DBRS on EU NPL Directive
First Steps to the Implementation
A recent Commentary by DBRS explains the purpose and scope of The European Credit Servicing Directive 2021/2167 (ECSD or the directive) summarizes the steps taken toward the implementation of the directive and assesses the potential impact on the European servicing market.
In August 2022, DBRS Morningstar published a commentary discussing the evolution of the debt servicing market in Europe, “Panning for Gold: Servicer Evolution in Europe”, based on its observations from operational reviews and own research. The rating agency looked at the third-party and servicing market across Europe with a focus on consolidation in the industry leading to pan-European servicing platforms. According to that report, one factor that could lead to further consolidation in the market is the harmonization of regulations across the European Union (EU) and its member states.
The European Credit Servicing Directive 2021/2167 (ECSD or the directive) was published in the official journal on 8 December 2021 and came into force on 28 December 2021. The member states have until 29 December 2023 to transpose the directive and put it into effect.
The directive is part of the EU plan to reduce the stock of non-performing loans (NPLs) held by European banks to prevent future stockpiles of NPLs from building up, and to foster the development of a secondary market for NPLs. The market’s concern has been that if banks accumulated large stocks of NPLs, it would limit their ability to provide finance to drive economic growth and also inhibit the transfer of NPLs to credit purchasers from the credit institutions. The directive had been under discussion since 2018 but its progress to become law was hastened by the Coronavirus Disease (COVID-19) pandemic and worries that the impact of the pandemic would result in increasing defaults.
While NPLs were considered to be the responsibility of EU banks and the member states, the matter was considered by the European Commission given the commonality and linkage of the financial systems across the EU. In particular, the fact that many banks operate in multiple jurisdictions could result in EU-wide issues, affecting economic growth and financial stability, if NPLs were not dealt with in a timely and efficient way
The directive aims to enable banks to deal more effectively with stocks of NPLs by improving conditions for the sale of NPLs to third parties. It creates an EU-wide regulatory framework imposing rules on banks selling NPLs as well as the credit purchasers acquiring them and those engaged to service them. Banks selling NPLs will be required to provide consistent data to potential purchasers in a template that is still to be agreed. This will enable credit purchasers to undertake adequate due diligence when looking to acquire portfolios of NPLs.
The NPLs to which the directive applies are loans advanced by EU credit institutions that have been classified as non-performing in accordance with EU capital requirements regulation. It does not include loans advanced by non-bank lenders or non-EU established banks. It does apply to NPLs transferred to another EU established credit institution or those transferred when the directive comes into effect.
The directive applies to credit purchasers who acquire portfolios of NPLs from banks but are not EU banks themselves. They will not need to be licensed under the new framework but if they are not licensed to service their own portfolio, they will be required to appoint a licensed credit servicer.
Looking ahead, DBRS Morningstar believes the implementation of the directive will be beneficial for investors in the NPL markets of the EU. The harmonisation of regulation will bring standard requirements for the provision of information for due diligence enabling investors to assess portfolios more accurately
The standardisation of regulation of credit servicers should give investors confidence that servicers in different jurisdictions will act with the same diligence and care in all member states. For further details you can find below the link to the full report
Link to the report:
https://www.dbrsmorningstar.com/research/415386
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