knowledge 12 January 2024 |

Credit Servicing: what does the new EU Regime mean for Irish NPLs and credit servicing?

Introduction

The legal landscape for credit servicing in Ireland has evolved again with the transposition of an EU-wide regime into Irish law by the European Union (Credit Servicers and Credit Purchaser) Regulations 2023.  The Regulations (here) were published in January 2024 but came into operation on 30 December 2023.

The new EU-based regime for credit servicing (the “EU regime”) will operate alongside Ireland’s existing domestic credit servicing regime (the “Irish regime”).  All sellers, purchasers and servicers of loan portfolios in Ireland will need to ensure they can identify which regime applies and also (assuming the EU regime is relevant) that they have fully analysed and integrated the requirements of the 2023 Regulations into their business. 

What is the new EU regime?

The 2023 Regulations give effect to the EU Directive on credit servicers and credit purchasers (EU 2021/2167 – here).  The primary goal of the Directive is to assist EU credit institutions in efficiently selling non-performing loans (“NPLs”) so that those credit institutions are not hampered in discharging their key role of providing finance to EU businesses.  As part of that overarching goal (amongst other matters) the Directive contemplates the standardisation of information for potential “Credit Purchasers”, as well creation of a new authorisation for “Credit Servicers”, which can be passported throughout the EU. 

As Ireland already has a significant national credit servicing regime there is overlap between the existing Irish regime and the new EU regime, which requires careful analysis. The below table provides some high level guidance on the scope of the new EU regime vs the existing Irish regime.

 

Scope / Impacted Party	EU Regime	Irish Regime
In-scope types of finance	Non-performing credit in the form of a deferred payment, a loan or other similar financial accommodation	Credit in the form of a deferred payment, cash loan or other similar financial accommodation (including the letting of goods) (“credit”). Hire purchase agreements and “consumer-hire agreements” (e.g. finance leases) (“hire agreements”).
“Borrower”	All types (but with more of a focus on consumers and SMEs)	Natural persons and, in the case of “credit”, certain corporate SMEs.
Seller	EU credit institution focus	Entity authorised to provide credit or hire agreements in the State1
Purchaser	No authorisation required – some obligations	Authorisation required for (i) holding legal title to a credit agreement/hire agreement, and/or (ii) making key decisions or setting
Credit servicer	Authorisation required	Authorisation required
Credit servicing scope	• collection/recovery of payments from borrowers • renegotiating terms and conditions with borrowers • dealing with complaints • telling borrowers about changes to interest rates, charges or payments due	• holding legal title to a credit/hire agreement • managing or administering a credit/hire agreement (including the activities within the Directive’s scope • making of key decisions or setting strategy in relation to management of portfolio of credit/hire agreements
Application in time	NPL sales by EU credit institutions on or after 30 December 2023.	Applies to existing and future credit and hire agreements.

As is typical for legislation of this nature, there are some important exemptions that parties may be able to avail of, depending on the relevant fact pattern (e.g. the EU regime’s authorisation requirements do not apply to credit servicing by an EU credit institution, by an Irish retail credit firm, or by certain authorised investment fund entities). 

We now consider the most salient aspects of the EU regime for in-scope sellers, Credit Purchasers and Credit Servicers.  As a general point, it is important to note that where the EU regime does not apply, the existing Irish regime may nevertheless apply, depending on the circumstances.  This can be a complex issue and it will be important for it to be considered in the context of the specific relevant fact-pattern.

The EU regime and Sellers

The EU regime applies only to NPLs² originated by EU credit institutions and transferred on or after 30 December 2023. 

In-scope NPL sellers, have two primary categories of obligations:

• Pre-sale information:  credit institutions are required to provide prospective Credit Purchasers with necessary information in relation to the NPLs to enable the Credit Purchaser to conduct its own assessment of the applicable value.  Subject to limited exceptions, a credit institution is required to provide very detailed information as prescribed by Implementing Technical Standards published by the European Commission.³  Sellers will, therefore, need to ensure that their systems collate the relevant information and that it is capable of being provided in an efficient and data protection-compliant manner.

• Post-sale Reporting:  both credit institutions and Credit Purchasers (in relation to further sales on the secondary market) have periodic reporting requirements to the Central Bank of Ireland (“CBI”).  The type of information required to be reported includes the legal entity identifier (“LEI”) of the purchaser (or similar information where there is no LEI), and the size and nature of the NPLs sold (e.g. outstanding balance and whether consumer NPLs were included).

It is important to note that, unlike the Irish regime, the new EU regime is not limited to NPLs with natural persons/SMEs.  On the face of the legislation, transfers of high value corporate NPLs by EU credit institutions (including in the syndicated loan market⁴) also come within the scope of the EU regime. 

The EU regime and Credit Purchasers

Credit Purchasers are treated differently, depending on whether they are domiciled within the EU or a third country. 

Third Country Credit Purchaser

EU Representative:  To ensure a third country Credit Purchaser is capable of being effectively supervised, it is required to designate an EU-domiciled representative.  The CBI will address that representative on all issues relating to compliance with the 2023 Regulations and the representative is fully responsible for the Credit Purchaser’s compliance.

Credit Servicer:  A third country Credit Purchaser is required to appoint a Credit Servicer (or other sufficiently qualified entity⁵) in relation to a broader category of NPLs than an EU-domiciled Credit Purchaser. 

A third country Credit Purchaser must appoint a Credit Servicer (or other qualified entity) where the underlying borrower is:  (i) a natural person; or (ii) an SME.⁶  An EU-domiciled Credit Purchaser is only required to appoint a Credit Servicer (or other qualified entity) if the underlying borrower is a consumer. 

Credit Purchasers (EU and Third Country)

Credit Purchasers have relatively limited (but still important) obligations under the EU regime.  These include:

• the appointment of a Credit Servicer (or other qualified entity), as discussed above, including various technical requirements around the servicing contract;

• information and other obligations to the underlying borrowers;

• notification and information obligations to the CBI.

The EU regime and Credit Servicers

Persons engaged in credit servicing are significantly affected by the 2023 Regulations.  They will need to ensure that they consider the Regulations in detail and factor their provisions into business models and procedures.  Some of the more significant points for Credit Servicers are:

• Authorisation: the Regulations introduce a new requirement for authorisation as a “Credit Servicer” for any person carrying on “credit servicing” within the meaning of the Regulations (see the summary in the comparison table above). 
  
  An entity that is authorised as a “credit servicing firm” under the Irish regime is automatically deemed to be authorised as a Credit Servicer for the purposes of the Regulations. 
  
  Interestingly, while certain authorised entities (e.g. credit institutions and retail credit firms) are not required to obtain an authorisation as a Credit Servicer, those entities are not expressly deemed to be authorised as a Credit Servicer under the EU regime.  This distinction may be relevant in certain circumstances;  for example, if such an entity wished to passport its credit servicing business to another EU Member State.

• Segregated Accounts: if a Credit Servicer intends to receive and hold payments from underlying borrowers, the Credit Servicer must ensure those funds are held in a segregated account, for the benefit of the Credit Purchaser. 

• Borrower Obligations: the Credit Servicer (similar to the Credit Purchaser) has a range of information and other obligations to the underlying borrowers.

• Credit Servicer Agreement: the Credit Servicer (and Credit Purchaser) must have a credit servicing agreement, which must include at a minimum certain prescribed provisions (e.g. description of the services, the remuneration and a specific requirement for the fair and diligent treatment of borrowers).

• Outsourcing: prior notification requirements and some typical restrictions on the outsourcing of credit servicing activities apply.

• Passporting: an authorised Credit Servicer has the ability, under the EU regime, to passport its authorisation to other Member States.  This could create interesting business opportunities for Credit Servicers and also foster cross-border competition in the existing Irish market.

Penalties and remedial measures

The 2023 Regulations are designated as an enactment that comes within the CBI’s extensive administrative sanctions regime.  The Regulations set out “prescribed contraventions” of the Regulations which can be committed by a Credit Servicer, Credit Purchaser, and/or selling credit institution.  The Regulations also specifically note that the CBI may apply administrative penalties and remedial measures to members of the board or senior management of an entity who are responsible for an infringement.

Comment

All parties involved in NPL sales and credit servicing need to ensure that they have carefully considered the new EU regime and that their policies and procedures are compliant with the 2023 Regulations (where applicable).  While the EU regime offers interesting opportunities for the development of a competitive and effective EU-wide credit servicing market, it also presents a challenge for persons involved in the Irish market as a result of the existence of a dual EU- and Irish- credit servicing regimes.  It will be critical for sellers, purchasers and credit servicers to successfully navigate the complexity and ensure that the requirements of the applicable regime are adhered to.