A group of portfolio solutions lawyers across DLA Piper's global firm have been pleased to provide their views on the European Commission's consultation on the development of secondary markets for non-performing loans and distressed assets, and protection of secured creditors from borrowers' default, which closed on Friday 20 October 2017.
DLA Piper's market leading Portfolio Solutions group, with its long track record in advising banks, loan servicers and financial investors on the largest, cross-border and domestic loan portfolio transactions worldwide, is well placed to assist the Commission in its work to better understand the current NPL markets and how they may be improved.
Clearly it is important that all financial institutions are encouraged to reduce NPL levels in order to promote efficient deployment of capital and to prepare for future market changes (such as potential interest rate rises). We therefore welcome the Commission's investigations of how current NPL levels may be resolved, including by further developing secondary markets for NPLs.
Key points which we hope the Commission will take into consideration in its work include:
- The need to address the factors contributing to the bid-ask gap for NPLs, such as treatment of provisioning and write offs by banks leading to high ask prices, and high costs and a need for high returns which can result in low offer prices from investors
- Ways in which access to loan information for investors may be improved, such as considering changes to data protection rules to allow for information to be shared more easily (while still providing sufficient protection for debtors) and measures, such as standardising due diligence information, to encourage originating lenders to collect and store relevant loan information in an easily accessible form from the outset
- Procedural and regulatory improvements to support the trading and resolution of NPLs
- Other solutions to the NPL problem and ways in which they might be encouraged in appropriate circumstances, including the use of joint ventures, securitisation structures, bad banks and common platforms for resolving NPLs (such as those which are being used in Portugal and Italy)
The consultation also considers the introduction of a European-wide security instrument which could allow for out-of-court enforcement of security. While seeking ways in which lenders can achieve a quicker exit from NPLs, in a manner which is consistent across EU Member States, is a worthy goal, there appear to be some challenges to achieving this through the proposed security instrument. It may be difficult to agree the form of such an instrument due to legal, constitutional and cultural differences across Member States. In addition, even if such an instrument were introduced, there could be issues with low levels of lender take up in jurisdictions where lenders consider court involvement in enforcement to provide a level of protection from claims from borrowers that the enforcement process has been improper or that the enforcement proceeds achieved are too low.
We await with interest the Commission's feedback on responses to the consultation.
A copy of the European Commission's consultation paper is available here.
Read more about DLA Piper's market leading Portfolio Solutions group.