EU Credit Servicing Directive

The Directive on Credit Servicers and Credit Purchasers, EU 2021/2167 (the “Directive”) came into effect in Ireland on 30 December 2023. The Directive applies to credit servicers and credit purchasers” in relation to non-performing credit agreements (“NPLs”) issued by a credit institution established in the EU. The aim of the Directive is to create a harmonised, regulated framework for NPLs originated by EU banks to be traded between credit institutions and credit purchasers and managed/administered by credit servicers.

We set out below, the requirements and implications for in-scope entities under the Directive.

Credit Servicers

The Directive provides that credit servicers must obtain authorisation before commencing its activities, which may be passported across the EU. In Ireland, entities that are currently authorised to operate as a credit servicing firm under existing regulation are deemed to be authorised under the Directive and will not need obtain further authorisation. However, with respect to NPL servicing, the list of activities that trigger authorisation in Ireland as a credit servicing firm were pared back to remove activities that go beyond the requirements of the Directive. The list of these activities includes but are not limited to, holding legal title, determining strategy or maintaining control over key decisions.

In the event that a credit servicer receives and holds payments from underlying borrowers, the credit servicer must hold these funds in a segregated account in order to differentiate between the original NPL and the new repayments.

Credit Purchasers

The Directive imposes different treatment to credit purchasers depending on whether they are domiciled in the EU or a third country. It is important to note that purchasing an in-scope NPL will not trigger an authorisation requirement for credit purchasers. However, the Directive provides that in order to purchase an in-scope NPL, the credit purchaser is obliged to appoint a credit servicer, a credit institution, or an entity otherwise authorised to provide credit in the EU to undertake credit servicing activities in respect of agreements concluded with certain types of debtors. Where a credit purchaser appoints a credit servicer to undertake such activities, it must inform the relevant competent authority. In Ireland, this Authority is the Central Bank of Ireland.

In the event that the credit purchaser is not domiciled in the EU, they are obliged under the provisions of the Directive to appoint an EU-domiciled representative (the “Representative”) to ensure that they will be effectively supervised. The Representative will be fully responsible for the credit purchaser’s compliance with the Directive.

Moreover, Article 20 of the Directive introduces enhanced requirements with respect to in-scope entities. In advance of the first debt collection or whenever requested by borrowers, in-scope entities must provide information to borrowers on the transfer that took place, the identification and contact details of the credit purchaser and of the credit servicer, as well as information on the amounts due by the borrower and a statement to the effect that all relevant union and national law continues to apply.

Additionally, the Directive imposes a requirement on credit purchasers, or it’s Representative, to notify the national competent authority if;

• The aggregate outstanding balance of the creditor’s rights under the non-performing credit agreements, or the non-performing credit agreements transferred;

• The number and size of the creditor’s rights under the non-performing credit agreements or of the non-performing credit agreements transferred; and

• Whether the transfer includes a creditor’s rights under a non-performing credit agreement, or a non-performing agreement itself, concluded with consumers and the types of assets securing the non-performing credit agreement, when applicable.

However, the national competent authority in Ireland has not provided any technical guidance with regard to the manner or form of reporting of the above events.

Additionally, there are ten discretionary provisions under the Directive with Ireland exercising four of them. The requirements under these discretionary provisions for in-scope entities in Ireland are as follows:

• Entities carrying out credit servicing activities under the existing Irish legislation will be recognised as authorised credit servicers under the Directive;

• A creditor can impose a charge on a consumer arising from a consumer’s default but that any such charge, if imposed by a creditor, shall be no greater than is necessary to compensate the creditor for the cost it has incurred as a result of the default and a creditor shall not be allowed to impose “additional” charges on a consumer in the event of a default;

• In line with the record retention period as provided for in the Consumer Protection Code, a record retention period of six years will be provided in the transposition of the Directive; and

• Credit Servicers will be allowed to receive and to hold fund from borrowers.

Exemptions

The Directive includes a number of carve outs to the requirements including:

• The sale of NPLs by an EU credit institution to another EU credit institution after 30 December 2023; or

• The sale of either a performing loan or an NPL originated by an entity that is not classified as a credit institution.

Consumer Protection Code Addendum

The Central Bank of Ireland has updated the Consumer Protection Code (“CPC”) through an Addendum to align it with the Credit Servicing Regulations. This Addendum extends the CPC’s application to credit servicers by including them in the list of regulated entities. These changes take effect from September 17, 2024.

Take Aways

The Directive aims to enhance competition within the EU-wide credit servicing market. This may pose as a challenge to in-scope entities in Ireland increased competition could potentially lead to more stringent legislative measures. However, the standardisation of the rules around purchasing and servicing NPL loans will support a more efficient and transparent marketplace.

For more information about the impact of the NPL Directive in Ireland, or to find out how Cafico International can assist your business, please reach out to Rolando Ebuna.