The EU Directive on Credit Servicers and Credit Purchasers (EU/2021/2167) (the Directive) regulates the sale, purchase and servicing of non-performing loans originated by EU banks (NPLs). The Directive entered into force on 28 December 2021 and requires EU member states to bring their domestic implementing rules into effect on 30 December 2023. How will the Directive affect parties to syndicated loans?

Background

The Directive aims to reduce the build-up of NPLs within EU banks. It does so by creating a framework to help foster a secondary market in NPLs, while ensuring this will not adversely affect borrowers.

The syndicated loan market is arguably not the primary focus for this new framework. An active secondary market in syndicated loans (both performing and non-performing) already exists. However, despite lobbying from various bodies, such as the LMA and Financial Markets Law Committee, syndicated lending is not excluded from the scope of the Directive.

What does the Directive require NPL parties to do?

The Directive is complex. However, broadly, the following obligations apply to parties to NPLs:

• Sellers: Banks selling NPLs to "credit purchasers" (see below) must:
  • before sale, disclose information about the creditor's rights under the NPL and any supporting collateral, to enable the purchaser to assess the likelihood of recovery. For this purpose, the seller must complete prescribed forms of data disclosure templates set out in Implementing Technical Standards (ITS). The European Banking Authority has published its final draft ITS, and submitted it to the European Commission for implementation; and
  • periodically, report certain information about completed sales to relevant EU national supervisory authorities.
    
    
• Credit purchasers: These are non-bank purchasers of NPLs. They must:
  • where the credit purchaser is a non-EU entity, appoint an EU entity as its representative to ensure compliance with the Directive;
  • appoint a credit servicer, EU bank or EU-supervised consumer credit or mortgage lender to service certain types of NPL (for example those with consumer borrowers). This does not apply where the borrower is a large corporate;
  • notify relevant EU national supervisory authorities of any credit servicer it has appointed and, on a periodic basis, of any on-sales of NPLs it has made; and
  • comply with certain obligations to treat borrowers under NPLs fairly.
    
    
• Credit servicers: These are legal entities that manage and enforce rights and obligations under an NPL on behalf of a credit purchaser and carry out "credit servicing activities", such as collecting payments. Under the Directive they must:
  • be authorised as a credit servicer by an EU national supervisory authority, unless they are an EU bank or certain other type of entity authorised or supervised in the EU. Only EU-incorporated entities are eligible for authorisation; and
  • comply with certain obligations to treat borrowers under NPLs fairly.

Does the Directive apply to loans with non-EU borrowers?

There is nothing in the Directive to exclude these. The ITS provides that sellers do not have to use the prescribed data fields set out within it for NPLs with non-EU borrowers. However, this supports the view that NPLs to non-EU borrowers are otherwise within scope.

What types of loan transfer are affected by the Directive?

The loan transfer scenario that the Directive primarily contemplates is the sale by an EU bank of a portfolio of NPLs that it originated to a non-EU bank purchaser. However, it directly or indirectly affects a much wider range of transfers, including the following:

• Single syndicated loans: There is nothing in the Directive to exclude these. Again, the ITS provides that selling banks do not have to use the prescribed data fields set out within it for the transfer of a single loan, or loans under a syndicated loan facility. This supports the view that these are otherwise within scope. The key factor is whether the transferred loan was "issued by" an EU bank. No guidance is available on how to interpret this in the context of a loan that may have had multiple original lenders, and subsequently been transferred numerous times.
  
  
• Non-EU bank sellers: The pre-sale disclosure obligations apply where a credit institution is selling to a non-credit institution. "Credit institution" includes EU and non-EU banks, and so non-EU bank sellers may be subject to this obligation if the loan was originally issued by an EU bank.
  
  
• Loans that may come into scope at a later date: Even where the pre-sale disclosure obligations do not apply to a proposed transfer on account of:
  • the loan not being an NPL at the time;
  • the identity of the seller or purchaser; or
  • the transfer occurring before the disclosure obligations come fully into effect,

a purchaser may still request this information to facilitate further sales of that loan at a later time. Alternatively, the purchaser may seek a representation that the loan was not issued by an EU bank.

How does the Directive affect facility agents and security agents?

Facility agents and security agents would not generally consider themselves credit servicers when applying the ordinary meaning of that term. They have not been treated as credit servicers in Ireland to date, where credit servicing is already a regulated activity. However, "credit servicing activities" is very broadly defined in the Directive and so could be interpreted as including activities that facility agents and security agents typically perform in an enforcement or distressed scenario. For example, they may be involved in recovering payments or renegotiating terms with the borrower. Without further guidance from the European Commission or European Banking Authority, it may therefore be more difficult for non-EU entities to perform these roles on loan transactions where there is an EU bank in the original syndicate. If:

• that loan becomes an NPL; and
• the EU bank's original commitment becomes held by a non-bank,

any actions in respect of that NPL that fall within the definition of "credit servicing activities" in the Directive would need to be carried out by a credit servicer - this must be an EU entity (see above) or other relevant EU authorised entity.