German implementation of NPL Directive creates secondary market for non-performing loans

The German regulator has implemented the Directive (EU) 2021/2167 on Credit Servicers and Credit Purchasers (NPL Directive) via the Secondary Credit Market Act (Kreditzweitmarktgesetz – KrZwMG) for non-performing loans. The KrZwMG, which was enacted shorty before the deadline for transposition of the NPL Directive into national law on 30 December 2023, regulates dealings with non-performing loans (NPLs) in Germany from a supervisory perspective.

Secondary market for non-performing loans

The objective of the NPL Directive and KrZwMG is the creation of a functioning secondary market for non-performing loans. Markets for non-performing loans should distribute credit risks more efficiently and increase the resiliency of financial systems. The KrZwMG covers the obligations of purchasers and sellers of non-performing loans, the requirements on the provisions of credit services and the supervision of credit services institutions.

Non-performing loans are loans falling under the scope of Art. 47a of Regulation (EU) No 575/2013 (CRR) (i.e. defaulted loans and loans impaired in accordance with the applicable accounting framework, Art. 47a Abs. 3 CRR). According to the German Federal Financial Supervisory Authority (BaFin), non-performing loan agreements also cover claims that are terminated and expired, foreclosed, adjusted in value, or amortised. Therefore, market participants must verify whether the loan is non-performing in each individual case. Furthermore, non-performing loans must be acquired under contract law. Statutory purchase transactions are typically not covered.

Credit services as services requiring a licence

The KrZwMG covers four specific credit services, particularly the redemption and enforcement of payment claims due and other claims of the lender under the loan contract. This is an exhaustive catalogue of services. Such credit services may only be rendered by Credit Services Institutions (Kreditdienstleistungsinstitute – KrDI). By servicing NPLs, Credit Services Institutions should help to secure the liquidity of the banking sector. With the concept of the Credit Services Institutions, a further “institution” arises, governed by financial market regulation (the same as, for example, “credit institutions” or “payment institutions”).

If a company intends to provide credit services, it generally requires the authorisation of BaFin. CRR credit institutions and national credit institutions holding a licence for credit business are particularly exempt from this licence requirement. The required documents to be submitted for the licence application largely correspond to the requirements already known for applications under the German Banking Act (KWG) or the German Payment Services Supervision Act (ZAG) (e.g. proof of reliability and professional suitability of the general managers, suitable owners of qualifying holdings, viable business plan, etc.). BaFin and the German Central Bank (Deutsche Bundesbank) have published comprehensive guidance notices, overviews, and forms, facilitating the respective companies the preparation of licence applications.

Due to tight legal deadlines, credit servicers initially only had time until 16 February 2024 to notify BaFin of the intention to apply for a licence after the KrZwG coming into force. As this deadline was also too short for the supervisory authorities, BaFin accepted applications until 5 April 2024. Companies were allowed to provide services previously not subject to a licence requirement until 16 August 2024. Since 17 August 2024, they now require a respective licence from BaFin. Meanwhile, according to the BaFin-register, approximately 20 Credit Services Institutions have received a licence under the KrZwMG.

Provisions for credit purchasers and sellers

The KrZwMG also contains various duties of conduct, information and notification obligations for sellers of non-performing loans, credit purchasers and credit servicers. For example, the selling credit institutions must comprehensively inform a potential credit purchaser before conclusion of an agreement on the purchase of a non-performing loan contract about the loan contract or the claims. Additionally, credit institutions transferring non-performing loan agreements to a credit purchaser must regularly transmit information on credit purchasers to Deutsche Bundesbank. For the filing of the new reporting forms, a biannual frequency has been set (30 June and 31 December). According to BaFin, the first reporting deadline for submissions is 31 December 2024. Deutsche Bundesbank is currently developing the filing process.

Credit purchasers are also subject to special obligations. If the loan agreement was concluded with a natural person or an SME, the credit purchaser must mandate a credit servicer for providing credit services on the non-performing loan agreement . The credit purchaser must also notify the supervisory authorities of the name and the address of the credit servicer no later than the day on which the provision of credit services commences. Furthermore, there are regular notification obligations regarding the transferred loan agreements or claims arising.

Development on EU-level

The implementation of the NPL Directive in Germany is flanked by various legal acts at the EU level. The material Implementing Regulation (EU) 2023/2083 dated 26 September 2023 established implementing technical standards (ITS) for the use of standardised data templates by credit institutions when selling or transferring non-performing loan agreements that are included in a portfolio held for sale or transfer. This provides potential purchasers with all necessary information to enable them to properly assess the value of the creditor's rights under the non-performing loan agreement or the value of the non-performing loan agreement and the likelihood of recovery of the value. The application of such data templates to loan agreements should reduce information asymmetries between potential purchasers and sellers of loan agreements and contribute to the development of a functioning secondary market in the EU (cf. Art. 16 NPL Directive).

Based on Art. 5 (2) of the NPL Directive, the European Banking Authority (EBA) also issued guidelines for the assessment of management and administrative bodies of credit servicers to ensure they possess adequate knowledge and experience. The guidelines define the criteria for assessing the collective knowledge and experience of the corporate bodies. This is based on a comparative assessment of the individual members by the credit servicers. Where EU member states must ensure that the competent authorities prepare and administrate an index or a national register of all credit servicers providing services in their territory, the EBA, based on Art. 9 of the NPL Directive, issued guidelines on national lists or registers of credit servicers on 5 March 2024. These guidelines define which type of information the national lists and registers must contain to increase transparency for credit purchasers and borrowers, and create identical competition conditions throughout the EU. With the implementation of Art. 24 of the NPL Directive, providing that member states ensure that financial intermediaries establish and maintain efficient and transparent procedures for handling complaints of borrowers, in July 2024 the EBA updated and extended the existing Joint Committee Guidelines on Complaint Handling from the year 2014.

Actual growth of secondary credit market remains to be seen

Various industry associations have already adjusted their NPL-model contracts to the KrZwMG and the NPL Directive and developed a model-credit services agreement. This is intended to support the participants in the NPL market in meeting the requirements of the KrZwMG and to achieve a certain degree of standardisation in the NPL market.

Whether the provisions of the KrZwMG will revive and expand the secondary lending market as intended by the NPL Directive cannot yet be answered. Current market indicators such as the NPL-Barometer of Bundesvereinigung Kreditankauf und Servicing (BKS) predict a total NPL volume of over EUR 40 bn. in bank balance sheets for Germany until the end of 2024. The EBA reported NPL-holdings in German banks of EUR 39.8 bn. for March 2024 and an increase of EUR 8 bn. compared to the previous year.

There are various indicators that banks in Germany have started with targeted credit sales on the secondary market. By selling receivables to credit servicers, companies are able to take them off their balance sheets, concentrate on their core business and improve their rating. As soon as the price expectations of the seller and purchaser side coincide, it is more likely that there will be transactions and that the secondary credit market will continue to be revitalised.

For more information on Germany’s implementation of the NPL Directive and its impact on a secondary market for non-performing loans, contact your CMS client partner or the autor Moritz Gerstmayr.