The Consumer Voice in Europe

SECONDARY MARKET FOR NON-PERFORMING LOANS

The European Commission’s proposal is a bad deal for

distressed borrowers

Contact: Farid Aliyev – financialservices@beuc.eu

BUREAU EUROPÉEN DES UNIONS DE CONSOMMATE URS AISBL | DER EUROPÄISCHE VERB RAUCHERVERBAND
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Ref: BEUC-X-2018-068 - 09/07/2018

1
 Why it matters to consumers
The European Commission has proposed to create a single secondary market for non-
performing loans. Banks would be able to easily sell loans which have soured to third party
investors, including the so-called vulture funds established in any EU country or outside
the EU. This initiative is against the interests of borrowers who are in financial difficulty.
They would be exposed to vulture funds and debt collectors located in other countries, and
potentially to even worse treatment and repossession of homes.

Summary

Last March, the European Commission proposed a package of measures to remove non-
performing loans (NPLs) from banks’ balance sheets. The narrative is that high levels of
NPLs reduce banks’ profitability and prevent them from lending more to businesses and
consumers, which in turn slows down EU economic growth.

The Commission proposed to create a single European secondary market for NPLs to enable
banks to easily sell off loans taken out by businesses and consumers to third party investors
and credit servicers (debt collectors) located anywhere within the EU. This is extremely
dangerous for retail borrowers.

While it is commonly acknowledged that the NPL problem across the EU stems to a large
extent from the past financial crisis and irresponsible lending practices by financial
institutions, distressed borrowers are unacceptably pressed to foot the bill. A single EU
secondary NPL market would open up new business opportunities for third-party credit
servicers and investors, including non-EU investors, while distressed borrowers across
Europe would be exposed to firms established abroad with potentially worse treatment and
greater numbers of home repossessions. Vulture funds and debt collectors have a bad
reputation because of their unfair and aggressive practices towards distressed retail
debtors. Therefore, BEUC advocates for the exclusion of consumer loans from the scope of
the Commission’s proposal.

There are alternative, sustainable ways of addressing the NPL problem, while protecting
borrowers in financial difficulties. Banks usually sell NPLs to third-party investors at hugely
discounted prices. As a minimum, the concerned borrowers should be able to purchase
their own debt at the discounted price, instead of it being sold to third-parties.

Besides that, strict responsible lending obligations should be imposed on all credit providers
and intermediaries in future, so that loans are granted only to those borrowers who can
afford them.

Finally, the activity of third-party credit servicers and credit investors needs to be
restricted. Market actors who maximise their profits on the back of vulnerable consumers
and businesses should not be supported, but should, instead, face restrictions.
1. What is it all about?

A decade after the start of the global financial crisis, the EU economy has not fully
recovered. The key solutions of the crisis, such as structural reform of banks have not
been tackled yet, while many legacies of the crisis remain unsolved. One of those legacies
is the accumulation of problematic loans – the so-called non-performing loans (NPLs) – on
banks’ balance sheets.

According to a technical standard adopted by the European Banking Authority in 2014, a

loan is classified as non-performing when repayments are more than 90 days past the due
date or the debtor is assessed as unlikely to pay.1 The total volume of NPLs across the EU
is at around EUR 910 billion.

Consumer NPLs (unsecured loans and mortgage credit) constitute around one third of that
amount.2 There is little data on the composition of consumer NPLs, i.e. the respective
shares of mortgage credit and unsecured loans is unclear. The volume of consumer NPLs
is particularly high in the following Member States: Bulgaria, Ireland, Greece, Croatia,
Italy, Cyprus, Hungary, Portugal, Romania, Slovenia.

In March 2018, the European Commission proposed a package of measures to tackle the
pending NPLs and to prevent their future accumulation. The Commission’s proposal is
based on the assumption that high levels of NPLs reduce banks’ profitability and prevent
them from lending more to businesses and consumers, which in its turn slows down EU
economic growth.3 Hence, reducing the volume of NPLs is high on the EU’s political agenda.

As part of the package, the Commission proposes a directive on credit servicers, credit
purchasers and the recovery of collateral which, inter alia, aims to create a single
European secondary market for NPLs where banks can easily sell their NPLs to
investors and make use of specialised credit servicers. The secondary market would
cover both consumer and business loans.4

According to the Commission’s analysis, the EU secondary market for NPLs is currently
fragmented along national borders. This means banks cannot easily sell NPL portfolios to
third-party loan servicers and investors within the EU market. It therefore proposes to
grant an EU passport to credit servicers who act on behalf of third-party investors. This
would be an authorisation to provide their services across all Member States based on a
licence obtained in any Member State.

1
‘EBA Final draft technical standards on Supervisory reporting on forbearance and non-performing exposures
under article 99(4) of Regulation (EU) No 575/2013’, EBA, 24 July 2014,
https://www.eba.europa.eu/documents/10180/449824/EBA-ITS-2013-
03+Final+draft+ITS+on+Forbearance+and+Non-performing+exposures.pdf
2
‘Second progress report on the reduction of non-performing loans in Europe’, European Commission, 14 March
2018, http://ec.europa.eu/finance/docs/policy/180314-communication-non-performing-loans_en.pdf
3
‘Non-performing loans package’, European Commission, March 2018, https://ec.europa.eu/info/business-
economy-euro/banking-and-finance/financial-supervision-and-risk-management/managing-risks-banks-and-
financial-institutions/non-performing-loans-npls_en
4
‘Proposal for a directive on credit servicers, credit purchasers and the recovery of collateral’, European
Commission, 14 March 2018, https://ec.europa.eu/info/law/better-regulation/initiatives/com-2018-135_en
The following measures are also part of the Commission’s NPL package: (i) Provide banks with a mechanism of
out-of-court value recovery from secured loans. This mechanism will apply to business loans. Consumer loans
are excluded. (ii) Proposal for a regulation introducing common minimum capital requirements for newly
originated loans that become non-performing. The aim is to prevent future NPL crisis from happening; A non-
binding guidance to national authorities on how they can set up national asset management companies (bad
banks) dealing with NPLs.
2. Who are credit servicers and credit purchasers?

‘Credit servicers’ and ‘credit purchasers’ are important players in secondary markets for
NPLs. Credit purchasers are specialised firms which purchase portfolios of distressed debt
from banks at a discounted price, and then try to collect the total amount of debt, plus
fees and penalties, from the debtor. Credit servicers act as intermediaries on behalf of
credit purchasers. They are in charge of collecting the money from debtors.

Most credit purchasers are specialised funds, known as ‘vulture funds’. Almost all the big
actors in this market are American companies. They purchase NPL portfolios from banks
at hugely discounted prices, around 40%-50% for secured loans (mortgages), and up to
90% for unsecured loans.5

Vulture funds and debt collectors have a bad reputation because of their unfair and
aggressive practices towards distressed debtors - consumers, businesses, and even
governments. For example, it is widely known how vulture funds have made juicy profit
margins using legal proceedings against states in financial distress. It is worth mentioning
that in 2015, Belgium adopted a law strictly limiting the business of vulture funds as regard
government debt. Vulture funds are worried that similar laws might be replicated in other
countries. Therefore, one of the biggest US vulture funds appealed to the Belgian
constitutional court against this law.6

3. BEUC demands

a. No promotion of an EU secondary market for non-performing

consumer loans

There should be no single secondary market for consumer NPLs. The

Commission’s proposal is mainly focused on the soundness and profitability of
banks, while consumer interests are side-lined. Furthermore, the proposal would
open up new business opportunities for third-party credit servicers and investors,
including non-EU investors, while distressed individual borrowers across Europe
would be exposed to those firms established abroad and potentially to bad
treatment and home repossessions. We therefore call on the European
Parliament and the Council to exclude consumer loans (personal credit and
mortgage credit) from the scope of the directive.

◆ NPL definition interfering with national legislation?

According to the proposal, loans are classified as non-performing when repayments are
more than 90 days past due or the debtor is assessed as unlikely to pay. Yet, this definition
may be incompatible with national laws aimed at better protecting distressed debtors.

5
‘Impact assessment on the development of secondary markets for non-performing loans by removing of undue
impediments to loan servicing by third parties and the transfer of loans’, European Commission, 14 March 2018,
pp. 114-116, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=SWD%3A2018%3A75%3AFIN
6
‘Les fonds vautours tentent de faire la loi en Belgique’, 15 March 2018, http://www.cadtm.org/Les-fonds-
vautours-tentent-de
For example, our German member vzbv reports that in Germany, lenders may not cancel
a credit contract due to missed payments unless certain criteria are met. These criteria go
far beyond a simple time limit in order to prevent unnecessary cancellations.7 The criteria
to be met are the following:

- a minimum of two consecutive entirely missing or inadequate payments have

occurred plus;
- with credits relating to residential property, at least 2.5% of the credit amount is
overdue (higher percentages apply here with other forms of consumer credit) plus;
- the consumer borrower has been warned and given a final two-week timeline to
settle the open payments before the actual cancelling of the contract is enacted.
Furthermore, the lender is obliged to offer at the latest, with this notice, an
invitation to discuss the contract in order to find a solution by a mutual consent.

The above provisions are perfectly in line with Article 28 of the Mortgage Credit Directive
which says that “Member States shall adopt measures to encourage creditors to exercise
reasonable forbearance before foreclosure proceedings are initiated.” 8 The EU-level NPL
definition seems, however, to ignore national consumer-protection provisions.

◆ NPL volumes declining: The creation of a secondary market for NPL is

unnecessary
The total volume of NPLs across the EU is at around EUR 910 billion. At the end of
September 2017, it declined to 4.4% of the total volume of loans, compared to 5.4% one
year earlier. The average ratio of NPLs has decreased by more than one third since 2014.
A similar trend happened with regard to consumer NPLs: 4.4% in the third quarter of 2017
versus 5.5% in the third quarter of 2016.9

This progress has been made possible by the joint efforts of the Commission, European
Central Bank, European Banking Authority and national authorities, who have incentivised
banks to manage and reduce their NPLs, and pushed for bank restructuring and liquidation,
where needed.

One can assume that the existing downward trend in NPL volumes will continue and
ultimately reduce them to insignificant levels in the coming years. Thus, a creation of the
EU secondary market for NPLs is unnecessary.

◆ Consumers are not responsible for the NPL crisis

To a large extent, the NPL issue in Europe originated with the 2008 financial crisis, the
resulting economic crisis and huge unemployment levels. Financial institutions played a
significant role in that respect. For example, the real estate bubbles in several Member
States were caused by irresponsible lending practices and over-reliance on the growth of
house prices. Another example is the foreign currency loans crisis in Central and Eastern
Europe which happened because consumers were pushed to take loans in foreign
currencies that were promoted at lower interest rates than loans in local currencies.

Individual consumers are not responsible for the financial crisis or the NPL crisis. On the
contrary, millions of consumers have been victims of the reckless behaviour of financial
firms. The Commission’s proposal is disproportionate as it aims to address the NPL issue

7
‘German Civil Code Bürgerliches Gesetzbuch’, § 498 BGB
8
‘Directive 2014/17/EU on credit agreements for consumers relating to residential immovable property and
amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010’, Art 28, https://eur-
lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32014L0017
9
‘Second progress report on the reduction of non-performing loans in Europe’, European Commission, 14 March
2018, http://ec.europa.eu/finance/docs/policy/180314-communication-non-performing-loans_en.pdf
partly on the back of distressed borrowers who will be exposed to the pressure of vulture
funds and debt collectors.

◆ The Commission’s narrative doesn’t stand up the scrutiny

The two main theses behind the Commission’s proposal are:
1. high NPL volumes impact banks’ profitability and stability;
2. high NPL volumes prevent banks from granting more loans to businesses and
consumers.

While the first argument seems obvious (this is actually the essence of the EC initiative),
the second one is arguable.

Numerous academic and empirical studies question the level of the financial sector’s
contribution to the real economy and growth. Some even indicate that the growth of the
financial sector comes to the detriment of non-financial sectors that are more value-
creating, e.g. many high skilled people are more attracted to the high salaries paid by
financial institutions than by salaries in other sectors.10 Thus, it is questionable whether
banks would lend more to the real economy in the absence of the NPL problem, or whether
those funds would be rather allocated to speculative activities or distributed to
shareholders.

◆ The Commission’s impact assessment is surprisingly vague on the impact

on distressed borrowers
The Commission’s proposal is mainly focused on the soundness and profitability of banks.
Consumer interests seem to be side-lined.

The impact assessment accompanying the legislative proposal offers a detailed analysis of
barriers to cross-border sales of NPLs portfolios by banks, information about how to
overcome those barriers, and a calculation of efficiency gains for banks, third-party credit
servicers and NPL investors.

However, when it comes to the potential impact on distressed borrowers, the impact
assessment states that “The potential impact on highly indebted households is hard to
foresee as it will depend on the behaviour of loan servicers. If the latter help indebted
social groups more than banks to arrive at a more suitable payback profile of their loans,
debtors may benefit. The opposite is possible if loan servicers apply existing debtor
protection rights in a stricter way than banks.” 11

The above suggests that consumer protection is not a high priority in this legislative
proposal.

◆ There are bad experiences of consumers with debt vultures

10
‘Does London’s financial centre boost or harm the UK economy?’, 25 February 2014,
https://www.theguardian.com/business/economics-blog/2014/feb/25/london-financial-centre-boost-or-harm-
uk-economy
11
‘Impact assessment on the development of secondary markets for non-performing loans by removing of
undue impediments to loan servicing by third parties and the transfer of loans’, European Commission, 14
March 2018, page 77, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=SWD%3A2018%3A75%3AFIN
According to the European Banking Authority, since 2013, NPL transactions were observed
in only 13 (Czech Republic, Germany, United Kingdom, Croatia, Ireland, Italy, Latvia,
Norway, Poland, Portugal, Romania, Slovenia, Spain) out of 27 countries surveyed.12

Some Member States have rules in place regulating and/or restricting the activity of credit
servicers and credit purchasers. The Commission considers that those specific rules
constitute a barrier for business and will have to be removed: “...those Member States that
require banking licenses (DE, FR, HU, MT, AT, SK) would no longer be able to do so; those
that have different licensing regimes for performing and non-performing loans (BG, FR, PT,
RO) would be expected to change the rules. A number of Member States (BE, BG, ES, HU,
FI) would need to review the constraints they had put on some investment funds to buy
NPLs and BG may need to generalise the permission to transfer consumer loans.” 13

Our Austrian member Arbeiterkammer reports a case in Austria involving the sale of loans
of a major Austrian bank to third parties several years ago. It resulted in a wave of
complaints being filed with consumer and debt advice organisations. Debt collection
agencies and lawyers intervened quite rigorously, even pushing for payment despite
ongoing payment plans that had been set by the court in private bankruptcies.14

Belgian law forbids certain practices of debt collectors, e.g. calling or visiting the debtor
late in the evening, visiting neighbours, family and employer of the debtor, misleading
information on the consequences of non-payment.15 However, debt collectors, especially
bailiffs specialising in collecting non-financial debt (utility bills, parking fines, etc.), use
legal loopholes to charge excessive fees to debtors.16

In France, several hundred debt collecting firms operate on the market. Even though their
activity is regulated, there are many abuses. For example, to exert pressure on debtors,
some collectors pose as court bailiffs. Debt collectors are remunerated by a commission;
thus, they are motivated to recover the full amount from the debtor as quickly as
possible.17

Vulture funds entered the Irish market after the start of the financial crisis as many
consumers have been unable to repay their mortgage debt. Currently, a big Irish bank
which is 75% state-owned, intends to sell 18,000 NPLs to vulture funds. There is a risk
that mortgage debtors will lose their homes as vulture funds may quickly start repossession
procedures, even with respect to debtors who have restructuring arrangements with the
bank.18 Several other banks are also in the process of selling NPL portfolios to vulture
funds.

12 ‘
EBA report the dynamics and drivers of non-performing exposures in the EU banking sector’, EBA, 22 July
2016, https://www.eba.europa.eu/documents/10180/1360107/EBA+Report+on+NPLs.pdf
13
‘Impact assessment on the development of secondary markets for non-performing loans by removing of
undue impediments to loan servicing by third parties and the transfer of loans’, European Commission, 14
March 2018, page 44, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=SWD%3A2018%3A75%3AFIN
14
‘Bank Austria stößt faule Kredite in Höhe von 850 Mio. Euro ab’, 17 December 2007,
https://diepresse.com/home/wirtschaft/economist/349508/Bank-Austria-stoesst-faule-Kredite-in-Hoehe-von-
850-Mio-Euro-ab
‘Bank Austria sells bad loans’, 11 April 2012, http://wiev1.orf.at/stories/276052
15
‘Recouvrement de dettes’, SPF Economie, https://economie.fgov.be/fr/themes/services-financiers/credit-la-
consommation/endettement/recouvrement-de-dettes
16
‘Ces huissiers spécialisés dans le business de dettes’, 31 janvier 2013,
http://www.levif.be/actualite/belgique/ces-huissiers-specialises-dans-le-business-des-dettes/article-normal-
135443.html
17
‘Les méthodes musclés de « chasseurs de dettes »’, 2 avril 2013,
https://www.lemonde.fr/societe/article/2013/04/02/les-methodes-musclees-des-chasseurs-de-
dettes_3151843_3224.html
18
‘Vulture fund legislation will not stop repossessions, TD warns’, 6 March 2018,
https://www.irishtimes.com/news/politics/oireachtas/vulture-fund-legislation-will-not-stop-repossessions-td-
warns-1.3417498
In Latvia, 15% of consumer complaints received by the Consumer Rights Protection Centre
in 2012 were related to debt collection services.19

As reported by ALCO in February 2018, a consumer group and BEUC member in Lithuania,
forced debt collection was under way in 252,882 cases (the total population of Lithuania is
2,8 million inhabitants). This means that 1 in 6 households is affected. Around 152,000
people earning a minimum wage had more than one case where half of their salary is taken
by the debt collectors; if the indebted person earns more than minimum wage, another 70
percent of the difference is being appropriated.20

It is also useful to note that, in Lithuania, the average net monthly income of a bailiff’s
office is 9,900 euros. This is a significant amount considering that the minimum monthly
wage is 400 euros. Currently 118 bailiff offices operate in the country 21, while it is
estimated that many more debt vulture firms operate without a licence.

In Portugal, in recent years, some credit institutions have sold NPLs, both consumer credit
and mortgages. There is no specific legislation that foresees consumer protection in these
cases. In addition, there is no regulatory regime on debt collection activities.

Due to the existence of several debt collection services and the absence of regulation,
Portuguese consumer group DECO witnessed various abusive practices, such as debt
collection agents pretending to be debt execution officers, solicitors, or lawyers. The aim
is to force the debtor to repay or to agree to a payment plan under the threat of an
immediate foreclosure of assets and income attachment. There are other threats made,
such as several phone calls per day to the debtor’s home or workplace, to friends, family
members, or neighbours, putting at risk the person’s mental health, the right to work,
relaxation, and privacy of the debtor. Another detrimental practice is the informal
agreement of payment plans, not in the written form, which translates into uncertainty for
the debtor as he/she is not aware of contract terms or of where payments made are going.

◆ Risk of supervisory arbitrage by the rogue players to the detriment of

consumers
The draft directive establishes several requirements for granting the authorisation to credit
servicers. One of the requirements is that credit servicers must ensure the fair and diligent
treatment of borrowers, including taking into account their financial situation and, where
available, the need for such borrowers to be referred to debt advice or social services. In
addition, credit servicers would need to respect the rights and obligations of the initial
credit agreement.22

Yet, given that the interests of credit servicers/credit purchasers and consumers are
diametrically opposed, it is highly doubtful that those firms will respect all legal obligations
and put consumer interests above their own. Especially since those firms typically do not
enjoy a high reputation and do not run significant reputational risk. The consumer would
be exposed to credit servicers and credit purchasers established abroad, which creates
further risks.

It is the role of the national competent authorities to enforce legislation, but, in fact, the
quality of supervision and enforcement varies widely across Member States. According to

19
‘Consumers complain most often about Swedbank’, 31 January 2013, http://bnn-news.com/consumers-
complain-swedbank-87019
20
Ministry of Justice of Lithuania, http://en.tm.lt/
21
Camber of Judicial Officers of Lithuania, http://www.antstoliurumai.lt/en/lietuvos-antstoliu-rumai
22
‘Proposal for a directive on credit servicers, credit purchasers and the recovery of collateral’, European
Commission, 14 March 2018, Art 5(c) and 5(d), https://ec.europa.eu/info/law/better-regulation/initiatives/com-
2018-135_en
the Commission’s proposal, credit servicers would be supervised by their home country
authority, where the EU passport is obtained.23 This means that credit servicers will have
a strong incentive to obtain the EU passport in Member States with weaker supervisory
standards. In other words, there is a significant risk of supervisory arbitrage that will
ultimately impact the protection of distressed borrowers.

b. Alternative, sustainable ways of addressing NPLs and protecting

consumers

Continue with the existing mechanism of reducing the NPLs. NPL volumes across
most EU countries are gradually decreasing thanks to the joint efforts of the Commission,
European Central Bank, European Banking Authority and national authorities, who have
incentivised banks to manage and reduce their NPLs, pushed for bank restructuring and
liquidation, where needed. Those efforts should be continued.

Grant forbearance measures to borrowers in financial difficulties. In accordance

with the Mortgage Credit Directive24 and the EBA guidelines on arrears and foreclosure 25,
credit providers should grant forbearance measures to distressed borrowers, such as
restructuring loan terms. The Commission’s proposal on secondary NPL market seems to
interfere with the Mortgage Credit Directive obligation imposed on lenders. EU and national
competent authorities must monitor the lenders’ compliance with that obligation.

Writing off loans instead of selling off at a huge discount? Banks are usually selling
NPLs to third-party investors at hugely discounted prices. An EU-level reflection should be
launched on whether it would not be more appropriate to write off those loans instead.
That could be made conditional on certain criteria, to be defined. As a minimum, the
concerned borrowers should be able to purchase their own debt at the discounted price,
instead of selling to third-parties.

Impose strict responsible lending obligations on credit providers and

intermediaries. Credit is not a substitute for income and should be granted only to those
borrowers who can afford it. Responsible lending obligations already exist with respect to
mortgage credit26, but such requirements are missing in relation to unsecured loans. The
expected review of the Consumer Credit Directive next year is a good opportunity to close
the regulatory gap.

Build a backstop against future NPLs. We welcome the Commission’s proposal on

capital requirements related to future NPLs.27

Impose restrictions on the activity of third-party credit servicers and credit

purchasers. Market players who maximise their profits on the back of vulnerable

23
Idem, Art 12
24
‘Directive 2014/17/EU on credit agreements for consumers relating to residential immovable property and
amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010’, Art 28, https://eur-
lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32014L0017
25
‘Guidelines on arrears and foreclosure’, EBA, 1 June 2015,
https://www.eba.europa.eu/documents/10180/1092172/EBA-GL-2015-
12+Guidelines+on+arrears+and+foreclosure.pdf/a16dfe3a-932c-4ff3-b4ff-8cf9f54799ca
26
‘Directive 2014/17/EU on credit agreements for consumers relating to residential immovable property and
amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010’, Art 18, https://eur-
lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32014L0017
27
‘Proposal for a Regulation on amending Regulation (EU) No 575/2013 as regards minimum loss coverage for
non-performing exposures’, European Commission, 14 March 2018, https://ec.europa.eu/info/law/better-
regulation/initiatives/com-2018-134_en
 consumers and businesses should not be promoted, but should, instead, face restrictions.
The European Banking Authority, in cooperation with the national competent authorities,
should launch an investigation into the activity of credit servicers and credit purchasers,
assess to what extent those firms comply with the existing EU legislation, collect data on
consumer detriment and its causes, and propose measures to better protect individual
borrowers in financial difficulty.

END

This publication is part of an activity which has received funding under an

operating grant from the European Union’s Consumer Programme (2014-
2020).

The content of this publication represents the views of the author only and it is his/her sole
responsibility; it cannot be considered to reflect the views of the European Commission and/or