Implementation of the Credit Servicers Directive in Germany: A game-changer in the NPL-market

The Directive (EU) 2021/2167 sets out a harmonized regulatory framework for services in relation to non-performing loans and has to be implemented by Member States by 29 December 2023. In Germany, the draft bill of the Credit Secondary Markets Act (Referentenentwurf Kreditzweitmarktgesetz) was published on 20 July 2023. In addition to proposed changes of provisions of important existing German acts such as the German Banking Act (Kreditwesengesetz), the draft bill proposes a completely new Credit Service Institutions Act (Entwurf des Kreditdienstleistungsinstitutsgesetzes). The new regulatory framework will change the non-performing loan ("NPL")-markets in the EU.

Introduction

Since the Global Financial Crisis, NPL have been increasingly in the spotlight of European regulators and policy makers. NPLs can significantly tie up the own funds of banks and pose a material risk to the orderly functioning of financial markets and the stability of the financial system. Consequently, the European Commission, the European Banking Authority ("EBA"), the European Central Bank ("ECB") and regulators across the member states ("Member States") of the European Union ("EU") have been focusing on this issue for more than a decade. A key element of the policy approach taken in the EU is to (i) establish a harmonized secondary NPL market that facilitates transactions between credit institutions and Credit Purchasers (as defined below) across the EU Member States and (ii) harmonize the regulatory frameworks that apply to NPL-related services.

• One of the key milestones towards the harmonized treatment of NPLs and NPL-transactions was the issuance of the ECB guidance to banks on NPLs in March 2017. The ECB specifically focused on banks’ NPL strategy, NPL governance, NPL recognition as well as NPL impairment measurement and write-offs.¹ Shortly after this publication in July 2017, the Council of the EU published an action plan to tackle non-performing loans in Europe. 
• In March 2018, the European Commission published the first draft proposal for a Directive on Credit Purchasers and Credit Servicers (as defined below). 
• In 2020, the NPL Action Plan to tackle NPLs in the aftermath of the COVID-19 Pandemic ("EU NPL Action Plan"). This action plan specifically addressed the development of secondary markets for distressed assets. 
• In line with the above, the Directive (EU) 2021/2167 (Credit Servicers Directive – "CSD") was published on 8 December 2021. The CSD must be implemented by the EU Member States by 29 December 2023. 
• So far, only a few Member States have published the draft legislation implementing the CSD in national law. In Germany, the draft Credit Service Institutions Act (Kreditdienstleistungsinstitutsgesetz-Entwurf – "Draft KrDIG") was published on 20 July 2023. The draft assigns the responsibility for the supervision of Credit Servicers and Credit Purchasers to the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – the "BaFin") and the Deutsche Bundesbank.

Scope of application

The CSD introduces a harmonized regulatory framework for NPL-transactions between banks, Credit Purchasers and firms providing NPL-related services. The CSD aims at creating a deep and liquid secondary market for distressed assets in the EU that provides banks with the possibility to reduce their NPL stocks by selling portfolios to third-party investors. However, the CSD also regulates Credit Purchasers and firms that support Credit Purchasers in their interaction with borrowers. 

Below, we briefly outline the scope of the term "credit agreement" that will trigger the application of the CSD and Draft KrDIG and specify the market participants that will fall within the scope of the CSD and Draft KrDIG.

Non-performing credit agreements 

The new regulatory framework concerns transactions and services that directly relate to non-performing credit agreements (i.e. the NPLs). Pursuant to Article 3(13) CSD,² a non-performing credit agreement is defined as a "credit agreement that is classified as a non-performing exposure in accordance with Article 47a of Regulation (EU) No 575/2013" (Capital Requirements Regulation – "CRR"). Such non-performing exposures include, in particular, (i) exposures in respect of which a default is considered to have occurred and (ii) exposures which are considered to be impaired under the applicable accounting framework. 

The CSD and Draft KrDIG only cover non-performing credit agreements (i) originally issued by credit institutions established in the EU and (ii) the initial transfer of which or initial assignment of rights under such agreements has occurred on or after 30 December 2023. 

Credit Servicer and Credit Purchaser

The CSD defines the terms "Credit Servicer" and "Credit Purchaser" as the primary entities involved with the dealing of NPLs:

• Credit Servicer – Credit Servicers are firms that perform credit servicing activities (Article 3(8) CSD). Such firms manage and enforce the rights and obligations under the non-performing credit agreements on behalf of a Credit Purchaser. The Draft KrDIG differentiates between so-called Credit Servicer Institutions (Kreditdienstleistungsinstitute) and Credit Servicers (Kreditdienstleister) (both as defined below).
  • Credit Servicer Institutions - Credit Servicer Institutions are firms that carry out credit servicing activities on behalf of the Credit Purchaser (based on a license under the CSD/Draft KrDIG).³ The definition explicitly exempts CRR credit institutions, Alternative Investment Fund Manager ("AIFM") and certain non-banking entities carrying out activities that generally qualify as Credit Services (as defined below) within the meaning of the CSD.
  • Credit Servicer – While credit institutions subject to the CRR and non-banking entities do not qualify as Credit Servicer Institutions when carrying out Credit Services activities, they will be subject to certain requirements under the CSD/Draft KrDIG, such as the conduct rules. Against this background, in the Draft KrDIG the German legislator introduces the term "Credit Servicers" that covers both the Credit Servicer Institutions and CRR credit institutions, as well as non-banking entities that are subject to certain requirements under the CSD.⁴
• Credit Purchaser – A Credit Purchaser is any natural or legal person, other than a credit institution, that purchases a creditor’s rights under a non-performing credit agreement, or the non-performing credit agreement itself, in the course of its trade, business or profession, in accordance with applicable EU and national law. The Draft KrDIG adopts this definition of Credit Purchaser.

Firms out of scope

The CSD exempts several entities which would, per definition, fall within its scope. Already existing supervisory systems and market standards as well as efficiency reasons are an explanation for this.

Credit institutions, non-banks and AIFs

Credit institutions and certain creditors that are authorised to grant loans but do not qualify as credit institutions are subject to the CSD/Draft KrDIG in their capacity as Credit Servicer. However, they do not require a license for the provision of Credit Services (see Sec. 11 Draft KrDIG).

Debt collection agencies

Regulating the debt recovery processes across the Member States has been the focus of the EU for a while. One important milestone was the introduction of the cross-border debt recovery procedure, known as the European Account Preservation Order ("EAPO") through Regulation (EU) No. 655/2014. The EAPO allows the freezing of bank accounts of debtors located in EU Member States. That being said, there is no harmonized regulatory framework that applies to debt collection services and debt collection agencies. Instead, different national frameworks apply in each Member State. In Germany, debt recovery services qualify as a legal service (Rechtsdienstleistung) and are subject to the Legal Services Act (Rechtsdienstleistungsgesetzes – "RDG"). In the future, debt collection agencies which have been subject to the RDG so far, but intend to provide Credit Services which fall within the definition of the CSD, will need to be authorised under and supervised pursuant to the Draft KrDIG. Where such firms provide services in relation to receivable portfolios which do not qualify as NPLs, such activities will continue to be subject to the RDG (see Sec. 1(3) Draft KrDIG). The Draft KrDIG is proposing to assign the responsibility for overseeing compliance with the RDG in this case to the BaFin (Sec. 3(5) Draft KrDIG). The BaFin would fulfil such supervisory responsibility in close cooperation with the Federal Office for Justice (Bundesamt für Justiz). In contrast, debt collection agencies that do not provide Credit Services will be entirely outside the scope of the CSD and Draft KrDIG. 

Credit intermediaries 

Credit intermediaries play an important role in the credit market and facilitate transactions between banks and borrowers. In Germany, credit intermediaries are subject to a licensing requirement under Sec. 34c of the Trade, Commerce and Industry Regulation Act (Gewerbeordnung – "GewO"). The BaFin is not the supervisory authority for these cases. Credit intermediaries that facilitate bank’s and/or Credit Purchasers’ negotiations with borrowers will continue to be subject to the GewO. The CSD and Draft KrDIG will not apply (see Article 3(9)(b) CSD/Sec. 2(3) no 2 Draft KrDIG).

Intermediaries facilitating NPL-transactions in the secondary market

In contrast to the credit intermediation in the primary markets, the intermediation between banks and Credit Purchasers with respect to NPLs in the secondary market is not subject to specific requirements under the CSD/Draft KrDIG. In Germany, such activity is subject to the general provisions of the GewO.

Lawyers

Lawyers are exempt from the scope of the CSD if their activity is provided in the context of legal counselling or legal representation. 

Credit Services 

Credit Services are defined as credit servicing activities in the CSD. The CSD provides a list of activities which are seen as such. Only one of those activities needs to be carried out by the prospective Credit Servicer to become subject to the CSD.

Collection and/or Recovery of payments

The collection and recovery of due payments that are related to the respective credit agreement is seen as a credit servicing activity. The Draft KrDIG uses the wording "enforcement of due claims". This way it is compliant with German national law.

The collection of debt is regulated in Sec. 2(2) RDG. Since debt collection is considered a credit servicing activity, in accordance with Sec. 1(3) Draft KrDIG, firms who carry out this activity are now subject to the Draft KrDIG and the authorisation regime.

Renegotiating terms with the borrower

Firms which are renegotiating any terms and conditions related to the respective NPL are also commencing a credit-servicing activity. However, they benefit from the exemption that credit intermediaries as defined in Article 3, point (f), of Directive 2008/48/EC or in Article 4, point (5), of Directive 2014/17/EU are not in scope of the Draft KrDIG if the credit servicing activity consists only of renegotiation certain terms of the NPL with the borrower.

Administration of complaints

To ensure adequate consumer protection, the handling of complaints is subject to the CSD, and therefore to supervision.

Notification of the borrower of changes

To ensure adequate consumer protection, notification of borrowers about any changes of interest rates, due payments or charges of the credit agreement, is also subject to the CSD, and therefore to supervision.

Key regulatory requirements 

Licensing requirement (Article 4 and following)

Article 4 of the CSD requires Credit Servicers to obtain an authorisation in their home Member State from the respective National Competent Authority ("NCA") before commencing activities.

The key criteria for firms applying to be licensed as a Credit Servicer Institution are set out in Sec. 10(3) Draft KrDIG. In essence, the following needs to be provided: 

• evidence of the trustworthiness (Zuverlässigkeit) and of the adequate knowledge and experience of the members of the board (Geschäftsleiter)⁵ and the supervisory board (Mitglieder des Verwaltungs- oder Aufsichtsorgans);⁶ 
• evidence of the good repute of the holders of the so-called qualifying holdings in the applicant (i.e. holders holding 10% or more of its share capital) (Inhaber einer bedeutenden Beteiligung);⁷ 
• evidence of the separate accounts to hold funds (in case the applicant intends to hold funds from borrowers on behalf of the Credit Purchasers);⁸ 
• a viable business plan (tragfähiger Geschäftsplan) setting out the envisaged business activities, the governance structure and the arrangements aimed at compliance with organisational requirements;⁹ and 
• information on outsourcing arrangements and thereto-related outsourcing agreements.¹⁰

What does the above licensing requirement mean for existing firms registered pursuant to the RDG?

Pursuant to Article 32(2) CSD, Member States may allow the firms already carrying out credit servicing activities in accordance with national law to continue carrying out their credit servicing activities until 29 June 2024, or until they obtain the CSD-license. In addition, Member States may automatically recognize entities who are already carrying out credit servicing activities under national regimes that are equivalent to the CSD.

In Germany, the Draft KrDIG does not provide for an automatic recognition of debt collection agencies that already operate under the RDG. However, Sec. 47(1) Draft KrDIG provides that such firms can continue carrying out their business activities until 29 June 2024. If they want to carry out activities after 29 June 2024, they are subject to the following requirements:

• Pursuant to Sec. 47(2) sent. 1 Draft KrDIG, such firms have to notify the BaFin of their intention to continue providing Credit Services after 29 June 2024 within two weeks after the KrDIG has entered into effect. 
• Within four weeks after the KrDIG has entered into effect, such firms have to submit a complete application meeting the requirements under Sec. 10(3) Draft KrDIG (Sec. 47(2) sent. 2 Draft KrDIG). This application needs to be submitted within four weeks after the KrDIG has entered into effect.
• The BaFin has 45 days to assess the application in terms of its completeness. It can request additional information that is necessary for the assessment and set a time limit of four weeks for the applicant to provide all relevant information.
• Once the BaFin has confirmed that the application is complete, the BaFin has 90 days to (i) assess whether the application meets the regulatory requirements and (ii) grant (or refuse) the authorisation.

While it remains to be seen whether the requirement to submit a complete application within four weeks after the KrDIG comes into effect will remain in the final KrDIG, firms that carry out business activities that fall within its scope should promptly prepare for compliance and a license application. 

Holding funds from borrowers on behalf of Credit Purchasers

The CSD allows individual Member States to determine whether the Credit Servicers should be authorised to receive and hold funds from borrowers to transfer these to Credit Purchasers (Article 6 CSD). The German legislator has made use of this discretion and allows Credit Service Institutions to hold funds from borrowers on behalf of Credit Purchasers. These funds have to be held in a separate account (Treuhandkonto) with a credit institution. In addition, Sec. 17(2) and (4) Draft KrDIG requires the Credit Service Institutions to (i) ensure that the separate account is protected against the rights of third-parties (including in the insolvency of the credit institution) and (ii) transfer the funds from borrowers to the separate account held on behalf of the Credit Purchaser upon the receipt.

Conduct of Business Rules

The relationship between Credit Servicers and borrowers is subject to several conduct of business rules (Sec.28 Draft KrDIG/Article 10 CSD) such as to: 

• act in good faith, fairly and professionally;
• provide information to borrowers in a non-misleading and clear way; and
• respect and protect personal information and privacy of borrowers.

The Credit Servicer is also subject to organisational requirements (Sec. 14 Draft KrDIG) and must ensure the competency and adequate knowledge of its board (Sec. 15 Draft KrDIG).

Outsourcing 

The outsourcing of credit service activities by a Credit Servicer Institution is subject to the outsourcing requirements under Article 12 CSD and Sec. 20-22 Draft KrDIG. Firms providing Credit Services under the outsourcing arrangements are defined as the so-called "Credit Service Providers" (Article 3(7) CSD).

• The outsourcing arrangements must not impair the Credit Servicer Institution’s compliance with requirements under the CSD and Draft KrDIG.
• The outsourcing is conditional upon the Credit Servicer Institution’s ability to access all relevant data and the BaFin’s ability to supervise the provision of the Credit Services.
• The Credit Servicer Institution has to ensure that it retains sufficient resources and expertise as to ensure the continuation of the service after the (potential) termination of the outsourcing agreement with the Credit Service Provider. Pursuant to Section 20(3) Draft KrDIG, the Credit Servicer Institution has to comply with the requirements under Sec. 25b of the German Banking Act (Kreditwesengesetz – "KWG"). In particular, the Credit Servicer Institution must not delegate its responsibility to third parties and is ultimately responsible for compliance with all the obligations under the CSD in cases where it has outsourced certain activities.
• Sec. 17(6) Draft KrDIG provides that the service providers, including the Credit Service Providers, must not hold the funds from borrowers. 

Cross-border credit servicing activities

One of the key elements of the CSD is the introduction of the EU passport concept for Credit Servicers. This will allow firms to carry out credit servicing activities across the EU.

Sec. 23 Draft KrDIG sets out the requirements for incoming credit servicing activities (i.e. credit servicing activities carried out in Germany by credit servicers located in other Member States). Sec. 24 Draft KrDIG covers any outgoing credit servicing activities (i.e. activities carried out by German credit servicers in other Member States). The supervision of cross-border credit servicing is regulated in Sec. 25 Draft KrDIG.

A Credit Servicer with an authorisation in a home Member State is allowed to carry out activities covered by that authorisation without any restrictions or additional requirements in other host Member States. Its home NCA is responsible for the supervision of credit servicing activities carried out in the other Member States. This means that the home NCA will also be responsible for overseeing the Credit Servicers’ compliance with conduct rules in the other Member States. If, for example, the BaFin in its capacity as the host NCA determines non-compliance incidents, it is authorised to report such non-compliance to the responsible home NCA. If the Credit Servicer does not take sufficient remediation measures upon BaFin’s notification to the host NCA, the BaFin is authorised to take supervisory measures against the respective Credit Servicer directly. 

We expect the Credit Servicers with a cross-border footprint to conduct mapping exercises across the EU to determine the jurisdiction with the most ‘servicer friendly’ regime. 

Annual audit of Credit Servicer Institutions 

Similar to other regulated firms in Germany, the Credit Servicer Institutions will be subject to the requirement to (i) provide the BaFin with their annual account (aufgestellter Jahresabschluss),¹¹ (ii) appoint a suitable external auditor for the purpose of the annual audit and (iii) notify the BaFin of such appointment. The BaFin can request the appointment of another external auditor in certain situations.¹² The external audit will have to be performed in line with certain audit requirements and the final report will need to be provided to BaFin.¹³ 

Reporting requirements

Sec. 36 Draft KrDIG provides for several reporting obligations, including the requirement to notify BaFin of the intention to appoint new members of the board (Geschäftsleiter).

Requirements that will apply to the Credit Purchasers 

The CSD is also taking aim at Credit Purchasers. It grants them rights but also states obligations.

Information rights of Credit Purchaser

According to Sec. 6 Draft KrDIG, a prospective Credit Purchaser has the right to be provided with sufficient information by the credit institution from which he envisages purchasing NPLs. The EBA has developed draft implementing technical standards ("ITS") for the provision of this information. In Germany credit institutions, selling NPLs will be required to use these ITS pursuant to Sec. 6(2) Draft KrDIG.

Furthermore, the credit institution has information obligations towards the BaFin, in accordance with Sec. 6(3) Draft KrDIG.

Obligations of Credit Purchaser

Credit Purchasers are subject to numerous obligations according to Article 17 of the CSD. Adopted through Sec. 7 Draft KrDIG, it states that a Credit Purchaser should appoint a Credit Servicer to be able to perform credit-servicing activities if the credit agreement is concluded with natural persons or SME´s. It also has to notify the NCA of the appointed Credit Servicer.

Sec. 9 Draft KrDIG regulates third country Credit Purchasers. They have to appoint a representative that is domiciled in the EU or that has its registered office or, if under its national law it has no registered office, its head office in the EU, thus ensuring compliance with an EU Member State regulatory framework.

Supervision powers by the NCA 

Credit Purchasers and Credit Servicers are subject to ongoing supervision by the NCA (in Germany: the BaFin). The NCAs will have sanctioning powers to exercise their functions and duties according to the CSD. Credit Servicers, Credit Purchasers and Credit Service Providers are subject to different reporting and information obligations to the BaFin and the Bundesbank in accordance with Sec. 31 ff. Draft KrDIG. 

Level 2 Implementing Measures: Guidelines by the EBA

The EBA will be responsible for further specifying certain provisions under the CSD:

• On 19 April 2023, the EBA has published a draft consultation paper under Article 5(1)(c) CSD on the assessment of adequate knowledge and experience of the board of the Credit Servicer in regard to obtaining an authorisation as a Credit Servicer. The final EBA Guidelines are expected to be published in early 2024.
• The EBA is also responsible for developing guidelines on the establishment of lists and registers in accordance with Article 9(1) CSD. The EBA published a consultation paper on Draft Guidelines on the establishment and maintenance of national lists or registers of credit servicers under Directive 2021/2167 (EBA/CP/2023/17) on 26 July 2023.
• Pursuant to Article 16 CSD, the EBA has developed draft ITS specifying transaction data templates that credit institutions need to use to provide information to Credit Purchasers. The EBA published a final report outlining the draft ITS on 16 December 2022.

Outlook 

Both existing firms and firms considering commencing activities regulated by the CSD will find themselves in a regulatory environment that is similar to the regulatory framework that applies to credit institutions, investment firms and payment institutions. The focus of the CSD is primarily on fit & proper requirements and business rules. It is less on topics such as own funds requirements. 

Some clients will have to analyse whether their business activities will be subject to the CSD and Draft KrDIG. Clients that expect to be subject to such requirements should start their gap analysis to understand whether they meet the coming regulatory requirements. In addition, clients should start preparing their applications for any required license under the new regime as soon as possible.

The Draft KrDIG already gives an insight into what to expect when the KrDIG will enter into effect in a few months (i.e. end of December 2023 at the latest).

Robert Benson (White & Case, Legal Trainee, Frankfurt) and Felix Mueller (White & Case, Trainee Solicitor, London) contributed to the development of this publication.

_{1 In October 2017, the ECB updated its guidance with regard to the prudential backstops on NPLs. It plays an important role in the context of the ECB’s Supervisory Review and Evaluation Process (SREP).
2 Sec. 2(18) Draft KrDIG.
3 Sec. 2(2) Draft KrDIG.
4 Sec. 2(4) Draft KrDIG.
5 Sec. 10(3) sent. 1 no. 4 in connection with Sec. 15(1)-(2) Draft KrDIG.
6 Sec. 10(3) sent. 1 no. 4 in connection with Sec. 15(3) Draft KrDIG.
7 Sec. 10(3) sent. 1 no. 5 in connection with Sec.16(1) Draft KrDIG.
8 Sec. 10(3) sent. 1 no.7 in connection with Sec. 17(2) Draft KrDIG.
9 Sec. 10(3) sent. 1 no. 6 in connection with Sec. 14(1)-(2) Draft KrDIG.
10 Sec. 10(3) sent. 1 no. 8 in connection with Sec. 20 Draft KrDIG.
11 Sec. 32 Draft KrDIG.
12 Sec. 33 Draft KrDIG.
13 Sec. 34 Draft KrDIG.}

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