; and the address of the credit servicer's branch in the host Member State.
• The Directive imposes record keeping requirements on credit servicers. These include relevant correspondence with both the credit purchaser and the borrower.
• A credit servicing agreement must include the following: a detailed description of credit servicing activities to be carried out by the credit servicer; the level of remuneration of the credit servicer or how the remuneration is to be calculated; the extent to which the credit servicer can represent the credit purchaser in relation to the borrower; an undertaking by the parties to comply with applicable EU and national law; and a clause requiring the fair and diligent treatment of the borrowers.
• The Directive also sets out additional requirements in relation to the information that a credit purchaser or its credit servicer must provide to a borrower following the sale of an NPL.

WHEN?

Member States will be required to adopt measures to transpose the requirements two years and one day after the Directive enters into force (i.e. 30 December 2023). Entities providing credit servicing under national law can carry on doing so in their member state for a period of 6 months after the transposition deadline of the Directive. Following that, only credit servicers authorised under the national law transposing the Directive can operate.

WHAT DO WE NEED TO DO?

Participants in the EU NPL market, including US and UK distressed credit managers will need to consider whether to appoint an existing EU affiliate as a representative, or alternatively to establish a new affiliate or appoint a third party for that purpose. Firms that operate in the consumer or SME credit markets will need to appoint an EU credit servicer (some firms may already have such a servicer in Ireland or elsewhere under existing portfolio structures).

Market participants will need to familiarise themselves over the next two years with information, disclosure and conduct of business obligations that will be imposed in the EU NPL market.

UK or EU investment firms operating in the EU NPL market (which are not specifically excluded from the scope of the Directive) may be subject to local licensing requirements if they perform credit servicing activities in relation to local borrowers, unless an EU credit servicer is appointed to administer loans and deal with borrowers. The territorial question of where credit servicing activities are deemed to be performed are not addressed in the Directive.

Co-Author: Bisola Williams