Secondary Credit Market Act (Kreditzweitmarktgesetz – KrZwMG) brings new obligations for the German NPL market

Non-performing loan (NPL) business and collection in Germany is to be further regulated. From 1 January 2024, there will be notification obligations for NPL sales and debt collection of NPL claims will only be permitted by licensed credit servicers.

The Secondary Credit Market Promotion Act (Act) has been enacted at the end of 2023. The Act brings new obligations for the NPL market. There is an urgent need for action, particularly for debt collection agencies operating in this market. Some of their activities now fall under the Act. Debt collection service providers must notify their intention to provide these services after the end of a transitional period of six months, within a tight deadline of only seven weeks after the law coming into force (including documents relating to the application for a license).

BACKGROUND: CREDIT SERVICES DIRECTIVE AND ACTION PLAN FOR THE REDUCTION OF NON-PERFORMING LOANS IN EUROPE

The KrZwMG serves to implement Directive (EU) 2021/2167 of the European Parliament and of the Council of 24 November 2021 on credit servicers and credit purchasers and amending Directives 2008/48/EC and 2014/17/EU (Credit Services Directive). The Credit Services Directive must be implemented by the member states by December 29, 2023. It is part of the EU´s action plan for the reduction of NPLs. Credit institutions should have the opportunity to sell NPLs on efficient, competitive, and transparent secondary markets.

AT A GLANCE

The main objectives of the Credit Services Directive are the harmonisation of requirements for the licensing of credit servicers, the creation of a uniform framework for credit purchasers and credit servicers, and the strengthening of borrowers’ rights. With the implementation of the Credit Services Directive, authorised credit service institutions also have the option of operating cross-border with the European Passport (so-called passporting).

Implementing the Directive, the KrZwMG regulates:

• new obligations of credit institutions as sellers of NPLs,
• new obligations for purchasers of NPLs (including the mandatory involvement of a credit servicer),
• new requirements for providers of credit services and for purchasers of NPLs, in particular a new authorising requirement (institutional status) including requirements for their business organisation,
• the ongoing supervision of credit services institutions by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin); and
• regulations on cross-border business, e.g. access for European providers.

Appropriate supervisory powers are granted to the BaFin for the purpose of supervision. A register of credit services institutions authorised or operating with a European passport is established by the Act. Serious breaches of the obligations created by the Act may be punished with fines or criminal penalties.

With extremely short transitional periods for debt collection service providers to obtain a license, the authorising requirement will apply from 2024.

THE SECONDARY CREDIT MARKET ACT IN DETAIL

1. Scope of application

The law only applies to receivables from NPLs that are transferred for the first time after 30 December 2023.

The scope of application of the new KrZwMG is limited to the regulation of the secondary market for NPLs. Hence, the requirement is always that a loan purchaser acquires a NPL or receivables arising from it from a credit institution. What constitutes a NPL is governed by Article 47a CRR (Regulation (EU) 575/2013). Among other things, loans that are overdue more than 90 days are generally considered non-performing. BaFin has furthermore stated in its FAQ¹ that the KrZwMG shall cover terminated loans primarily.

The KrZwMG does not cover activities outside the European NPL secondary market, including:

• provision of services to the original lender of a NPL;
• the sale of loan receivables originally granted by non-CRR institutions; or
• the sale of loans granted by a credit institution domiciled in a third country.

In this respect, the current legal situation remains unchanged. Therefore, if a service provider manages NPLs in one of the abovementioned categories, only registration in accordance with the Act on Out-of-Court Legal Services (Rechtsdienstleistungsgesetz – RDG) is required if a debt collection service is provided in Germany.

2. Credit seller

The KrZwMG also regulates the obligations of sellers of NPLs. Credit institutions which sell loans have various information and notification obligations to the buyer before selling a NPL, so that the buyer can check its recoverability. This involves information regarding the loan agreement and the receivables arising from it, and on the collateral provided. The information should be sufficient to assess the recoverability of the receivables. The KrZwMG stipulates that the type, scope and form of the data can be specified in more detail by statutory order.

In addition, extensive reporting obligations to the supervisory authority have been introduced, which sellers must fulfill every six months. These reporting obligations apply to the selling credit institution, but also to a loan purchasers who resells a NPL.

3. Credit purchasers

Credit purchasers acquire existing non-performing credit agreements at their own risk. In contrast to the original lending, the acquisition of such a loan receivable is not a transaction requiring a license.

With the KrZwMG, credit purchasers within the EU are now obliged to appoint a credit servicer if they acquire credit agreements concluded with consumers or small and medium-sized enterprises.

This obligation does not apply to credit purchasers who are themselves credit servicers or who may act as such. These can be credit institutions or EU-regulated creditors within the meaning of the Mortgage Credit Directive (2014/17) or the Consumer Credit Directive (2008/48) and (from the system of the law) management companies within the meaning of the Capital Investment Code (Kapitalanlagegesetzbuch – KAGB). At European level, UCITS and AIF managers have even been completely excluded from the Credit Services Directive.

There is no exception to the obligation to appoint a credit servicer for other regulated companies such as insurance companies or pension funds.²

Credit purchasers from third countries are also obliged to appoint a representative within the EU to ensure that the rights of customers and the supervisory authorities are enforced and to avoid reputational damage for the seller. In addition to the credit purchaser, the representatives are responsible for fulfilling the obligations that arise for the credit purchaser from this regulation and the legal regulations issued based on the KrZwMG.

Credit purchasers (or, in the case of a third country company, its representatives) are also obliged to inform BaFin and the German Federal Bank of the name and address of the credit servicers.

When reselling a loan, they have the same ongoing reporting obligations as a selling credit institution (see above).

4. Licensing requirement under the KrZwMG, relationship to the RDG

The KrZwMG introduces a new licensing requirement for credit services. In future, service providers will have to be established as credit service institutions.

The central concept of credit services primarily covers:

• the collection and enforcement of claims due to the lender under the contract;
• the renegotiation of material contractual terms and conditions, however, only within the limits of what is permissible, i.e. following instructions and only insofar as no new credit decision within the meaning of the German Banking Act (Kreditwesengesetz – KWG) is made;
• the processing of complaints in connection with the contract; and
• certain notifications to the borrower.

One of the aims of regulating these activities is to ensure a high level of protection for borrowers, especially consumers.

As part of the authorisation procedure, requirements are placed on the professional suitability and personal reliability of management and administrative bodies as well as owners of significant shareholdings in credit services institutions.

The institution must have solid corporate governance arrangements and appropriate internal control procedures. This includes a risk management and accounting process as well as conduct of business and complaints management requirements. The EBA will provide further details at European level.

Credit services institutions may accept and hold funds from borrowers. However, this is linked to the requirement to comply with additional conditions in relation to the segregation of accounts and funds, so that the assets collected are protected in the event of insolvency of the credit services institution.

No permission is required for:

• CRR credit institutions;
• Authorised or registered management companies under the KAGB and internally managed investment funds in corporate form; and
• Creditors that are not credit institutions but are subject to supervision under Directive 2008/48/EC on credit agreements for consumers (the Consumer Credit Directive) or Directive 2014/17/EU on credit agreements for consumers relating to residential immovable property (the Residential Property Credit Directive) and for which credit services for consumer credit are part of their normal business activities.

5. Differentiation from debt collection activities

Activities currently covered by the Act on Out-of-Court Legal Services (RDG), within the meaning of debt collection service, will in future be subject to the KrZwMG as credit services and therefore require a corresponding registration.

Therefore, once the new KrZwMG comes into force, a special license under the KrZwMG with more far-reaching requirements must be applied for in credit services. Registration under the RDG is no longer sufficient in this respect.

A transitional arrangement of six months is provided for companies that are already active as debt collection service providers under the RDG when the KrZwMG comes into force. During this period, they can continue to carry out their activities under current law (i.e. on the basis of their RDG registration).

However, there is an urgent need for action:

• the intention to continue to provide services covered by the new law after the six-month transitional period must be notified to the BaFin within seven weeks of the law coming into force (i.e. on February 16, 2024 at the latest).
• no later than seven weeks after entry into force (i.e. on February 16, 2024 at the latest, however, as the case may be, upon a further period of four weeks after being contacted by the BaFin in the event of a missing application or incomplete filing), the authorisation application and the required documents must be submitted.

On 23 January 2024, the German regulator BaFin has announced that documents for the required licence application may be filed until April 5, 2024 rather than within the deadline of 7 weeks until mid February as there are plans of the German Parliament to change the law in this respect. However, plans to also extend the grandfathering period of 6 months have not yet been announced.

¹BaFin - FAQs zum Kreditzweitmarktgesetz
²Usually, they are also not permitted to acquire NPLs. In terms of meaning and purpose, the law should not cover that become non-performing only after a sale. However, the law is less clear than desirable.