The European Commission has now set out the new disclosure templates to be used by EU credit institutions selling non-performing loans (“NPLs”) under the Directive on Credit Servicers and Credit Purchasers (the “Directive”). These disclosure templates are set out in the adopted implementing technical standards (the “ITS”) to the Directive. The ITS enters into force today - 19 October 2023.
The Directive and the ITS will apply to the sales and servicing of NPLs issued by a credit institution established in the EU. The Directive is due to be transposed into Irish law by 29 December 2023. We have previously provided updates and more detailed analysis on the Directive as it has progressed through the legislative process: in June 2021, August 2021, November 2021 and September 2023 respectively.
Who should be interested in the ITS?
The ITS is of particular interest and importance to EU credit institutions (i.e. banks and institutions that accept deposits from the public) who intend to sell NPLs that were originated post 1 July 2018, and to the advisers to such sellers. It will also be of some interest to the purchasers of those NPLs.
How are NPLs defined?
The definition of NPL in the Directive (and by extension the ITS) is a credit agreement that has been classified as non-performing in accordance with Article 47a of the EU Capital Requirements Regulation. In very general terms and for this purpose, a credit agreement becomes non-performing when:
- the borrower is assessed as unlikely to repay in full without realisation of collateral; or
- more than 90 days have passed without the borrower paying the agreed instalments; or
- it is otherwise considered impaired in accordance with the applicable accounting framework.
Amongst other matters, the Directive mandates that an EU credit institution must provide prospective credit purchasers with necessary information regarding the NPLs and any collateral so as to enable prospective credit purchasers to conduct financial due diligence and valuation prior to entering into the relevant NPL transfer agreement. The ITS now specifies the information to be provided by EU credit institutions selling NPLs under the Directive. EU credit institutions will have to use the data disclosure templates prescribed under the ITS for this purpose and will also have to use the same templates if they transfer NPLs to other EU credit institutions.
The ITS creates templates to be completed by the selling EU credit institution on a loan-by-loan basis for transactions where the ITS apply. The ITS provides that data fields in the templates are either mandatory or non-mandatory. EU credit institutions must provide information for all mandatory fields (unless the instructions for completing the disclosure templates in the ITS allow otherwise) and EU credit institutions must make reasonable efforts to provide information for the fields that are not marked as mandatory. Different data fields apply depending on whether the NPL relates to a private individual or corporate borrower and the collateral type of the NPL. The templates are accompanied by a data glossary and instructions for filling in the templates.
There are some exemptions contained within the ITS and the Directive. However, it is important to note that certain NPL types and transaction types are in scope for the overall Directive even though the ITS does not apply to them. Separately, the application of the Directive and the ITS to transfers of portfolios that include both performing loans and NPLs remains uncertain at this point.
The adopted ITS and the related disclosure templates do not apply to:
- sales of NPLs as part of sales of branches, sales of business lines or sales of clients’ portfolios;
- sales or transfers of NPLs through securitisation where the EU Securitisation Regulation applies and the provision of the related information is governed by the delegated and implementing regulations under the EU Securitisation Regulation;
- sales or transfers of NPLs pursuant to credit default swap, total return swap and other derivative contracts, contracts of insurance and sub-participation contracts; and
- sales or transfers of NPLs pursuant to a financial collateral arrangement or a transaction that would be a repurchase or securities lending transaction as defined in the EU Capital Requirements Regulation.
Moreover, the ITS provides that EU credit institutions are not required to provide information for the mandatory data fields in the disclosure templates in relation to sales or transfers of:
- a single NPL or several NPLs with a single borrower;
- NPLs under syndicated credit agreement facilities;
- NPLs with non-EU borrowers;
- NPLs where an EU credit institution is selling the NPLs to a member of its own group;
- NPLs that have been acquired by the selling EU credit institution from an entity other than an EU credit institution subject to the EU Capital Requirements Regulation; and
- unsecured NPLs with a natural person outside the scope of the EU Consumer Credit Directive.
Furthermore, the obligation to make reasonable efforts to provide information for non-mandatory data fields does not apply to the NPL types listed immediately above.
In addition, the Directive contains exemptions from using the templates for NPLs that were originated prior to 1 July 2018 and separately for NPLs that became non-performing prior to 28 December 2021. Moreover, the Directive provides that, for NPLs originated between 1 July 2018 and 19 October 2023 and that are not otherwise exempted, EU credit institutions need only complete the data templates with the information already available to them.
In anticipation of the likely transposition of the Directive into Irish law later this year, EU credit institutions and their sale process advisers should familiarise themselves with the disclosure templates in the ITS. Where there are no applicable exemptions, in-scope NPL sales and transfers will need to ensure compliance with the ITS following the transposition of the Directive. We anticipate that EU credit institutions may find it challenging to provide all mandatory data fields immediately because the data fields in the disclosure templates are likely to differ somewhat from the data fields typically used by EU credit institutions in prior transactions.
Moreover, EU credit institutions originating loans after – or purchasing loans originated after – the ITS enters into force on 19 October 2023 may need to ensure that their systems can generate the required information if they wish to sell the loans after they become non-performing. They may also need to review their systems to check that they can establish what information on earlier loans is available to them if they subsequently wish to sell those loans.
This article is provided for general information purposes only and does not purport to cover every aspect of the themes and subject matter discussed, nor is it intended to provide, and does not constitute or comprise, legal or any other advice on any particular matter.