The EU NPL Directive: Impact on Secondary Loan Trading

Overview

The Directive on Credit Servicers and Credit Purchasers was adopted by the EU in 2021 (the Directive) and the implementing technical standards (ITS) relating to the Directive have also been adopted by the European Commission. Member states (of the EU) were required to implement the Directive into local law by the end of 2023 and notably France, Luxembourg, Ireland and Germany have now passed laws implementing the Directive.

The Directive is a complicated piece of legislation which, broadly speaking, is intended to facilitate the disposal of non-performing loans (NPLs) sitting on the balance sheets of EU banks.  Amongst other things, it is intended to lower regulatory barriers for non-banks to acquire NPLs and give prospective purchasers access to key information at the diligence stage of a transaction.

A detailed analysis of the Directive is beyond the scope of this update, nevertheless, set forth below is a brief overview of the elements of the Directive most relevant to institutions who regularly trade loans, distressed credit and/or insolvency claims.           

Who is subject to the Directive?

• The ITS and the Directive are designed to: (i) obligate “credit institutions” established in the EU (i.e. EU banks) which are selling NPLs from their banking book (as opposed to their trading book, which is an important distinction for such sellers) to provide prospective secondary market purchasers with specified information on the loans in question (and, if applicable, the collateral related thereto), and (ii) impose separate obligations upon such purchasers of NPLs (outlined in more detail below).

NPL Definition

• For the purposes of the Directive, NPLs are classified as (i) credit agreements and rights under credit agreements, (ii) in the form of a deferred payment, loan or other similar financial accommodation, (iii) which have been “issued” by EU banks. The definition is broad enough to capture both syndicated and bilateral loan agreements.
• The meaning of “non-performing” is derived from Article 47a of the EU Capital Requirements Regulation (the CRR). The criteria set out in the CRR classifies a loan as non-performing if (i) it is either 90 days past its due date, or (ii) full repayment of the loan without realising collateral is deemed to be unlikely.
• Although primarily intended to standardise sales of portfolios of loans by EU banks, it is important to note that the requirement to complete the templates also applies to the sale of individual NPLs.

Exemptions

There are some important exemptions to the obligations imposed on sellers of NPLs to be aware of, including but not limited to the following:

• NPLs under syndicated credit agreement facilities;
• one or more NPLs originated to a single borrower (although the Directive applies to bilateral loans, an EU Credit Institution would not therefore be subject to obligations if it was divesting a bilateral loan (or loans) made to the same borrower);
• NPLs where the borrower is located outside of the EU; or
• NPLs which have been acquired by the divesting EU bank from an entity which is not an EU bank which is subject to the CRR.

In addition, amongst other things, the ITS do not appear to apply in the following transactions:

• where there is no change to the lender of record under the NPLs, e.g. sub-participations or where a transfer of risk takes place pursuant to a total return swap, credit default swap or other derivative contract;
• to securitisations of NPLs where the provision of information on the NPLs in question is subject to the EU Securitisation Regulation; or
• sales of NPLs where the overall transaction is not limited to NPLs but forms part of a larger overall transaction as part of the restructuring of the selling bank within insolvency, liquidation or resolution proceedings.

Seller Requirements

• If the Directive applies to a transaction, the EU bank divesting the NPLs may be required to provide prospective purchasers with “necessary information” about the NPLs being sold.
• The necessary information is imparted through the population of six separate templates which are prescribed by the ITS. The templates contain 135 data fields, 78 of which are mandatory. The templates must be completed on a loan-by-loan basis.
• The data fields require key information about each loan, such as: the identity of the borrower, the details of any insolvency or restructuring proceedings, the date and governing law of the loan agreement, the outstanding loan balance, if there is collateral – the type, its seniority, internal and external valuations of the collateral and whether any enforcement proceedings have been commenced, as well as listing any payments have been collected in the prior three years.
• The information regarding each NPL must be provided by the selling EU bank to the prospective purchaser(s) in electronic form (using secure channels) and prior to the entering into a sale contract (subject to any prospective purchasers entering into a confidentiality agreement with the seller).

Purchaser Obligations

The Directive also imposes obligations on non-bank “credit purchasers” of NPLs, which include the following:

• Article 10(1) of the Directive requires credit purchasers to provide fair treatment to the borrowers and pursuant to Article 10(2) of the Directive, for certain information to be provided to the borrowers under NPLs following completion of a purchase but in advance of the first debt collection, including but not limited to (i) name, address and contact details, (ii) when the transfer took place, (iii) the amount and type of debt that has been transferred and (iv) if the Borrower is located in the EU, the details of the “competent authority” in that member state to which complaints can be submitted (as well information regarding the terms of the appointment of a credit servicer, if applicable). The Loan Market Association have produced a form of notification, which is available to its members on their website;
• Article 17(1) of the Directive requires (i) EU credit purchasers to appoint an authorised credit servicer to service NPLs made to “consumers” and (ii) non-EU credit purchasers to appoint an authorised credit servicer, EU bank or an EU supervised consumer credit or mortgage creditor to service NPLs made to a natural person or micro, small or medium-sized enterprises;
• Article 18(1) of the Directive requires EU credit purchasers to notify the member state authority (of the credit purchaser) of the appointment of a credit servicer, EU bank or an EU supervised consumer credit or mortgage creditor; and
• Article 20(1) of the Directive requires EU credit purchasers to notify the member state authority (of the credit purchaser) of subsequent sales of NPLs to a new credit purchaser.

Importantly, the exemptions applicable to sellers of NPLs outlined above (e.g. NPLs under syndicated credit agreement facilities are not subject to the Directive) do not expressly exempt credit purchasers of such NPLs from the corresponding obligations imposed by the Directive. However, such obligations may vary according to the relevant law that the credit purchaser is subject to in its jurisdiction of domicile. 

Sanctions

Specific sanctions for a breach of the Directive are not set out in the overarching legislation but will instead depend on the local law brought into force to implement the Directive. That said, the Directive does stipulate that certain measures, such as fines and remedial measures (in a variety of specific situations), must be included. 

Summary

The Directive and the ITS impose a significant number of obligations on buyers and sellers of NPLs whose impact on a particular organisation is determined by the role that organisation plays in a transaction and whether the counterparties, loans traded and the method of settlement are in-scope for the Directive. Nevertheless, there are a number of significant exemptions to the Directive that may be applicable to loan trading activities of participants in the secondary loan market. If counterparties are uncertain on any of these points and whether the Directive applies in a specific circumstance, then they should seek the advice of legal counsel to provide the necessary clarity.