May 11, 2024 3:08 pm

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Review of the implementation of the Credit Servicer Directive: Part I Germany & Greece

More than three months has elapsed since the deadline for EU member states to implement the EU Directive – on the sale, purchase and servicing of the non-performing loans (NPLs) originated by EU banks – into national law. While some national parliaments met the end of 2023 deadline, most did not. In large part, this is due to the complexity of the Directive which led to push back from servicers and purchasers adversely impacted by the new regime.

Critics suggest the Directive risks introducing additional red tape at the national level that undermine the objective of a harmonised regulatory framework that supports the secondary NPL market. However, we believe many of the problems identified are addressable and are confident that the long-term objectives will be met in time.

 

Background

Prior to the Directive on Credit Servicers and Credit Purchasers, there was no EU regulation of credit servicers, which led to broad spectrum of oversight between member states – ranging from national regulation to no governance – on the rules related to NPL purchases from EU banks. This vacuum allowed non-regulated NPL purchases to operate in some jurisdictions, creating an unlevel playing field and unequal transparency standards that stifled cross-border NPL trading. In December 2022, the European Commission published Implementing Technical Standards on NPL transaction data templates (ITS), which outlines standardised templates aligned to the Directive that EU banks must adopt in the sales process for NPLs.

The new Directive imposes obligations on EU banks selling NPLs, non-bank purchasers of EU NPLs, and NPL servicers. The purpose of the EU-wide regulatory regime is to strengthen the European secondary NPL market, raise risk management and transparency standards, encourage the transfer of risk from the EU banking sector to private capital, reduce the burden of NPLs on bank balance sheets (which limit lending capacity and reduces bank profitability).

For a full summary of the purpose of the EU Directive, please review our article published last November. In sum, the Directive sets up rules for credit servicers and purchasers and standardise practices across the EU:

• Credit servicers must get authorisation from their home state, inform borrowers about NPL sales and servicer changes, and keep detailed records for 10 years. Exceptions apply to servicers of non-EU bank NPLs and those already under specific EU supervisions.
• Credit purchasers are required to gather and share crucial information prior to NPL transactions, report appointed servicers to local authorities, and ensure representation within the EU for non-EU purchasers. EU credit institutions and pre-Directive transactions are exempt.

For credit purchasers, the Directive aims to increase competition between credit servicers, thereby reducing barriers to entry, increasing NPL investor demand and narrowing the bid-ask spread. For credit servicers, the enlarged investor universe should generate a sustainable increase in transaction volumes.  However, the implementation of the Directive throughout the EU into national law has generated significant pushback, with the new environment for secondary NPL trading bringing new uncertainties. National authorities are empowered to investigate and penalise non-compliance.

How EU member states implement the Directive will be crucial to whether the EC’s objectives are reached. Most member states have been slow to publish draft legislation that sets implementation of the Directive. In this first review, we take a closer look at progress among 2 of our most important markets: Germany and Greece.

 

Germany

Germany has led Europe in bringing forward national law to comply with the EU Directive. The Credit Secondary Market Act (KrZwMG), which regulates the secondary market for NPLs and credit service institutions (CSI), was implemented on 30 December, with phased compliance deadlines.

Under the revised law, CSIs require permission from BaFin, Germany’s financial regulator, and are under their direct supervision. This applies to any firm negotiating terms with borrowers of NPLs, including debt collectors. Companies were required to submit documents and information to BaFin by April 5, 2024, for permission-free servicing which was extended until mid-August.

In order to obtain permission from BaFin, they must be able to demonstrate reliable and professional management suitable to the proper performance of its servicing activities. Registered companies must have administrative or supervisory bodies with appropriate knowledge and experience. In addition, CSIs must operate a professional organisational structure with internal control procedures that protects the rights of borrowers and their personal data. For example, escrow accounts must be set up to handle borrower funds and procedures established to record and process borrower complaints.

 

Ambiguities linger

However, despite these headline rules and requirements, the new law introduces a complex transition period with several ambiguities which has resulted in a so far low number of CSIs applying for permits from BaFin. These include:

• the precise requirements in respect of organisational setup and assessment of loan servicer suitability are unclear. It appears, but is still not certain, that BaFin will impose a risk-based assessment of operational requirements, dividing stricter rules and requirements for companies handling large pools of loans or servicing more risky loans, and more relaxed rules and requirements for companies managing fewer, less risky loans.
• the documents and permit application forms appear to be drawn from licensing procedures related to Germany’s Banking Act and Payment Services Supervision Act, which are not compatible with the information available by relevant credit servicers that will need to register. Thus, some companies will have a more difficult time than others in registering, depending on their existing licences.

The initial wave of permit applications will provide more clarity on BaFin’s specific requirements, and whether greater flexibility will be provided. The extent of BaFin’s scrutiny compared to other licensing procedures is also unknown.

 

Greece

Greece’s implementation of the EU Directive has sparked an unintended consolidation among the country’s loan servicing industry, as loan servicers bemoan the untenable higher operating costs associated with organisational and operational compliance.

Under the new framework, loan servicers are required to digitalise all borrower and loan information, improving service standards for debtors, enhance protection of borrower rights, while increasing efficiency and transparency in NPL management. Details must include outstanding balance, interest, commissions, other charges, interest rates, interest payment history, etc.

The new regulatory framework disproportionately hurts smaller loan servicers without current portfolios to manage, requiring firms to invest beyond their means into previously unrequired upgrades to systems, staffing and procedures. Non-compliance risks hefty fines and license revocation.

For many, the new requirements, significantly increase compliance costs to the detriment of sustainable profitability. One potential solution is for two or more of the smaller loan servicers to merge into a larger entity that can better afford the compliances costs. Either way, the Greek loan servicing market looks set to shrink in 2024 and beyond.

Already four domestic loan servicers have pulled out of Greece’s NPL management market, while a fifth is reviewing their options. According to NPL Confidential, Hoist, Pepper, Cerved and Special Financial Solutions (SFS) have all confirmed to the Bank of Greece that they will not seek to renew their operating licence. Resolute is reportedly expected to make a decision soon.

Yiannis Stournaras, BoG Governor, acknowledged that national level compliance with the EU Directive will trigger domestic market consolidation but re-iterated that loan servicers remain a vital cog in the banking ecosystem which are governed by the central bank’s Code of Ethics. Stournaras reportedly said all active servicers will be checked twice to ensure compliance this year.

The audit and supervision of Greece’s loan servicers and debt management companies is already underway. Since September 2023, Greece’s Ministry of Development has issued € 1.5 million in fines to servicers and debt collection companies, from upholding complaints over non-compliance with new legislation which reveal poor practices within the domestic servicing and dent collection market. In early April, three major domestic loan servicers and debt collection companies of NPLs were fined for legislation non-compliance, collectively amounting to € 790,000. Specifically:

1. doValue Greece was fined € 330,000 for mistakenly contacting borrowers about overdue debts. In some cases, debt notifications were issued to borrowers that had already replayed in full, in pre-approved instalments, or were protected from repayment obligations by court-approved bankruptcy orders.
2. Cepal Hellas was fined € 280,000 over delays verifying debtor representatives, processing debt settlements, and poor communication with borrowers.
3. Intrum Hellas was fined € 180,000 for providing borrowers with inaccurate information on outstanding debt, as well as a series of delays related to requests for debt certificates, correcting mistaken deposits, and in providing information regarding customers’ remaining loan drawdowns.

Kostas Skrekas, Greece’s Minister of Development, said: “The Government proves in practice that it stands against unfair practices, which hurt, insult the citizen and explicitly violate the legislation that regulates the operation of companies. We will continue to do this with determination and persistence, intensifying controls and examining the relevant complaints.”

Tags: credit servicer, Europe, Germany, Greece, regulation

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