The EC published its report, Implementing Technical Standards on NPL transaction data templates (ITS) in December 2022, setting out prescribed disclosure templates to be used by EU banks selling NPLs under the Directive. However, most member states are yet to bring the Directive into effect, and it will be interesting to see exactly how they plan to do so, considering the deadline has now passed.

EU Directive

Our article “EU Directive for NPLs sets new standards for investors and servicers” published in February 2022 discusses the implications of the Directive. To recap:

• The Directive imposes obligations on: (i) EU banks selling NPLs, (ii) non-bank purchasers of EU NPLs, and (iii) NPL servicers.
• Banks selling NPLs and credit purchasers
  • Banks selling NPLs must provide all necessary information to the purchaser before entering into a contract to transfer a credit agreement. Prescribed data templates contained in the ITS must be followed.
  • If a credit purchaser transfers a credit agreement to another credit purchaser, it must inform the relevant member state’s regulatory authority on a biannual basis.
  • 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 under the Directive.
  • An authorised servicer will also need to be appointed where there is an EU credit purchaser of consumer NPLs, or non-EU credit purchaser of NPLs granted to any natural person, or micro, small or medium-sized enterprise. Member states need to be notified of the appointment of a credit servicer.

Member states are not allowed to impose additional licensing restrictions except in exceptional circumstances, to encourage growth of the secondary market.

• Credit servicers
  • Must obtain authorisation from home member states to carry out credit servicing activities.
  • Member states are required to publish a list of authorised credit servicers. Credit servicers will then be able to passport their licence to practise throughout the EU.
  • Are responsible for notifying borrowers of an NPL sale and providing specific information ahead of the first debt collection.
  • Must avoid misleading borrowers.
  • Must keep records for a period of five years (or up to 10 years, depending on the statutory limitation period of the home member state) of all correspondence with the credit purchaser and the borrower, all instructions received from the credit purchaser, and instructions provided to the service providers.

These rules will not apply: (i) to servicers of NPLs originating from a non-EU bank, (ii) if the credit servicing activities are carried out by an EU credit institution (such as the bank itself or a non-bank creditor already supervised in the EU), (iii) fund managers, and (iv) UCITS investment companies.

Potential implications in relation to the Directive include:

• Facilitation and growth of the secondary market for NPLs.
• Various key issues will still need to be resolved during the implementation phase.
• The mechanics of a portfolio sales process will change. For example, from a purchaser’s perspective, licensed credit servicers will need to comply with conduct of business rules for borrowers.
• Selling bank will need to provide all necessary information to credit purchasers so they can assess the value of the loan assets and the likelihood of recovery. This will result in sellers having to retrieve large volumes of information from internal storage.
• Ambiguity around the definitions may result in different market participants reaching different conclusions, e.g., distinction between ‘credit servicer’ and ‘credit service provider’.
• Jurisdictions with NPL or credit servicing laws will need to accommodate the Directive and change their existing requirements.

Implementing Technical Standards (ITS)

The EC has adopted the ITS, which specifies the disclosure templates to be used by EU banks selling NPLs under the Directive. It aims to provide a common disclosure standard for NPL transactions across the EU and to reduce information asymmetries, enabling cross-country comparison in order to promote the secondary NPL market within the EU.

Summary of the ITS

The ITS has 135 data fields in the template, 78 of which are mandatory, but EU banks selling NPLs must use reasonable efforts to complete all of them. The data fields require EU banks to complete information about the borrower, borrower group, guarantors, collateral (its location and value) and the value that the selling bank applies to the loan on its own books. This reporting does not apply to a sale held on the bank’s trading book, or if the loan is not classified as an NPL.

The ITS specifies that EU banks selling NPLs must:

• Provide the required information to prospective buyers before entering into a contract for the sale of the NPLs.
• Before the provision of required information, enter into confidentiality agreements with the prospective buyer and only share personal data that is necessary.
• Ensure secure channels, such as virtual data rooms, are used to provide the required information.

NPLs have often been sold as portfolio sales on bespoke terms. They can also be sold on the secondary loan market on LMA terms. Historically, when high volumes of NPLs are traded on the secondary market using LMA terms, very little information is given to buyers and the principle of caveat emptor (buyer beware) applies. Where NPL portfolios are traded on bespoke terms, the amount of information provided by the seller can differ depending on the selling entity and risk appetites of the parties. The introduction of a requirement to provide specific information to enable purchasers to assess the NPL value may have an impact on the secondary loan market. This can reduce entry barriers for small credit institutions and smaller sized investors, as they will now have better access to market information. This can improve the overall liquidity of the secondary loan market.

When do the ITS rules apply?

The ITS applies to the sale and transfer by EU banks of credit agreements that are classified as non-performing exposures in accordance with Article 47a of the Capital Requirements Regulation. The ITS applies to sales and transfers that are held under the banking books (not trading books), and fall under the time period stated within the Directive. The relevant time period refers to transfers of NPLs held on EU banks’ banking books taking place on or after 30 December 2023, where the loans were originated on or after 1 July 2018 and became non-performing after 28 December 2021. For NPLs originated between 1 July 2018 and the entry into force of the ITS (19 October 2023), EU banks need only complete the data templates with the information already available to them. The date of the credit agreement is the relevant date.

The ITS criteria do not apply in case of:

• Sales or transfers of NPLs through a securitisation where the EU Securitisation Regulation applies.
• Sales or transfers of NPLs due to a credit default swap, total return swap or any other derivative contract, contract of insurance or sub-participation contract.
• Sales of NPLs as part of a sale of a branch, business line or client’s portfolio, which is not just limited to NPLs, and transfers of NPLs due to an ongoing restructuring operation of the selling bank within insolvency, resolution or liquidation proceedings.
• Sales or transfers of NPLs pursuant to a financial collateral arrangement or a repurchase or securities lending transaction.

Impact of ITS implementation

EU banks will need to consider how the ITS affects their transaction documentation, especially existing confidentiality agreements and any limitations or exclusions of liability. EU banks will need to ensure that systems are put in place to comply with the associated Directive requirements to file reports (such as on their sales of NPLs to credit purchasers) with regulators.

Member states are required to adopt national rules for effective and proportionate penalties, as well as remedial measures, for non-compliance of EU banks with their disclosure obligations under the Directive. Compensation can be sought under EU law by buyers of NPLs if the bank fails to comply with the ITS requirements.

Uncertainties with ITS rules

There are some uncertainties on how the new ITS rules will apply. For example, what happens where an EU bank selling an NPL is not required to complete the data fields in the ITS template? What information will need to be provided instead under Article 15(1) of the Directive, which details the prospective credit purchaser’s right to information regarding a creditor’s rights under a non-performing credit agreement, or the non-performing credit agreement itself? This applies to sales of NPLs to non-EU purchasers or transfers under sub-participation agreements or collateral arrangements.

The European Banking Authority has highlighted that the scope of the ITS’ application is not the same as the scope of the Directive’s application. EU banks will need to be careful when categorising what falls within, or outside of, the scope of the ITS. Syndicated NPLs also have certain exemptions when being transferred. EU banks do not need to complete information in the ITS for syndicated NPLs. Currently, it is not clear whether the selling EU bank will need to make general disclosures under Article 15 of the Directive. Even if the selling EU bank does not have to complete the ITS, it will still have reporting obligations, and a purchaser of the syndicated NPL will still have credit purchaser obligations.

Next steps

The deadline for member states to apply measures implementing the Directive has now passed. The lack of a uniform set of rules will undoubtedly add additional ambiguity to firms’ preparation for compliance with the new requirements. It remains to be seen how member states and relevant firms will navigate these additional regulatory requirements.

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