Understanding the European Union NPL Directive

Short summary

In a nutshell, this new regulation, added to the whole spectrum of other areas of the financial sector regulated by the EU, aims to address the issue of rising number of NPLs by:

• Setting out licensing requirements for the entities servicing the non-performing loans, so called credit servicers,
• Enabling cross-border provision of such credit services in the EU,
• Introducing various obligations for banks (credit institutions) and the purchasers of the loans (credit purchasers) e.g. with respect to the transfer of NPLs

By regulating the outsourcing of the servicing of NPLs and their transfer, the EU aims to enable banks to better deal with NPLs. NPL portfolios currently represent substantial amounts in the banks’ balance sheets. The present EU-wide harmonization of the regulatory framework aims to support the further development of the secondary markets for NPLs. 

Regulated entities

Primarily regulated entities will be:

• Credit purchasers: entities other than banks, that purchase NPLs from the banks or from other credit purchasers.
• Credit servicers: legal entities managing and enforcing NPLs and carrying out credit servicing activities. Credit servicing activities include: (a) collecting or recovering payments, (b) renegotiating the credit agreement with the borrower, (c) administering any complaints relating thereto, (d) informing the borrower of any changes in interest rates and other payments due.
• Credit service providers: a third party used by a credit servicer to perform the credit servicing activities.

The Directive applies to loans, issued by credit institutions (banks), which are classified as non-performing within the meaning of CRR. These include, among others, loans where the bank considers that the obligor is unlikely to pay or is in default with its obligations for more than 90 days or loans, where the exposure is considered impaired.

Authorization of credit servicers

Under the Directive, credit servicers will need to obtain a new authorisation/license in order to conduct credit servicing activity. The requirements, licensing and withdrawal procedures are detailed in the Directive. The authorization will thus be harmonized within the EU. Cross-border passporting of the license from the home member state to the host member state will be possible, as is the case of number of other financial services provided within the EU.

The competent authorities within the member states will be obliged to establish a publicly accessible list or national register of licensed credit servicers, including those providing cross-border services.

In this respect it is important to note that certain entities, which carry out credit service activities, will be exempt from the licensing requirements. These include banks, supervised non-credit institutions, AIFMs, management companies and, with some exceptions, investment companies under the UCITS Directive.

It is also interesting to mention that the Directive does not require any specific licence for the activities of the credit service provider to whom the credit servicer may outsource some of the credit servicing activities.

Conduct of business rules

The Directive sets out the fundamental rules for how credit purchasers and credit servicers conduct their relationships with borrowers. It requires them to:

• Act in good faith, fairly and professionally;
• Provide information that is not misleading, unclear or false;
• Respect and protect their personal information and privacy;
• Communicate in a way that does not constitute harassment, coercion or undue influence.

Market players should take into consideration that the Directive sets out minimum content requirements for the credit servicing agreement that governs the contractual relationship between the credit purchaser and credit servicer. The  existing agreements will need to be amended to comply with the new set of requirements.

Subject to notification of the credit purchaser, a credit servicer may outsource certain activities to a credit service provider. In such a case, the credit servicer remains fully responsible for complying with all obligations. The Directive further details the conditions for such outsourcing. 

Transfer of the NPLs

Prior to entering into a transfer agreement relating to NPLs, banks will have to provide to a prospective credit purchaser with all necessary information regarding a creditor’s rights and applicable collateral, while ensuring the protection of information and confidentiality. This is to enable the potential purchaser to conduct its assessment of the value of the transferred assets and the likelihood of recovery.

Further, banks as well as credit purchasers transferring the NPLs will be required to report regularly (bi-annually or quarterly) to the competent authorities on the details of the transfers.  The reports should include information on the identity of the (new) credit purchasers, balance of NPLs transferred, security provided, and whether the transfers include the NPLs concluded with consumers. 

After any transfer of NPLs, the credit purchaser or the entity appointed to perform credit servicing activities must inform the borrower about the transfer, and provide necessary information relating thereto. 

Credit purchasers’ obligations

To ensure that borrowers’ rights are preserved with respect to NPLs, credit purchasers, based outside the EU, must designate an EU-based representative who shall be fully responsible for complying with the obligations imposed on the credit purchaser. 

Credit purchasers based in the EU will be obliged to appoint a bank, non-credit institution or a credit servicer to perform the credit servicing activities in relation to NPLs concluded with the consumers. Credit purchasers based outside the EU, or their EU representative, shall appoint an entity performing credit servicing activities (unless these are done by the representative itself) in relation to any NPLs concluded with natural persons and SMEs. 

Transposition and key takeaways

The Directive must be implemented into national laws by December 29, 2023. As usual, it gives the member states some leeway in certain areas. After the implementing laws are adopted in the member states, the relevant market players (banks, credit purchasers, credit suppliers) will have to adopt their business to the new rules, including:

• Obtaining the license for credit servicers, and passporting the license (if necessary)
• Incorporating changes to business of the credit servicers, such as conduct of business, credit service and outsourcing agreements,

Complying with new notification and reporting obligations for the banks and credit purchasers.

By Miroslav Kapinaj, Counsel, Dentons