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24 May 202114 minute read

Proposed EU Directive on credit servicing – what impact for the current Irish regime?

Introduction

In December 2020, the European Commission (Commission) announced its strategy to prevent a future accumulation of non-performing loans (NPLs) in the EU as a result of the COVID-19 pandemic. The Proposed directive on credit servicers, credit purchasers and the recovery of collateral (the Proposed Directive) is a key measure in the Commission’s NPL strategy.

The article gives an overview of the existing Irish credit servicing regime, the key proposals under the Proposed Directive and highlights the impact of the Proposed Directive on Irish credit servicing firms, particularly those that are already regulated under the Consumer Protection (Regulation of Credit Servicing Firms) Act 2018 (the 2018 Act).

The Irish Credit Servicing Regime

Ireland’s credit servicing regime is enshrined in the Central Bank Act 1997, which has undergone several amendments over the past years.

In 2015, the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 (the 2015 Act) introduced the regulation of “credit servicing firms”. The 2015 Act defines credit servicing as managing or administering the credit agreement.

In 2019, the 2018 Act expanded the activities of credit servicing to include entities that acquire/hold legal title to certain loans (performing loans and NPLs), determine the overall strategy for the management and administration of a portfolio of credit agreements and maintenance of control over key decisions relating to such portfolio. Currently this requirement is not set out in the Proposed Directive, which means the current Irish regime is broader than that proposed at EU level.

The Proposed Directive

In March 2018, the Commission published the Proposed Directive with the key aim to create a more fluid secondary market for NPLs. The Proposed Directive forms part of the EU’s Capital Markets Union which has as one of its objectives to create a better environment for banks to deal with NPLs.1

The table below summarises the scope of the Proposed Directive (in its current form):

Will apply to: Will not apply to:
Servicers and purchasers of credit agreements that were originated by licenced EU banks or their subsidiaries; loans serviced by licenced EU banks or their subsidiaries;
personal and business loans, secured and unsecured loans, and sales on the secondary market of both performing loans and NPLs; the purchase of performing loans or NPLs by licenced EU banks or their subsidiaries;
credit agreements issued to individuals, incorporated bodies and unincorporated bodies; the servicing of loans originated by non-bank lenders;
loan sales that took place before the Proposed Directive comes into force.

The Commission, the Council of European Union (Council) and the European Parliament (Parliament) commenced trilogue negotiations on the Proposed Directive in February 2021.2

Differences between the Irish Credit Servicing Regime and the Proposed Directive
The Current Irish Credit Servicing Regime The Proposed Directive

Scope

On top of carrying out management and administration activities in respect of credit agreements, an entity that undertakes any of the below activities are required regulated and need to be authorised with Central Bank of Ireland:

(a) holding legal title to credit granted under the credit agreement;
(b) determining the overall strategy for the management and administration of a portfolio of credit agreements; and
(c) maintaining control over key decisions relating to a portfolio of credit agreements.

The Proposed Directive will apply to any natural or legal person that carries out any of the following activities on behalf of a creditor:

(a) monitoring the performance of the credit agreement;
(b) collecting and managing information about the status of the credit agreement, of the borrower and of any collateral used to secure the credit agreement;
(c) informing the borrower of any changes in interest rates, charges or of payments due under the credit agreement;
(d) enforcing the rights and obligations under the credit agreement on behalf of the creditor, including administering repayments;

The scope of the Proposed Directive does not include the three additional activities stated in (a) – (c) on the left hand column, which trigger an authorisation requirement in Ireland.

Are purchasers/ holders of NPLs required to be authorised?

Yes

No, but there are certain obligations on the credit purchasers as set out in Articles 15-19. The obligations include but are not limited to:

  • Non-EU credit purchasers shall appoint an EU representative and appoint an authorised EU credit servicer, a licenced EU bank or its subsidiary to service credit agreements concluded with consumers.
  • Credit purchasers shall inform the national competent authority (NCA) of the entity that they have engaged to perform credit servicing activities and must notify the NCA if they intend to directly enforce the credit agreement.
  • The NCA can take action against a credit purchaser who does not comply with the requirements. – See Articles 20 - 22
  • The Proposed Directive provides that a credit purchaser shall not be subject to any additional requirements other than as provided for by the national measures transposing the Directive - See Article 15(2)
Authorisation framework

Authorised credit servicing firms must meet the Authorisation Requirements and Standards for Credit Servicing Firms laid out by the Central Bank of Ireland

Article 5 sets out the requirements that need to be fulfilled by credit servicers to be authorised in their home Member State, including: having a clean police report; not having been subject to any insolvency procedure; having appropriate control mechanisms to ensure data protection; a policy to ensure the fair treatment of the borrowers; and having adequate procedures to ensure the recording and handling of borrower complaints.

EU Passport

None

Yes – An authorised credit servicer will be able to provide services across all EU member states if it provides the host member state with certain information (EU Passport) - see Article 11.

Also, there is an obligation to set up a public register of authorised credit servicers in each Member State – see Article 8.

Obligation on the creditor to provide information regarding the credit agreement to the credit purchaser

Under the Central Bank’s Authorisation Requirements, a Credit Servicing Firm is required to inform, in writing, any holder of legal title over loans for whom it acts, of its obligations under financial services legislation, including any statutory Codes of Conduct that apply. A Credit Servicing Firm is required to demonstrate how its agreement in place with the loan owner enables it to fully comply with its obligations under financial services legislation

Article 13 specifically provides that creditors shall provide all necessary information to a credit purchaser prior to entering into a contract to assess the value of the credit and the likelihood of the recovery of the value of the loan.

The creditor shall also notify the relevant competent authority of the sale of in-scope credit agreements.

The European Banking Authority has published standardised NPL data templates that aim at facilitating the NPL sale transactions across the EU.


In our view, it is likely that Irish credit servicing regime will need to be amended to align with the Proposed Directive.

Timeline

It was originally envisaged that the Proposed Directive would be transposed and implemented into national law by 1 January 2021, but this has been delayed. Given that the trilogue negotiations between the Commission, Council and Parliament only commenced in February 2021, we envisage that the new implementation date will not be until late 2021 or 2022. It is likely that that further changes will be made as the negotiations progress and we will publish a further update when the Proposed Directive is finalised.


Appendix/useful resources
  1. The Proposed Credit Servicing Directive is available here
  2. The Consumer Protection (Regulation of Credit Servicing Firms) Act 2018 is available here
  3. The Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 is available here
  4. The Central Bank Act 1997 is available here
  5. Information on the existing Irish credit servicing regime is available here
  6. The Commission’s NPL strategy is available here
  7. The Council of the European Union’s progress report is available here
  8. The European Parliament’s draft reports on proposed amendments is available here and here
  9. Three-column comparison table setting out the Commission's proposals, together with the negotiating mandates of both the Council and the European Parliament is available here
  10. The European Banking Authority’s standardised NPL data templates is available here

In response to the Proposed Directive, the Council of the European Union published a progress report in June 2019 and the European Parliament set out the proposed amendments in a draft report of November 2019 and January 2020 respectively.
2Click here for the three-column comparison table setting out the Commission's proposals, together with the negotiating mandates of both the Council and the European Parliament.
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