Proposal for a Directive of the European Parliament and of the Council on Credit Services, Credit Purchasers and the Recovery of Collateral
Earlier this year the European Commission issued a proposal for a Directive of the European Parliament and of the Council on credit servicers, credit purchasers and the recovery of collateral (the “Proposal”). This Proposal addresses the problem of non-performing loans (“NPLs”) defined as loans where the borrower is unable to make the scheduled payments to cover interest or capital reimbursements, when the payments are more than 90 days past due, or the loan is otherwise assessed as unlikely to be repaid by the borrower. NPLs reduce the profitability of banks and are the source of systemic risk spilling over from one credit institution to another and from one EU member State to another. NPLs furthermore consummate banks’ own funds, so they hinder granting new loans to more viable borrowers and make such loans costlier. The Proposal pursues two key objectives: (i) help banks to better manage their NPLs by enhancing the efficiency of debt recovery procedures and (ii) encourage the development of a secondary market for NPLs. It is part of European Commission’s package, that includes (i) a proposal for an EU Regulation amending the capital requirement regulation (CRR) and introducing minimum coverage levels for newly generated loans that become non-performing, and (ii) a blue print on the set up of national asset management companies. The two objectives of the Proposal are further described herein.
1. IMPROVEMENT OF OUT-OF-COURT COLLATERAL ENFORCEMENT PROCEDURES
It is proposed to create a simplified out-of-court collateral enforcement procedure, referred to as the Accelerated Extrajudicial Collateral Enforcement mechanism (the “AECE”), because the lengthy procedures existing in most of the EU member States contribute to further depreciate NPLs.
Scope of the AECE
Conditions relating to the borrower: The AECE is only eligible to secure loans granted by credit institutions to business borrowers. It is not available for consumer loans.
Conditions relating to the collateral: The new collateral enforcement mechanism would apply to all movable and immovable assets. It is excluded in respect of collateral subject to the Financial Collateral Directive n° 2002/47/EC dated 6 June 2002 and security over the business borrower’s main residence.
Formalism: The AECE must be agreed in writing between the lender and the borrower. Member States are allowed to further require the agreement to be in notarized form. The AECE agreement must specify the enforcement event and the period of time in which the business borrower must execute payment following that event in order to avert the execution of the AECE mechanism.
The AECE’s effect is that of an enforceable title (titre exécutoire). Member States shall be required to provide for the AECE to be enforceable at least through public auction or private sale. They may also authorize enforcement through creditor appropriation. Within four weeks following the enforcement event specified in the agreement, the creditor must notify the borrower of its intention to enforce the collateral through the AECE. Member States have the option to provide for an extension of grace period following the enforcement event by at least six months if the borrower has paid at least 85% of the amount of the secured credit. Whenever recourse to an appraisal is necessary, the parties are not allowed to choose their expert. Instead, the expert will be appointed by the judge.
AECE will not prejudice insolvency proceedings, so will not be available to recover debt of a debtor benefiting from a stay of individual enforcement actions. However, it may be used in pre-insolvency proceedings. Il will not affect priority of creditors rules.
The agreed AECE clause is transferred together with the loan receivable to any assignee. French law security interests are already enforceable by way of public sale (vente aux enchères publiques), judicial attribution (attribution judiciaire) or contractual appropriation by the creditor (pacte commissoire), but enforcement by way of private sale is prohibited and clauses providing for sale without court intervention (clause de voie parée) are invalid and unenforceable in France. Enforcement of collateral by way of public auction requires court authorization. Therefore, the implementation of the Proposal will require amendments to French legislation governing enforcement of security interests.
2. MEASURES TO FOSTER A MORE EFFICIENT SECONDARY MARKET OF NPLS
Regulation of credit servicing activities provided by non-banking entities
Credit servicing activity is defined as the exercise of one or several of the following activities: (i) monitoring the performance of the credit agreement; (ii) collection and management of information about the status of the credit agreement, of the borrower and of any collateral used to secure the credit agreement; (iii) information of the borrower in relation to any changes in interest rates, charges or payments due under the credit agreement; (iv) enforcement of rights and obligations under the credit agreement on behalf of the creditor, including administering repayments; (v) renegotiation of the terms and conditions of the credit agreement with borrowers and (vi) handling of borrowers’ complaints.
The provision of any of the above activities except by a credit institution or its subsidiary, will be subject to prior authorization by the competent authority of the home member State of the credit servicer. Once authorized, the credit servicer benefits from the European passport, by way of notification with the home country regulator.
The Proposal further requires that credit servicers enter into a written agreement with creditors providing a detailed description of credit servicing activities to be carried out; the level of or the rules for calculation of the credit servicer’s remuneration; the extent to which the credit servicer is authorized to represent the creditor in relation to the borrower; and an undertaking by the parties to comply with the EU and national law applicable to the credit agreement, including consumer protection laws where applicable.
Credit servicers would be required to keep correspondence with the creditor and the borrower as well as all instructions from the creditor for 10 years following the date of the contract with the creditor. They would be bound by additional obligations and liabilities in the event they outsource certain of their credit servicing activities.
Obligations of non-banking credit purchasers
A credit purchaser other than a credit institution or a subsidiary of a credit institution carrying out a credit purchase in the course of its trade, business or profession would be subject to the duty to inform competent authorities in the following situations: (i) assignment of credit by credit institution to a non-credit institution; (ii) direct enforcement of a credit agreement by the credit purchaser and (iii) transfer of the credit agreement by the purchaser. Under Article 15 (2) of the Proposal, member States shall ensure that a credit purchaser is not subject to any additional requirements. Accordingly, the proposed reform should prohibit any restriction under applicable credit monopoly rules. In France, credit receivables and agreements relating to business loans may be acquired by regulated entities in France authorized to carry out credit activities or foreign entities having similar activities in their home country. The French credit monopoly rules would have to be relaxed to authorize the acquisition of credit agreements or receivables (including those relating to consumer loans) by any legal or natural person.
Credit purchasers established in a third country would be required to appoint a representative in at least one-member State, who will bear responsibility for the obligations imposed on credit purchasers. The representative would in turn be required to appoint a credit institution established in the EU, a EU subsidiary of a credit institution or an authorized credit servicer to perform credit servicing activities with respect to credit agreements concluded with consumers.
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