The EU’s Credit Servicers Directive – The Outlook Ahead – Dodd-Frank, Consumer Protection Act

QuickTake

Directive (EU) 2021/2167 on credit servicers and credit
purchasers (the Credit Servicers Directive or the
Directive)¹ was published in the
Official Journal of the European Union (EU) on 8
December 2021 and entered into force twenty days thereafter. For a
project which has been in the works for a number of years, the end
result has been mostly successful. Financial services providers
(both originators of credit but equally investors i.e., credit
purchasers – differentiated between EU and non-EU purchasers)
as well as credit services providers themselves will now need to
prepare for implementation of this new pan-EU regime.

In summary, the Credit Directive Servicers Directive aims to
introduce a harmonised framework for servicing of non-performing
credit agreements (NPLs) as well as encourage the
development of a secondary market for NPL and thus easier means for
credit originators (primarily credit institutions i.e., banks) to
transfer NPLs to investors off their balance sheets. Given that NPL
investors will usually delegate administration and collection
activities (i.e., credit servicers) the Directive aims to provide a
uniform EU-wide framework for such entities, who in turn will be
authorised and regulated to perform such services (on a passporting
basis) across the EU.

Importantly, unlike the EU’s NPL Guidelines (which read like
rules) issued by the European Banking Authority
(EBA) and equally the European Central Bank
(ECB) in its Banking Union capacity – both
of which aim to cover non-performing exposures (beyond just loans)
– the Credit Servicers Directive’s application is anchored
around the definition of a “credit agreement”. This
definition states that a credit agreement is “…an agreement
as originally issued, modified or replaced, whereby a credit
institution, grants a credit in the form of a deferred payment, a
loan or other similar financial accommodation. The latter point
allows for some leeway but also some uncertainty as to what may
also fall into scope. That being said, the Directive is likely to
serve a welcome framework for credit servicers to also act in
relation to other non-performing exposures that are not in scope of
the Directive.²

This Client Alert assesses the core components of the Credit
Services Directive, key considerations for relevant firms given the
outlook ahead. This Client Alert should be read in conjunction with
other coverage from PwC Legal’s EU RegCORE related to EU and
Banking Union specific reforms on loan origination standards as
well as dealing with NPLs.

Scope and timeline

The original 2018 European Commission proposal for pan-EU rules
on credit servicers, stemming from workstreams from the EU’s
Action Plan on NPLs, advocated application of this new regime to
“all” credit agreements that were issued by EU credit
institutions. In 2019 it was decided that two workstreams were
needed, one for the secondary market for NPLs and one on
accelerated extrajudicial collateral enforcement
(AECE). By 2020 the latter point, designed to
speed up the recovery of collateral, was proving to be rather
contentious.

By 2021 it was clear that the Credit Servicers Directive would
only apply to “non-performing credit agreements” and as
originated by a European “credit institution” –
i.e., an undertaking whose business is to take deposits or other
repayable funds from the public and to grant credits for its own
account. This is the version ultimately adopted in the final
version of the Directive. Equally, Title V of the Directive, as
originally set out in the Commission’s March 2018 legislative
proposal, planned to deal with AECE. In order to not derail the
delivery of the Directive from proposal into law, policymakers
agreed to remove all references to the AECE mechanism and split
these out in a separate legislative proposal. It remains to be seen
whether these will resurface and be advanced or ultimately be
shelved completely.

As such, the current Directive only covers NPLs, but it does
require a lot, inasmuch as it leaves a number of questions
unanswered even if there is a clear path to operationalisation of
this new framework. Article 32 on transposition of the Directive
stipulates that Member States shall adopt and publish, by 29
December 2023, the laws, regulations, and administrative provisions
necessary to comply with the Directive and shall immediately
communicate the text of those measures to the European Commission
(EC). The EC in turn has the same deadline to
produce a report on the review of the Directive, accompanied by a
legislative proposal if appropriate.

Entities carrying on credit servicing activities on 30 December
2023 have a deadline of 29 June 2024 to obtain an authorisation
under the Directive as implemented in each of the Member States of
the EU.

Key requirements

The EU’s Capital Requirements Regulation
(CRR) defines NPLs as loans where the payments are
more than 90 days past due, or are assessed as unlikely to be
repaid by the borrower. NPLs are bad for banks as aside from taking
up space on their balance sheets, they also generate less income
and can tie up significant amounts of a bank’s human and
financial resources, which reduces the bank’s capacity to lend.
NPL ratio in the EU had been steadily increasing since the 2008
Global Financial Crisis.

The Directive’s goal was to prompt banks with high volumes
of NPLs to “outsource” their servicing to (specialised)
credit servicers or to sell the NPLs to credit purchasers in the
secondary market and provide a uniform means of doing so.

In the end, the first workstream aimed at developing the NPL
secondary market and introducing common rules for both credit
servicers and credit purchasers was the one left standing.
Naturally, the rules covered in it have been retained in the final
version of the Directive, which lays down a common framework and
requirements for:

• credit servicers of a creditor’s rights under NPLs, or of
  the NPL itself, issued by a credit institution (or by one of its
  subsidiaries) established in the EU who act on behalf of a credit
  purchaser. Key elements of the framework for credit servicers
  include requirements on:




• • obtaining authorisation before carrying out credit servicing
    activities;

  
  

  • outsourcing by credit servicers;

  
  

  • communications from credit servicers to borrowers;

  
  

  • a passporting regime permitting authorised credit servicers to
    provide cross-border services; and




• credit purchasers of a creditor’s rights under a NPL, or of
  the NPL itself, issued by a credit institution (or one of its
  subsidiaries) established in the EU. Key elements of the framework
  for credit purchasers include requirements on:




• • information provided by creditors to credit purchasers before
    the transfer of the NPL;

  
  

  • additional obligations for non-EU credit purchasers; and

  
  

  • notifications to competent authorities concerning credit
    servicers, enforcement and transfers of NPLs.

Unlike credit servicers, credit purchasers do not require
authorisation provided they are not creating new credit. If they
do, then existing principles of whether the regulatory perimeter is
triggered apply.³

The Directive also encourages credit institutions to employ a
credit servicer, especially in the event of involvement of an
unregulated credit purchaser or in relation to the sale of NPLs to
third parties. This Directive should, therefore, establish an EU
-wide framework for both purchasers and servicers of NPLs whereby
credit servicers should obtain authorisation from, and be subject
to the supervision of, the competent authorities of Member
States.

Similarly, to other important EU legislative texts, the EC is
empowered to adopt implementing technical standards, developed by
EBA, to specify the templates to be used by credit institutions for
the provision of information required under the Directive.

Application

Article 2(1) of the Directive makes it clear that it applies to
purchasers and servicers of NPLs that were originally issued by EU
credit institutions or their subsidiaries. For these purposes the
nature of the borrower is irrelevant.

According to Article 2(5), the Directive does not apply to: (1)
the servicing of a credit agreement carried out by:

• a credit institution and its subsidiaries in the EU (that is,
  it does not apply to the purchase and servicing of NPLs by banks
  themselves);




• an alternative investment fund manager
  (AIFM);




• a UCITS management company or a UCITS investment company;
  or




• a non-credit institution subject to supervision by a competent
  authority of a member state in accordance with the Consumer Credit
  Directive (2008/48/EC) (CCD) or the Mortgage
  Credit Directive (2014/17/EU) (MCD), when
  performing activities in that Member State.

Nor does it apply to (2) the servicing of creditor’s rights
under a credit agreement or of the credit agreement itself that was
not issued by an EU credit institution established; or (3) the
purchase of creditor’s rights under a non-performing credit
agreement or of the non-performing credit agreement itself by an EU
credit institution established in the Union; or (4) the transfer of
a creditor’s right under a credit agreement or of the credit
agreement itself transferred before the date on which Member States
are expected to apply measures implementing the Directive.

Credit servicers – requirements in detail

The Directive defines (Art. 3(8) and (9) of the
Directive) a credit servicer as a legal person i.e., an entity that
in the course of its business conducts both of the following
activities:

• It manages and enforces the rights and obligations related to
  the creditor’s rights under a non- performing credit agreement
  or to the non-performing credit agreement itself on behalf of the
  credit purchaser; and




• It carries out at least one or more “credit servicing
  activities”. A “credit servicing activity” is one or
  more of the following:




• Collecting or recovering from the borrower, in accordance with
  national law, any payments due related to a creditor’s rights
  under a credit agreement or to the credit agreement itself;




• Renegotiating with the borrower, in accordance with national
  law, any terms and conditions related to a creditor’s rights
  under a credit agreement or of the credit agreement itself in line
  with the instructions given by the credit purchaser, where the
  credit servicer is not a credit intermediary as defined in the
  EU’s Consumer Credit Directive or the EU’s Mortgage Credit
  Directive;




• Administering any complaints relating to a creditor’s
  rights under a credit agreement or to the credit agreement itself;
  and




• Informing the borrower of any changes in interest rates or
  charges or of any payments due related to a creditor’s rights
  under a credit agreement or to the credit agreement itself.

The key elements for credit servicers include:

• Articles 4-9 and 13-14 – Authorisation and passporting.
  Credit servicers need to obtain authorisation from the home Member
  State to carry out credit servicing activities. Member States are
  required to publish a list of authorised credit servicers. Credit
  servicers authorised in one Member State can provide credit
  servicing activities in other Member States provided the original
  Member State is notified;




• Article 10 – Relationship with borrowers. Credit
  servicers should avoid misleading borrowers and should take care to
  notify borrowers of an NPL sale and ahead of the first debt
  collection, providing specific information, including the date of
  transfer, identification, contact details and authorisation of the
  new credit servicer or credit service provider;




• Article 11 – Contract between the credit servicer and
  credit purchaser. Records there should be kept for 10 years (please
  see below in Article 12 too); and




• Article 12 – Outsourcing and record keeping. Credit
  servicers remain full responsible for all obligations event if
  third parties perform the activities normally taken by the credit
  servicer. Credit servicers should also keep records for a period of
  10 years of all correspondence with the credit purchaser and the
  borrower, all instructions received from the credit purchaser, and
  all instructions provided to credit service providers.

Credit purchasers – requirements in detail

The Directive defines (Art. 3(6) of the Directive) a
credit purchaser as any natural or legal person other than
a credit institution, or a subsidiary of a credit institution, that
purchases a creditor’s rights under a non- performing credit
agreement or the non-performing credit agreement itself in the
course of their trade, business or profession:

For credit purchasers, the key elements include:

• Article 10 – Relationship with borrowers. Similarly, to
  credit servicers, credit purchasers are subject to specific
  obligations in respect of borrowers. Credit purchasers (and credit
  servicers) are subject to specific obligations in respect of
  borrowers. They should always act in good faith, treat borrowers
  fairly and respect their privacy. They should not harass nor give
  misleading information to borrowers. They should provide specific
  information to borrowers in advance of the first debt collection,
  concerning any transfer of a creditor’s rights. The information
  should include a date of transfer, identification, contact details
  and authorisation of a new credit servicer or a credit service
  provider, as well as detailed information on the amounts due by the
  borrower;




• Article 15 & 16 – Right to information regarding the
  credit agreement. Creditors must provide all necessary information
  to credit servicers before entering a contract to transfer a credit
  agreement, including the likelihood of recovery of the value of the
  NPL prior to the sale, the creditor’s rights under the NPL
  agreement, and, if applicable, information regarding the
  collateral;⁴




• Article 18 – Information on credit servicing. Credit
  purchasers must provide the relevant member state authority with
  details of the appointed credit servicer;




• Article 19 – Non-EU credit purchasers. A non-EU credit
  purchaser acquiring EU originated NPLs must designate a
  representative that is established in the EU. The representative
  will be responsible for the credit purchaser obligations; and




• Article 20 – Transfer of credit agreements. Credit
  purchasers must inform the relevant Member State authority if it
  transfers a credit agreement to another credit purchaser.

Supervision

Member States are required to designate competent authorities to
carry out the functions and duties set by the national provisions
implementing the Directive and ensure that they are given necessary
supervisory, investigatory and sanctioning powers. Member States
are also required to establish appropriate penalties and remedial
measures for credit servicers and credit purchasers that fail to
comply with specific obligations under the Directive.

Safeguards for consumers and duty to co-operate

In order to protect consumers, competent authorities must
establish a procedure for handling complaints by borrowers
concerning credit purchasers, credit servicers and credit service
providers. NCAs are also expected to co-operate and share
information relating to the operation of the Directive. Both of
these are enshrined in the text of the Directive.

Amendments to the Mortgage Credit Directive⁵
(MCD) and the Consumer Credit Directive⁶ (CCD)

Articles 27 and 28 of the Directive make the following revisions
to the MCD and the CCD:

• New Articles 27a of the MCD and 11a of the CCD will require
  that creditors communicate specific information to a consumer
  before modifying the terms and conditions of a credit agreement.
  This information is to include:




• • clear and comprehensive description of the proposed
    changes;

  
  

  • timescale for the implementation of the changes; and

  
  

  • mechanisms by which the consumer may make a complaint relating
    to the changes.




• Article 28 of the MCD and new Article 16a of the CCD will
  require creditors (i.e., credit purchasers) to have adequate
  policies and procedures so they can exercise, where appropriate,
  reasonable forbearance before initiating enforcement
  proceedings.




• New Article 28a of the MCD is to provide that, where there is
  an assignment to a third party of the creditor’s rights under
  an agreement covered by the MCD, the consumer is entitled to plead
  against the credit purchaser any defence that was available to them
  against the original creditor. It also creates an obligation for
  the consumer to be informed about an assignment.

Evaluation and review

As mentioned above, the Commission is required to submit a
report to the European Parliament and the Council of the EU,
accompanied by a legislative proposal if appropriate, within 24
months of the Directive entering into force, i.e. by end of 2023.
The report should cover:

• The adequacy of the regulatory framework regarding a potential
  introduction of caps on charges arising from the default applicable
  to credit agreements concluded with (i) natural persons for
  purposes related with trade, business or profession of that
  persons; (ii) micro, small or medium-sized enterprises (SMEs); and
  (iii) any borrower, provided that the credit is guaranteed by a
  natural person or is secured by assets or property belonging to
  that person.




• Relevant aspects, including potential forbearance measures, of
  credit agreements concluded with (i), (ii) or (iii).




• The need and feasibility to develop implementing or regulatory
  technical standards or other appropriate means to introduce common
  reporting formats for communication to borrowers.

Additionally, the Commission is mandated to conduct an
evaluation of the Directive and present a report by 29 December
2026, which should consider:

• The number of authorised credit servicers in the EU and the
  number of credit servicers providing their services in a host
  Member State.




• The number of creditor’s rights under non-performing credit
  agreements or of the non-performing credit agreements purchased
  from credit institutions by credit purchasers domiciled or
  established in the same Member State as the credit institution, in
  a different Member State than the credit institution, or outside of
  the EU.




• The assessment of the existing money laundering and terrorist
  financing risk associated with the activities performed by the
  credit servicers and credit purchasers.

The cooperation between competent authorities.

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Footnotes

1. Available here

2. This is the case as the
Directive’s definition is thus narrower than that in the EBA
and ECB rules as well as in national rules (notably the Irish and
Spanish rules that formed the basis of the EBA and ECB’s
efforts and also the foundation for the Directive) both in terms of
what financial exposures are covered but also in relation to the
originator i.e., the credit institution (or its subsidiary).

3. See commentary in the following press
release from the European Parliament available here.

4. The EBA is mandated to develop draft
implementing technical standards (ITS) specifying the formats to be
used by credit institutions to provide such information (Article
16). The EBA indicated in a discussion paper published in May 2021
on a review of its standardised data templates for NPL transactions
(EBA/DP/2021/02) that any consultation on these ITS would be based
on the revised templates to be developed following the discussion
paper.

5. Available here.

6. Available here.

Originally published March 2022

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