EBA standardises information requirements to support sales and transfers of non-performing loans in EU
The EU Directive on credit servicers and credit purchasers (Directive (EU) 2021/2167) (the NPL Directive) was introduced by the EU as part of its strategy to reduce current levels of non-performing loans (NPLs) held by EU credit institutions, as well as introducing a harmonised EU-wide framework for NPL sellers, purchasers and servicers.
The NPL Directive requires the European Banking Authority (EBA) to develop draft Implementing Technical Standards (ITS) to specify the templates to be used by credit institutions for the provision of information to credit purchasers when selling or transferring NPLs for the purposes of financial due diligence and valuation.
On 16 December 2022, the EBA published its final draft ITS specifying the information that credit institutions selling NPLs shall provide to prospective buyers.
The objective of the draft ITS is to increase the efficiency of the secondary market in the EU for NPLs and to reduce entry barriers for smaller banks and investors.
Standardised NPL data templates
The draft ITS aims to achieve this objective by providing a common data standard for NPL sales across the EU. Based on the experience gained with the voluntary use of the EBA's 2017 NPL data templates, the EBA has developed new templates which reflect industry feedback and wider market practices (the NPL Data Templates).
The intention is that the NPL Data Templates will enable cross-country comparisons, reducing information asymmetries between sellers and buyers, and improving the overall function of the NPL secondary market.
The NPL Data Templates will provide loan-by-loan information for the relevant NPL portfolios, including details of:
- the counterparties related to the loan
- the contractual characteristics of the loan itself
- any collateral and guarantee provided
- any legal procedures and enforcement procedures in place
- the historical collection of loan repayment
The draft ITS seeks to create proportionality by setting different information requirements depending on the nature of the borrowers and the loans included in the portfolios to be purchased/sold, and also allowing certain data fields in the NPL Data Templates to be treated as optional for certain transactions.
Not the only show in town
The EBA notes that it is not promoting NPL sales or transfers as the main NPL reduction strategy. The EBA sees NPL sales and transfers as one possible option available to credit institutions and notes that it is for them to determine the most appropriate NPL reduction strategy for them in accordance with the EBA Guidelines on management of non-performing and forborne exposures.
Next steps and commentary
The draft ITS have been submitted to the European Commission for adoption.
The publication of the draft ITS is, in general, a positive development in that it provides clarity on the information the EBA expects vendors to disclose when disposing of their NPLs. It remains to be seen whether market participants will view the level of disclosure as appropriate in all cases or in some instances in excess of what is commercially reasonable (in light of the NPL Directive's purpose of broadening and deepening the secondary NPL market within the EU).
From an Irish perspective, the draft ITS will no doubt be considered in the context of Ireland's transposition of the NPL Directive into domestic law (which must be implemented by 30 December 2023).
Whilst there is an ongoing consultation process between industry and the Department of Finance in relation to the Irish implementation of the NPL Directive, it is currently still unclear to what extent the existing Irish regime will be amended to accommodate the implementation of the NPL Directive (given the Irish regime is broader in scope than the NPL Directive (i.e. it requires a party to seek authorisation where, inter alia, it holds legal title to a loan) and applies to both performing and non-performing consumer and SME loans originated by non-bank lenders (not just credit institutions) or sold by one EU bank to another).
The EBA's final report on the draft ITS is available here.
For further information in relation to this topic, please contact Peter Walker, Partner, Jack Sheehy, Partner, Seán Ó Maoldomhnaigh, Associate, Elizabeth White, Knowledge Consultant or any member of ALG's Capital Markets Debt team.
Date published: 18 May 2023