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ESBG response to European Commission NPL consultation

ESBG response to European Commission NPL consultation

​​​​​​​​ESBG final draft response to the European Commission consultation
on the development of secondary markets for non-performing loans
​distressed assets and protection of secured creditors from borrowers' default

​European Savings and Retail Banking Group, ESBG Transparency Register ID 8765978796-80


Published: 23 October 2017​


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ESBG thanks the European Commission for the opportunity to provide its comments about the development of secondary markets for non-performing loans and distressed assets and protection of secured creditors from borrowers' default.

Responses to the Public consultation on the development of secondary markets for non-performing loans and distressed assets and protection of secured creditors from borrowers' default:

 

SECTION I: SECONDARY MARKET FOR LOANS


  • Transfer of loans


Question 1 – Would you consider the current size, liquidity and structure of secondary markets for NPL in the EU an obstacle to the management and resolution of NPLs in the EU? If yes, would you consider such obstacle to be significant?

In ESBG's opinion, secondary NPL Markets in Central and Eastern Europe (CEE) are currently inefficient or almost non-existent, but steadily growing and attracting new investors with an appetite for the risk return profile for this asset class. Liquidity is limited though growing due to some jurisdictions facing legal, regulatory, or tax scrutiny preventing investors from entering or expanding coverage of the respective markets.

The current state of secondary NPL Markets prevents an efficient management and resolution of NPLs but the obstacles are not severe. In some jurisdictions, the requirement of licensing the potential buyers has limited the involvement of investors.

 

Question 2 – What are the key considerations for banks in deciding whether loan sales should be a significant part of their strategy to manage its NPLs?

In answering please specify: 

- Bank internal factors (i.e. any factors inside the bank including the type and characteristics of the NPL portfolio, management capacity etc.)

- External factors (i.e. any factors outside of the bank that are important considerations in this context).

Internal factors:

  • NPL level, NPL ratio, emergency measure to deleverage;
  • Characteristics of NPL portfolio (age structure, collateral, repayments by the debtors, etc.);
  • Recovery potential vs capacity and time to recovery vs. market price for NPLs;
  • Internal processing capacities and related cost base for the workout internal units.

 

External factors:

  • Investor appetite, market liquidity;
  • Reputational risk;
  • Legal environment/consumer protection & enforcement possibilities;
  • Tax legislation;
  • Functional secondary market – interest, prices etc.

 

Question 3 – What would be the best way(s) of attracting a wider investor base to secondary loan markets, especially for non-performing loans? 

 

In ESBG's view, the following measures could be adopted:

  • Decrease the due diligence complexity - partly caused by the multi jurisdiction situation: i.e. convergence of the legal framework for NPL resolutions, clear tax regime and predictability for its changes; convergence of the legal documentation for new loans;
  • Increase the data quality of NPLs subject to sale, development and availability of national data bases with granular information about real estate market transactions. Also the standardization of NPL sale legal documentation;
  • Provide diverse legal investment instruments (e.g. equity vs. debt instruments, legal form of investment vehicles, etc.) to accommodate a wider range of investors (e.g. pension funds);
  • Overcome fragmentation and ideally reduce the asymmetry of information, portfolio transactions may become larger and more transparent and this could allow various investment structures that would fit the risk return profile of additional investor types. We fear that reducing the asymmetry of information will be difficult because potential investors will have to access the internal systems of the bank which we believe is unrealistic.
  • Homogenization/fiscal clarification, currently almost all operations are closed via direct sale, but there are other potential structures that are fiscally more efficient and that could improve prices, reducing the difference between bid/ask. However other types of operations present some “fiscal doubts" and therefore are discarded.
  • Simplicity of transmission: in many cases the transmission process is complicated and slow, which affects the price and the ability to execute the operation, in particular, the most outstanding issues would be registration issues in the name of buyers, problems in procedural succession on the part of the courts and oppositions of the debtors to the transfer.

 

Question 4 – In order to widen the investor base, please specify:

- Which incentive(s) should be given? 

- Whether certain obstacles to widening the investor base should be removed?

 

In ESBG's opinion the following incentives could be given:

  • Stable legal environment (legal certainty);
  • Enforceability of the rights by the creditors;
  • Supportive tax regime (tax incentives).

 

And the following obstacles should be addressed:

  • Licensing requirements for NPL buyers should be simplified and harmonized or eventually cancelled;
  • Clear legal and regulatory principles for the transfer, ownership and management of NPLs by banks as well as non-bank investors.

 

Question 5 – What are the specific advantages to the development of secondary markets when the acquiring investor is a bank, an investment fund or another type of entity? 

In particular, would you see specific advantages for:

- Helping banks overcome legacy assets;

- Creating investment opportunities for specialised investors? 

ESBG believes that the development of the NPL secondary market would definitely support banks to overcome legacy assets in a competitive and transparent manner. In our view, our specialised investors (banks, investment funds etc.) would secure better prices for the NPLs through diverse investment structures allowing tailored risk/return structures (e.g. structured transactions such as securitisation like deals, cf. Italy for reference) for a wider range of investors.

 

Question 6 – What are the main concerns linked to each of these investor types?

  • Reputation (related to the types of resolution strategies employed or servicing partners used for portfolio operational management);
  • Credibility;
  • AML;
  • Compliance.

 

Question 7 – What are potential benefits and risks from a public policy point of view when considering the appropriate legal framework for secondary markets for loans, and especially NPLs? 

Please rank the following dimensions (in order of importance): 

- Debtor protection;

- Privacy; 

- Data secrecy; 

- Promoting increased market size and depth and equal treatment of investors.

Benefits:

  • More robust banks;
  • Higher market liquidity and thus greater opportunity to deleverage;

Risks:

  • Requirement to sell curable clients to maintain NPL ratios.

Ranking:

  1. Debtor protection;
  2. Data secrecy;
  3. Privacy;
  4. Promoting increased market size and depth and equal treatment of investors.

 

Question 8 – How can one best strike the balance between such dimensions?

ESBG believes that the following measures would make the case for balance:

  • Obligatory and unified regulation for all investors in the EU
  • Accessible market for professional NPL investors
  • Transparency requirements for all market participants

 

Question 9 – Do differences in these benefits and risks across Member States justify national differences in the framework for secondary markets for loans?  If yes, in which way?

In ESBG's view, differences in the benefits and risks across Member States do not justify national differences in the framework for secondary markets for loans.

 

Question 10 – Would you consider current rules applicable in Member States pertaining to secondary markets for NPL in the EU a significant obstacle to the further development of these markets? 

We believe that in most cases no significant obstacles exist, while in other cases the applicable tax regime is a major obstacle.

 

Question 11 – What is the most suitable manner to protect a debtor in the case of transfer of a loan and/or collateral by the creditor to a third party?

ESBG considers that a unified code of conduct would be the best way to protect debtors, meaning that the same debtor protection rules should be applied to the NPL buyer as were applied to the initial creditor (the bank).

 

Question 12 – What are the (potential) advantages from specialisation across jurisdictions or asset classes?

ESBG believes that specialisation may potentially bring  better pricing for NPLs (assuming a competitive market), a more professional servicing approach to the purchased NPLs, and also build up the required infrastructure (market participants, platforms, transparency standards) in the respective jurisdictions and potentially also across jurisdictions.

 

Question 13 – Are you aware of obstacles to operating in secondary markets across national jurisdictions? Would you consider these obstacles to be significant, and/or influence your geographical scope of business operations?

We do not see particularly critical obstacles (exceptions for some jurisdictions apply). However, a united regulatory framework across the EU, as well as the harmonisation of legal provisions would be helpful.

 

Question 14 – Do you consider that an EU regulatory framework (Directive or Regulation) regulating certain aspects of the transfer of loans would be useful? What are in your view the key elements that should be addressed in such a framework?

In ESBG's view, the unification of legal environments regarding NPL secondary markets across EU countries might be helpful. Uniform rules and procedures will create grounds for better transparency and a more professional approach. In addition, this would increase the investor's base even in smaller markets.

In this regard, we believe that key elements to be addressed are:

  • Debtor protection;
  • Outsourcing management;
  • Regulatory framework.

 

Question 15 – Please provide any other comments that you find useful in relation to this section.

n/a.

  • Third party servicers

 

Question 16 – What are the advantages of having access to third-party loan servicers in terms of secondary loan market efficiency?

In particular, do you see specific advantages for:

- Helping banks overcome legacy assets;

- Creating investment opportunities for specialised investors? 

ESBG believes that more specialized loan servicers could improve collections, therefore increasing achieved NPL prices. Moreover, specialized loan servicers allow the possibility for banks to outsource specific parts of their portfolios (according to servicer specialisation) in order to achieve better results while streamlining internal workout organisation.

 

Question 17 – Are there any obstacles for banks and non-bank investors to have access to third-party loan servicers?

If yes, please specify the nature of these obstacles, i.e.: 

- Regulatory; 

- Legal;

- Other.

 

Generally speaking, we don't see obstacles in most of the CEE markets. However, in smaller markets few loan servicers are available.

 

Question 18 – What are the advantages and risks of outsourcing specific activities to third-party loan servicers compared to internal workout of loans? Please be concrete as to the activities that have been outsourced and why this has proved to be beneficial or not.

Advantages:

  • Special knowledge is necessary based on individual situations/problems, also a different approach is needed in the cases of corporate clients, project financing, retail portfolios, etc. Therefore, we think it is better to be able to “buy'' special services/activities from a specialised third-party rather than to build up internal large structures of specialists for possible future situations.

Risks:

  • Risks mainly relate to data secrecy to be covered between the bank and the third-party and to the active monitoring/control process/strategy approval process to be set-up between the parties.

Outsourced activities:

  • Hiring of legal counsel - advantage (expertise, elimination of reputational risk);
  • Investigators - IT structure, expertise;
  • Auction companies - platform for collateral sale defined by law;
  • Trustee structure - restriction on asset takeover.

 

Question 19 – What are the main risks for debtor protection, in particular for the households in financial difficulties, which are linked (directly or indirectly) with the practices of the third-party loan servicers?

ESBG sees risks related to the fact that in some jurisdictions there are different (lighter) regulatory frameworks for third-party servicers vs banks.

 

Question 20 – In the markets and jurisdictions that are relevant to you, is third-party loan servicing mainly focused on management of performing loans, non-performing loans, or both? Please describe the advantages and drawbacks of both situations.

In the market relevant to some of our members, third-party loan servicers are mainly focused on the management of NPLs.

 

Question 21 – Do, in your experience, third-party loan servicers concentrate on a specific asset class or does their asset mix tend to be more diverse? Please describe the advantages and drawbacks of both.

In our view, at the beginning, third-party loan servicers were focused on retail - unsecured consumer loans, but lately they have started to cover the entire NPL range - even standalone individual tickets.

 

Question 22 – What specific services are offered by third-party loan servicers, in the markets and jurisdictions that are relevant to you? Which services do you consider to be most instrumental in terms of market efficiency? Please be as concrete as possible.

In the market relevant to some of our members, mainly debt collection services are provided, while some are offering due diligence services.

 

Question 23 – Do you consider that an EU regulatory framework (Directive or Regulation) regulating third-party loan servicers would be useful? If yes, should such legal framework include rules on: 

- The licensing requirements for such servicers;

- The supervision of such servicers?

 

Are there any other elements that should be covered by such a legal framework?

ESBG considers that an EU regulatory framework (Directive or Regulation) regulating third-party loan servicers would be useful. In one of our Members States, such regulation is already in place - in the case of consumer loans (licensing of third parties for loan purchase).

In our view, both licensing requirements for such servicers and the supervision of such servicers would be helpful rules from a debtor protection perspective (but not to limit the enforcement of creditor's rights).

 

Question 24 – Please provide any other comments that you find useful in relation to this section.

n/a.

  • Removing possible constraints to the development of secondary markets for loans

 

Question 25 – Are you aware of significant differences in business practices in different markets and jurisdictions, for example through voluntary codes of conducts, industry standards, etc.? If yes, does this, and how, constitute an obstacle to your business?

ESBG is aware of significant differences in business practices in different markets and jurisdictions. In this regard, the different tax regulation and tax treatment across  Member States of the NPL sellers hinders an effective disposal process of NPLs and increases costs for NPL sellers.

 

Question 26 – As a market participant, are you actively partaking in several national markets? If so, do you encounter obstacles to operate internationally in an efficient manner? Please specify.

Some ESBG members actively partake in several national markets.

 

Question 27 – In the markets and jurisdictions that are relevant to you, are there unduly onerous legal restrictions in place:

a. On the sale of loan portfolios, including to non-bank entities? Please specify these restrictions and their impact;

b. On banks that want to outsource some or all loan servicing functions to thirdparties, including to non-bank entities. Please specify those restrictions and their impact.

 

Such undue restrictions could for example concern the areas of debtor protection, privacy, data secrecy, equal treatment of investors. If yes, could the removal of such undue requirements be considered? Please specify where such an approach could be contemplated and describe the advantages and drawbacks thereof.

 

  1. There are no significant restrictions: In one Member State - in the case of selling an NPL portfolio with a nominal value of more HRK 300 million, the National Bank has to approve the transaction. In another Member State, to sell NPL consumer loans - licensing of third parties for loan purchase is necessary. For the sale of NPL corporate loans there is a restriction in providing information in the Going Concern scenario, whereas the consent of the debtor is necessary. In another Member State, the NPL buyer must have the National Bank license for loan-buying activities.  In a last Member State, the existing restrictions refer to: (i) For retail loans - there are provisions which limit the sale of receivables only to banks or non-banking financial institutions, except for the cases where the loans are qualified as NPLs and accelerated or under enforcement; (ii) For corporate loans - according to the National Bank guidance, only loans qualified as “loss" may be assigned to non-licensed entities;

b.   n/a

 

In some CEE markets, the consumer loan protection is very strict. We think that softening these restrictions would help the NPL secondary market.

 

Question 28 – What specific aspects could be improved, in order to facilitate existing cross-border activities and/or entry into new markets? Going beyond mere facilitating, what would accelerate the resolution of NPLs?

In ESBG's opinion the following aspects could be improved:

  • A united regulatory framework across the EU;
  • More favourable tax regulations regarding write offs in several jurisdictions, like Croatia for instance.

 

Question 29 – Do you consider that the development of a common EU approach would have an added value in the areas of:

a. The sale and transfer of loans?

b. Loan servicing by third parties?

 

If yes, which areas so far regulated under national law should be the focus of such harmonisation efforts? Potential focal points could include third party servicers' licensing regimes, capital requirements, and trade secrecy and consumer protection.

 

Are there other actions that could be taken at EU level that would yield significant benefits for market efficiency (for example EU guidance or recommendations, the creation of a central register of loan servicers, etc.)? 

 

  1. The sale and transfer of loans.

 

Question 30 – Please provide any other comments that you find useful on this section. 

 

n/a.

 

SECTION II: POTENTIAL MECHANISM TO BETTER PROTECT SECURED CREDITORS FROM BORROWER DEFAULT

 

  • The rationale for a possible EU accelerated loan security

 

Question 31 – Do similar forms of out-of-court enforcement allowing banks to enforce secured loans exist in your country?

If yes, 

- Please describe these;

- What are the benefits of these provisions for banks in terms of enforcement and value recovery from NPLs?

- What are the main risks and challenges arising from these forms of out-of-court enforcement tool?

In some jurisdictions this is true, while in others not. However, instruments are not similar across jurisdictions.

In general, these provisions are more time efficient and less costly, however, in some jurisdictions, the debtor has means to defend himself, including via court protection.

The challenges vary between jurisdictions, for example, the need for cooperation of the debtor (which is problematic), to frequent amendments to the law, valuation issues, etc. In ESBG's view there is also the risk that small exposure lenders may jeopardize a larger restructuring.

 

Question 32 – Do you see benefits in ensuring that every Member State makes available an instrument along the lines of the 'accelerated loan security' facility?

In our opinion, by all means.

 

Question 33 – Do you see the accelerated loan security as a valuable instrument to avoid future accumulation of NPLs in banks' balance sheets?

In our opinion, by all means.

 

  • Functioning of a possible accelerated loan security instrument

 

Question 34 – Do you agree with the possible main features of an accelerated loan security as described above?  If not, what are the features that you do not agree with and why?

We do agree, but the question arises around valuation, valuation vs claim, and the exclusion of some categories.

 

Question 35 – What are the (additional) features that an accelerated loan security should have in order to enhance its effectiveness in avoiding the encumbrance of bank balance sheets with further NPLs in terms of functioning of the mechanisms? 

In ESBG's view, an accelerated loan security should have a clearly defined process and rules, a potential cross-border enforceability, valuation and potential tax issues.

 

Question 36 – Do you agree with the proposed restriction on the scope of a possible accelerated loan security instrument to loans to businesses and corporates, and on the exclusion of primary residence of borrower even in the case of these loans? Please explain the reasons for your answer. 

Most ESBG members see no benefit in restricting the instruments to corporate borrowers, as there is a substantial NPL stock in retail. However, some acknowledge the more sensitive nature of dealing with retail NPL, in particular with “first home" cases.

 

Question 37 – In what ways could an accelerated loan security be rendered potentially advantageous to borrowers to ensure its willing take-up by debtors (e.g. possible discharge of debtors in case the value of the assets becomes less than the debt)?

In ESBG's view, if discharging debtors could facilitate cooperation, which would lead to faster NPL resolution and potentially higher recoveries (in net present value), which in turn should reflect lower fees and interest rates for new loans, it could also create moral hazard and propensity to misuse the discharge, especially in times of crisis, when the value of collaterals goes down and debtors run out of money.

Focussing on “potential advantages" to borrowers to insure their willingness for giving in payment (datio in solutum) as a possible accelerated loan security instrument, following aspects should demonstrate that this is not a panacea:

-           By introducing a “Giving in payment" option to the benefit of mortgage holders (which could give collateralised property back to banks in exchange for final termination of their contract with no further penalty), we are facing the risk of causing instability and uncertainty for PAST contracts. For the banks it translates in systemic risk increase and for the borrowers it stimulates moral hazard amongst them.

-           For FUTURE contracts it would lead to a change from “Lending based on credit risk" to “Asset Financing":

Until now, a bank grants a loan to a person and that person is obliged to repay the full value of the loan and interest. The borrower is personally liable and if he does not pay, his creditor can gain access to his assets through legal procedures. Before granting a loan the bank will analyse the financial situation and history of the borrower and assess the risk of non-payment. On the basis of this credit risk analysis the bank will be willing to lend to the borrower.

Under “Giving in payment" this all may change. The borrower can at any time repay the loan by transferring the ownership of the house to the bank. So, when assessing the risk, the bank needs to look at the risk that the borrower will stop repaying and “send the keys to the bank". This risk depends mainly on the value of the house in relationship to the outstanding of the loan and less if the borrower can pay or not.

Simply put, the bank doesn't grant a loan to an individual anymore, but finances an asset, and the main risk is not the individual borrower and his financial situation, but the value of the asset.

In order to assess this risk, the bank will look especially at the value of the financed house and make an assessment of the potential fluctuations in value and the discount that needs to be applied if the bank would have to sell the asset, once given in payment.

 

Question 38 – How should an accelerated loan security instrument be designed in order to be consistent with the preventive restructuring framework and the insolvency law of your country (e.g. stay on enforcement actions, cram-down on minority creditors, avoidance actions, ranking of creditors)? In your view, what would be the main obstacles to ensure such consistency?

ESBG would like to stress that several points need to be addressed, such as:

  • The definition of core vs non-core assets; at least for the latter category, insolvency proceedings should impede on the execution of the instrument;
  • Instrument should be un-appealable to prevent lengthy proceedings.

 

Question 39 – How should an accelerated loan security instrument be designed in order to be consistent with the public and private law rules and principles (including for instance property law, public and private law) of your country? In your view, what would be the main obstacles to ensure such consistency?

Getting property rights in land register would be a useful measure in this regard. The pre-requisite is general acceptance of the accelerated loan security instrument in national regulations and the alignment of this instrument with existing pre-insolvency and insolvency procedures and existing law. ESBG believes that the main obstacles could be the inconsistency with existing legislation.

 

Question 40 – How should an accelerated loan security instrument be designed in order to be consistent with the existing national collateral legal framework?

ESBG would like to stress that an accelerated loan security instrument has to be aligned with and incorporated in existing national legislation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

About ESBG (European Savings and Retail Banking Group)

 

ESBG – The Voice of Savings and Retail Banking in Europe

ESBG brings together nearly 1000 savings and retail banks in 20 European countries that believe in a common identity for European policies. ESBG members represent one of the largest European retail banking networks, comprising one-third of the retail banking market in Europe, with 190 million customers, more than 60,000 outlets, total assets of €7.1 trillion, non-bank deposits of €3.5 trillion, and non-bank loans of €3.7 trillion. ESBG members come together to agree on and promote common positions on relevant regulatory or supervisory matters.


European Savings and Retail Banking Group – aisbl

Rue Marie-Thérèse, 11 ■ B-1000 Brussels ■ Tel: +32 2 211 11 11 ■ Fax : +32 2 211 11 99

Info@wsbi-esbg.org ■ www.wsbi-esbg.org

 

Published by ESBG. October 2017


​ See .pdf version >>


European Supervisory Authorities (EBA-ESMA); European Institutions