European Union: Upcoming Regulation For Loan Servicers

Last Updated: 23 May 2018
Article by Jesús Durán

Since its inception, loan servicing has not been a regulated activity.

This situation may change in light of the Draft Directive of the European Parliament and of the Council on Credit Servicers, Credit Purchasers and the Recovery of Collateral, dated 14 March 2018 (the "Directive").

Highlights

The Directive outlines the regulatory framework which is intended to apply to servicers, the main features being:

  • Regulatory authorisation required before commencing its activities
  • Public register of authorised servicers
  • 10-year document keeping and annual assessment
  • Cross-border servicing throughout the EU pursuant to a European Passport
  • Compulsory appointment of an authorised servicer to service consumer loan.

Scope

The Directive only regulates the servicing of banking loans i.e. credit agreements issued by a credit institution established in the EU.

The new regulation will therefore not apply to the servicing of corporate loans or credits issued by lenders which are not credit institutions, such as direct lending funds.

Regulatory authorisation

Member States shall require servicers to obtain an authorisation before commencing its activities.

In the case of Spain, the power to grant such authorisations is likely to be vested with the Spanish Central Bank (Banco de Espańa).

The following requirements must be fulfilled for the granting of an authorisation:

  • The members of the servicer's management body and the persons who hold qualifying holdings in the servicer must (i) be of sufficiently good repute; (ii) have a clean record in relation to criminal offences relating to property and financial activities and (iii) not be subject to any insolvency procedure.
  • The servicer must have appropriate governance arrangements and internal control mechanisms in place which ensure respect for borrower rights and compliance with personal data protection rules.
  • The servicer must apply an appropriate policy ensuring the fair and diligent treatment of the borrowers, taking into account their financial situation.
  • The servicer must have adequate internal procedures in place which ensure the recording and handling of borrower complaints.

The competent authority shall have 20 working to assess whether an application for authorisation is complete, and an additional 30 working days to determine whether the applicant complies with the above requirements.

A fully reasoned decision granting or refusing the authorisation shall be notified to the applicant within 5 working days. Refusal decisions may be appealed in Court.

The competent authorities may withdraw the authorisation in case the servicer does not make use of the authorisation within 12 months of its grant, ceases to engage in the servicing activities for more than 6 months and/or commits a serious breach of the applicable rules.

Register

The competent authority shall establish and maintain a register of all servicers authorised to provide services within its territory, including those servicers incorporated in other member States but providing cross-border services under a European Passport.

The register shall be made publicly accessible online.

Documentation and supervision

Servicers shall provide their services on the basis of a written contract providing at least (i) a detailed description of the services; (ii) the servicing fees; (iii) the extent to which the Servicer may represent the lender vis-ŕ-vis the borrower and (iv) an undertaking to comply with the applicable laws, including in respect of consumer protection.

The Servicer must keep and maintain, for at least 10 years from the date of the contract, (i) all correspondence with both the creditor and the borrower and (ii) all instructions received from the creditor in respect of each serviced loan. Said documents shall be available to the competent authority for inspection.

The competent authority shall evaluate, at least once a year, the implementation by servicers of the requirements regarding governance arrangements, fair treatment of borrowers and handling of borrower complaints.

Cross-border servicing

A servicer authorised in its member State of incorporation has the right to provide the services covered by the authorisation throughout the EU.

In order to provide cross-border servicing, Servicers must submit to its competent authority certain information including the host member State in which the Servicer intends to provide services and the measures taken to adapt the internal procedures, governance arrangements and internal control mechanisms to ensure compliance with the applicable laws.

The competent authority of the home member State shall, within 30 working days, communicate the information to the competent authorities of the host member State. The servicer may start providing services in the host member State upon receipt of the communication and in any event no later than after 2 months from the date of communication of the information by the competent authority of the home member State.

Servicing consumer loans

Loan purchasers not domiciled in the EU must appoint an authorised servicer (or a credit institution established in the EU) to perform any servicing activities in respect of consumer loans.

Effectiveness

The new regulatory framework for servicers shall be fully applicable from 1 July 2021.

The full text of the draft Directive may be found here.

The draft Directive is open for feedback until 8 June 2018.

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