The European Commission has recently published proposals aimed at encouraging the development of secondary markets for non-performing loans. It has sought to do so by introducing regulatory obligations surrounding the transfer of loans from banks to non-bank investors.
While the underlying objective is positive – particularly the stipulation that European Union member states should lift any existing restrictions in national law which currently prevent loan transfers to non-bank institutions – the proposals also contain measures that would, if adopted in their current form, cause uncertainty and disruption to the commercial real estate loan market, particularly club and syndicated transactions.
Most worrying of all, these proposals are not limited to NPLs, but rather capture any loan transfer between a bank and a non-bank lender. Some of the key issues created by the proposals include:
• The introduction of a mandatory disclosure duty which would introduce significant changes to well-established, existing market practices based around the ‘buyer beware’ principle. Not only could this create issues for those investors that do not wish to receive non-public information, but it could also result in liability for those lenders responsible for the disclosure, especially if the information subsequently turns out to be inaccurate or incomplete.
• The inclusion of reporting requirements in relation to non-bank transferees and the requirement for non-EU non-bank transferees to appoint an EU representative could discourage lenders other than EU banks from purchasing commercial real estate loans, thus making it more difficult for EU banks to divest loans away from their balance sheets.
• The definition of ‘credit servicer’ is drafted broadly and could be read as also capturing, for example, facility or security agents. If caught, the proposals would create a significant administrative burden for non-bank facility agents and trustees, which in recent years have become far more active in the CRE syndicated loan market.
• The proposed requirement for non-bank transferees to inform competent authorities before enforcing a loan would make enforcement slower and hamper lender recovery efforts.
• In relation to syndicated loans, there may be practical difficulties with ascertaining whether a participation held by a lender other than an EU bank was originated by an EU bank and whether it would fall within the scope of the proposals. It is also unclear how this would apply in the context of a mixed syndicate of lenders.
If enacted in their current form, these measures are quite alarming. However, it is important to emphasise this legislation is currently only a proposal and the commission has emphasised it is open to feedback.
On 4 May, Nicholas Voisey, managing director at the Loan Market Association, met with members of the EC to raise the above points and other issues. He was informed it certainly is not the commission’s intention to disrupt a well-functioning market. However, while much of the European secondary loan market may qualify as ‘well-functioning’, there are certain transactions – such as residential portfolio sales – and jurisdictions where challenges remain, and it is these the commission is keen to address.
The LMA has provided the commission with suggested drafting amendments, seeking to carve out syndicated and other wholesale loans from scope, effectively limiting their application to consumer and SME loans. We at the LMA believe this would be consistent with the broader Capital Markets Union project to facilitate SME lending. We hope these suggestions will shape the debate as the proposals make their way through the EU legislative process.
THE KEY POINTS
In March, the commission revealed plans to foster a secondary market for NPL trading.
• Define the activities of credit servicers and set common standards for authorisation and supervision, to address the lack of servicers by creating new rules for entry conditions.
• Firms purchasing NPLs will be required to notify authorities of loan acquisitions, while third-country purchases will need to be done through an authorised EU credit servicer.
• Legal safeguards and transparency rules to ensure transfers of loans does not affect the rights and interests of borrowers.
• Create national asset management companies to help banks clear up parts of their balance sheets.