New Luxembourg non-performing loan rules – the anticipated implementation of the NPL Directive

Introduction

After being voted by the Chambre des Députés, the NPL Law regarding the transfer of non-performing loans (NPL Law) was published on 18 July 2024 in the Luxembourg Official Gazette and will apply by 22 July 2024.

The NPL Law transposes Directive (EU) 2021/2167 of the European Parliament and of the Council of 24 November 2021, concerning credit servicers and credit purchasers (Directive).

The NPL Law also implements Regulation (EU) 2022/2036 of the European Parliament and of the Council of 19 October 2022. This relates to the supervisory treatment of globally systemically important institutions under a multiple entry point resolution strategy and methods for indirect underwriting instruments eligible for the minimum capital requirement and eligible commitments.

It also amends several national laws, including the law of 8 April 2011 introducing the consumer code (Consumer Code), the law of 5 April 1993 on the financial sector (LFS), the law of 23 December 198 establishing the CSSF, the law of 22 march 2004 on securitisation, and the law of 5 August 2005 on financial collateral arrangements, all as amended.

Below are the key elements of the NPL Law.

 

Relevant concepts

The NPL Law introduces several major concepts, including non-performing loan agreement (contrat de crédit non performant), credit servicing activities (activités de gestion de crédits) and credit servicer (gestionnaire de crédits).

A non-performing loan is a loan that is unlikely to be repaid by the borrower, or one for which the agreed-upon instalments have been unpaid for over 90 days (NPL).

Credit servicing activities are defined as one or more of the following activities:

• collecting or recovering from the borrower of payments due in connection with a creditor's rights under a NPL, or the NPL itself;
• renegotiating with the borrower any clause or condition relating to the rights of a creditor under a NPL, or to the NPL itself;
• servicing claims relating to the creditor's rights under a NPL, or to the NPL itself;
• informing the borrower of any changes to interest rates or charges or payments due in connection with the creditor's rights under a NPL, or the NPL itself.

Finally, a credit servicer is any legal person who, in the course of its commercial activity, manages and enforces the rights and obligations associated with the creditor's rights under a NPL, or with the NPL itself, on behalf of a credit purchaser, and who carries out at least one or more credit servicing activities.

 

A new specialised professional of the financial sector: the credit servicer

The credit servicer is a newly recognised entity that will be added to the roster of specialised professionals of the financial sector under the LFS. It allows credit servicers to benefit from the EU passport regime.

For this purpose, the NPL Law inserts a new set of articles in the LFS, namely articles 28-14 to 28-21. It establishes, inter alia, the rules for the authorisation procedure of credit servicers, the relevant regulatory requirements and the rules applicable to:

• the freedom to provide services under the EU passport; or
• establishing branches in Luxembourg of credit servicers authorised in another member state; or
• establishing branches in another EU member state of credit servicers authorised in Luxembourg.

Authorisation procedure

The LFS, as amended by the NPL Law, provides that no person may carry on credit servicing activities as a regular occupation or business without having written authorisation granted by the Supervision Commission of the Financial Sector (CSSF).

The authorisation:

• can only be granted to legal persons;
• is subject to the proof that the share capital was subscribed and paid-up, which must be least EUR75,000, or EUR150,000, where the applicant is authorised to receive and hold funds from borrowers to transfer them to credit purchasers;
• does not entitle the authorised entity to carry out the activity under the cover of another person or as an intermediary for the purpose of carrying on that activity.

Where that is the case, the authorisation application must include a statement confirming that the credit servicer does not intend to receive and hold funds from borrowers as part of its business model.

In case the credit servicer intends to receive and hold borrowers' funds:

• the credit servicer must have a separate account with a credit institution to segregate all funds received from borrowers until they are passed on to the credit purchaser concerned;
• funds received from borrowers are protected from recourse by the credit servicer's creditors in case of insolvency and do not form part of its assets;
• any payment is considered to have been made to the credit purchaser when a borrower makes a payment to a credit servicer to reimburse all or part of the amounts due under the relevant credit agreement;
• the credit servicer must provide the borrower with a receipt or letter of discharge acknowledging the amounts received, on paper or another durable medium;
• the credit servicer must account for funds received from borrowers separately from its own assets, which does not constitute the servicing of third-party funds for the purposes of the LFS.

The authorisation application shall be made in writing and be accompanied by at least information:

• on the legal status of the applicant;
• on the identity of the members of the management body, which must comprise at least two persons, and of the persons who hold qualifying shareholdings, and proof of their good repute, sufficient knowledge, and experience; and
• to evidence the required governance arrangements, internal control mechanisms and required internal policies.

The authorisation application must be submitted to the CSSF, which shall confirm within 45 days from the receipt whether the application is complete and decide and notify the applicant within 90 days from the date of receipt of the complete application.

In any event, a decision shall be taken within 12 months of receipt of the application, failing which the absence of a decision will be equivalent to a tacit refusal.

Freedom to provide services and establish branches in another member state

Where a credit servicer authorised in Luxembourg intends to establish a branch in another EU member state or provide services covered by credit servicing activities under the EU passport, it must inform the CSSF and provide all the required information under the LFS. It will be subject to any restrictions or requirements laid down in the national law of the host EU member state, including any prohibition on receiving or holding funds from borrowers, when applicable.

The CSSF shall, within 45 days of receiving all the required information, forward the information to the competent authorities of the host EU member state. It will then inform the credit servicer of the date on which the information was communicated to the referred competent authorities and of the date on which those competent authorities acknowledged receipt of the information submitted.

Freedom to provide services and establish branches in Luxembourg by credit servicers authorised in another EU member state

A credit servicer authorised in another EU member state may carry out credit servicing activities in Luxembourg with the EU passport or by establishing a branch, without prejudice to any restrictions or requirements applicable in Luxembourg.

For such purposes, the competent authorities of the home EU member state shall communicate to the CSSF the information submitted by the applicant and referred to in Article 13(2) of the Directive, and the CSSF shall promptly acknowledge receipt thereof.

The credit servicer may start providing services in Luxembourg as from the earliest of:

• the date of receipt of the acknowledgement of receipt by the CSSF; or
• in its absence, at the end of a period of two months from the date of submission of all the information required by Article 28-19(2) of the NPL Law to the CSSF.

Administrative sanctions and measures

The CSSF will monitor and assess the ongoing compliance with the requirements of the NPL Law by any credit servicers and by credit servicers authorised in Luxembourg that carry out credit serving activities in another EU member state.

As supervising authority, the CSSF may investigate and impose administrative sanctions and measures in accordance with the NPL Law.

 

Scope of the NPL Law

The NPL Law will apply to:

• credit purchasers and credit servicers acting on behalf of a credit purchaser with regard to the creditor's rights under a NPL, or the NPL itself, concluded by a credit institution established in an EU member state;
• to providers of credit servicing services in the context of outsourcing of credit servicing activities by a credit servicer; and
• the transfer of a creditor's rights under a NPL, or the assignment of the NPL itself, concluded by a credit institution established in an EU member state, by a creditor, to a credit purchaser.

The NPL Law explicitly excludes from its scope the servicing of creditor's rights under a loan or the loan agreement itself:

• carried out by:
• credit institutions,
• authorised or registered alternative investment fund, management companies or investment companies authorised in accordance with the amended law relating to undertakings for collective investment, on behalf of the fund it manages,
• a lender within the meaning of the Consumer Code who is not a credit institution;

• which has not been concluded by a credit institution established in an EU member state, unless the creditor's rights under the loan agreement or the loan agreement itself are replaced by a loan agreement concluded by such a credit institution;
• the purchase of the creditor's rights under a NPL, or the NPL itself, by a credit institution established in an EU member state;
• the transfer of the creditor's rights under a loan agreement, or the transfer of the loan agreement itself before 30 December 2023.

Notaries, bailiffs and lawyers who administer the rights of creditors under a loan agreement, or the loan agreement itself, where they carry out credit servicing activities as part of their profession, are exempt.

 

Rights and undertakings for credit purchasers

Information rights

Credit institutions are required to provide potential credit purchasers with necessary information regarding the creditor's rights under a NPL, or the NPL itself, including relevant guarantees.

This ensures that credit purchasers can assess the value and recovery likelihood of such contracts before concluding a transfer agreement.

This information must be provided once during the process, but before the transfer agreement is signed.

Additionally, the potential credit purchaser must ensure the confidentiality of the received information, complying with the Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, as amended.

Undertakings

If credit purchasers do not have the required authorisation to manage NPLs, they must appoint a credit servicer.

If a credit purchaser is not resident or based in an EU member state, a Luxembourg-based representative must appoint a credit servicer to handle the servicing activities related to NPLs with consumers or small and medium-sized enterprises.

Credit purchasers must continue to comply with the existing consumer protection laws, borrower rights, credit application rules, banking secrecy, and criminal laws after the transfer.

Credit servicers or appointed entities must comply with the obligations of credit purchasers unless the buyer or their representative remains subject to these obligations.

Luxembourg credit purchasers or their representatives must notify the CSSF if they appoint any credit servicer handling the servicing of NPLs. This notification must include the identity and address of the appointed servicer and be completed no later than the start of the provision of the servicing activities.

 

Contractual relationship between credit servicers and credit purchasers

Credit servicers must operate under a detailed credit servicing agreement to be entered into with credit purchasers.

The agreement must outline the servicing activities, remuneration, representation scope, and undertakings to comply with EU and national rules, including consumer protection and data privacy.

Credit servicers are also required to maintain records for five years after the agreement ends and provide these records to the CSSF upon request.

 

Outsourcing

Credit servicers may outsource the provision of any credit servicing activities to a credit servicing provider.

When doing so, credit servicers remain fully responsible for complying with all legal obligations.

Any outsourcing must be governed by a written agreement between the credit servicer and the credit servicing provider ensuring compliance with the relevant laws and must not limit in any way the CSSF’s supervisory capabilities.

The credit servicers have to keep and preserve records of the relevant instructions issued to the credit servicing providers, as well as the outsourcing agreement for a period of five years from the date of termination of the agreement.

The credit servicer must inform the CSSF and, where applicable, the competent authorities of the host EU member state, before outsourcing its credit servicing activities.

 

Relations with borrowers

In their relations with the borrowers, credit purchasers and credit servicers must act in good faith, provide accurate and non-misleading information, respect borrower privacy, and communicate in a manner that does not constitute harassment, coercion or undue influence.

After transferring the creditor's rights under a NPL, or assigning the NPL itself to a credit purchaser, the credit purchaser or the appointed entity must notify the borrower before the first debt recovery and upon the borrower's request. This notification, delivered on paper or another durable medium, must include a list of items, namely:

• information on the transfer
• identity and contact details of the credit purchaser
• a clearly visible contact point for the borrower to obtain information
• details of the amounts owed by the borrower, specifying capital, interest, commission, and other charges
• a statement affirming the continued application of relevant EU and national laws, particularly
concerning contract performance, consumer protection, borrower rights, and criminal law

This information requirement does not affect any additional legal disclosure obligations. The notification must be written in clear and comprehensible language.

 

Third-country impact

When a Luxembourg creditor transfers or assigns a NPL to a credit purchaser outside the EU, the purchaser must appoint a representative based in an EU member state.

This representative is fully responsible for ensuring the credit purchaser complies with the NPL Law.

The transferring creditor must confirm the appointment of the representative before completing the transfer or assignment. If no representative is appointed, the transfer or assignment cannot go further.

The CSSF will contact this EU-based representative, in addition to or instead of the credit purchaser, for all compliance matters related to the NPL Law.

 

Reporting to Competent Authorities

Credit institutions and Luxembourg-based credit purchasers must regularly report to the CSSF and other competent authorities about transfers of NPLs, providing detailed information on the identity of buyers, the volume of transferred rights, and other pertinent details.

These provisions aim to streamline the handling of NPLs, ensure transparency in transfers, and maintain a high level of protection for consumers and other borrowers.