Understanding the new legal framework for the transfer of non-performing loans

Scope of application

The law applies to credit agreements classified as non-performing under Article 47a of the Capital Requirements Regulation (CRR). Non-performing credit agreements include those where the borrower is in default, where the loan is impaired, under probation, or likely to be repaid only upon realisation of collateral.

There are exemptions to the law’s scope. For example, it does not apply to the servicing or purchase of creditor’s rights carried out by European Union-regulated entities or to credit agreements issued by non-EU institutions.

Obligations of credit sellers

One of the central requirements under the new law is that credit institutions selling NPLs must provide prospective purchasers with detailed information regarding the loan and any collateral attached. This transparency is critical to allow the purchaser to assess the potential recovery value of the loan.

Contrary to concerns about breaches of professional secrecy, the law ensures that sharing information in this context is compliant with confidentiality rules. However, purchasers are responsible for protecting this sensitive data.

Credit institutions must also inform supervisory authorities about NPL sales on a bi-annual basis, detailing the identity of the purchaser, the size and value of the transferred NPLs, and whether consumer agreements are involved.

Obligations of credit purchasers

For credit purchasers domiciled within the EU, it is mandatory to appoint a credit servicer to manage non-performing credit agreements concluded with consumers. For NPLs involving corporate borrowers, purchasers have the option to either service the loans themselves or appoint a third-party servicer.

If a non-EU entity purchases an NPL, it must appoint a representative within the EU to ensure compliance with the law. This representative must then designate a servicer for managing the credit agreements.

Debtor rights and consumer protection

Debtors must be informed about the transfer of their non-performing loan. This notification must occur prior to any debt collection efforts by the new owner or servicer. In cases where the debtor is a consumer, the law mandates transparency regarding changes to the credit terms and sets expectations for creditor forbearance before initiating enforcement actions.

The role of credit servicers

A credit servicer, acting on behalf of a credit purchaser, manages and enforces rights related to a non-performing credit agreement. These entities must be authorised by the CSSF to operate. Key responsibilities include collecting payments, renegotiating loan terms, and administering complaints related to the NPL.

In situations where a credit servicer receives funds from a borrower, those funds must be kept in a separate account and promptly transferred to the credit purchaser under agreed conditions.

Sanctions for non-compliance

Failure to comply with the provisions of the new law can result in significant sanctions. The CSSF has the authority to issue fines of up to €5 million or 10% of the entity’s annual turnover, with higher penalties possible if the financial benefit from non-compliance exceeds the maximum fine. In severe cases, the CSSF may also withdraw a servicer’s authorisation.