11 January 2024

EBA Publishes Peer Review On Supervision Of Creditors' Treatment Of Mortgage Borrowers In Arrears Under The Mortgage Credit Directive

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On 11 December 2023, the European Banking Authority (EBA) published a detailed report (the Report Show Footnote) on its peer review on the supervision of creditors' treatment...
European Union Finance and Banking
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RegCORE Client Alert | Banking Union


On 11 December 2023, the European Banking Authority (EBA) published a detailed report (the Report Show Footnote) on its peer review on the supervision of creditors' treatment of mortgage borrowers in arrears under the Mortgage Credit Directive (MCD) (itself subject to legislative review), assessing the conduct supervisory approaches of (national) competent authorities (collectively NCAs) in this area.

This particular peer review was developed in response to the current economic conditions and high interest rate environment, found that NCAs' supervision is overall effective and has been adapted to reflect the current interest rates environment and risks to mortgage borrowers. The design and delivery follows the "EBA peer review methodology" Show Footnote and is part of the EBA's "2023-2024 Peer Review Work Plan" Show Footnote.

As detailed in the Report, the EBA however found differences in the level of scrutiny which NCAs apply to MCD in-scope creditors, including the identification of risks borrowers are facing. Notably, the Report highlights that NCAs as well as by extension supervised firms need to improve their conduct of business compliance with the MCD and other related supervisory outcomes. Accordingly, the Report sets out some follow-up measures, both for individual NCAs, and for all NCAs more generally, to ensure that supervisory measures to mitigate consumer detriment are taken before such detriment materialises. As assessed in this Client Alert, the Report also sets out some best practices in this area that might be of benefit for other NCAs (including those participating in the Banking Union) to consider adopting and accordingly what this may mean for internal policies and procedures as well as legal documentation used by relevant supervised firms when engaging with counterparties and clients.

Scope of the Report

This is the EBA's first conduct and consumer protection issues focused peer review. The review examined seven NCAs' (conduct of business) supervisory efforts and whether their steps effectively ensure that consumers in payment difficulties benefit from reasonable forbearance by creditors, taking into account the EBA Guidelines on arrears and foreclosures Show Footnote (the Guidelines) and its Opinion on good practices for mortgage creditworthiness assessments and arrears and foreclosure Show Footnote. The seven NCAs under review included those in Cyprus, Greece, Hungary, Lithuania, the Netherlands, Portugal and Slovakia. Cyprus and Greece received a number of recommendations for improvement in the Report, whereas the Netherlands was repeatedly highlighted by the EBA as evidencing a number of best practices.

Peer reviews do not assess individual financial entities like MCD creditors' compliance because their aim is to improve EU supervisory outcomes and effectiveness in a consistent and converging manner overall. National supervision of credit servicers was likewise excluded from this peer review as such entities must comply with the EU's Credit Servicers Directive from 30 December 2023 (see standalone Client Alert on that development Show Footnote) but not the MCD. Nevertheless, the findings in the Report are likely to be of relevance to both MCD supervised firms as well as credit servicers across the entire EU-27. Despite the Report not looking as individual MCD in-scope creditors' compliance, the make-up of the number and type of creditors per Member State in the peer review sample is nevertheless noteworthy. In Portugal this includes 106 in-scope creditors (exclusively credit institutions i.e., banks). Additional types of firms operate in the Netherlands (58 in the sample) and in each of Lithuania (90), Slovakia (20), Hungary (52), Greece (27) and Cyprus (25) these include also financial enterprises, non-bank lenders, credit unions, credit purchasers, credit services and peer-to-peer lending platforms. While the EBA notes that "These differences, too, can arguably influence the supervisory approach chosen", the recommendations in the Report (even when accounting for jurisdiction specifics on how the MCD, Guidelines and the above-mentioned Opinion are implemented in the respective Member States) press for greater harmonisation on supervisory approaches in accordance with the EBA's supervisory expectations set out in the Report.

The peer review assessed the seven in-scope NCA's supervisory approaches and outcomes in assessing MCD creditors' treatment of mortgage borrowers in arrears and the effectiveness of NCAs':

  • powers, resources and governance arrangements for efficient and effective supervision;
  • engagement with supervised creditors to ensure that creditors exercise reasonable forbearance (as required in the MCD);
  • supervisory measures taken with respect to those supervised creditors that do not exercise reasonable forbearance and/or do not effectively implement all elements of the Guidelines or the Opinion. Notably, the peer review does not consider how compliance with the rules and supervisory expectations on this topic as set by the European Central Bank (ECB), acting in its role at the head of the Banking Union's Single Supervisory Mechanism (SSM);
  • procedures, policies and/or criteria to ensure preparedness for dealing with an increase in arrears or foreclosures as a result of changing economic conditions and/or market developments, which in turn impact borrowers, including but not limited to reducing the affordability of repayments in light of (potential) increases to interest rates for variable rate mortgages; and
  • supervisory response to anticipated changes in economic conditions such as but not limited to terms of engagement with supervised creditors or changes to supervisory expectations.

The EBA's Report found that the reviewed NCAs fully implemented the Guidelines. Nevertheless, the Report identified the following differences in:

  • the organisational structures for supervision, with some competent authorities dedicating resources exclusively to conduct and others focusing primarily on prudential supervision;
  • the level of engagement with MCD creditors to ensure application of reasonable forbearance measures. Some NCAs use a variety of conduct of business focused supervisory tools and regular and/or ad-hoc communication channels whereas others applied a more limited level of supervisory scrutiny; and
  • the effectiveness of procedures and/or policies to address increased arrears or foreclosures due to changing economic conditions and/or market developments, with some NCAs adopting close(r) engagement with MCD creditors and others a more relaxed form of supervisory engagement.

The seven in-scope NCAs were selected on the basis of "objective criteria that indicate the relevance of the requirements in Article 28 of the MCD and the EBA Guidelines on arrears and foreclosure in a given Member State. These criteria were supplemented by considerations aimed at ensuring a fair representation of different types of real estate markets, geographies, jurisdiction sizes, cultures, and socio-economic policies, all of which shape and have shaped each national mortgage market. Two of the [N]CAs under review volunteered to participate in the peer review, with one being already under the scope for application of the objective criteria. The peer review assessed the seven [NCAs'] supervisory practices in the supervision of creditors' treatment of mortgage borrowers in arrears and initiating of foreclosure proceedings over a maximum of six-year period from 21 March 2016."

Importantly, Articles 28(2) and (3) MCD were optional for Member States to transpose i.e., implement into national law. Accordingly, Slovakia has not imposed both provisions. Portugal and Hungary only opted to transpose Article 28(2).

  • Article 28(2) MCD states that: "Member States may require that, where the creditor is permitted to define and impose charges on the consumer arising from the default, those charges are no greater than is necessary to compensate the creditor for costs it has incurred as a result of the default."
  • Article 28(3) MCD states that "Member States may allow creditors to impose additional charges on the consumer in the event of default. In that case Member States shall place a cap on those charges."

In light of the above, differences exist amongst EU jurisdictions' respective implementation of the MCD as to what types and what levels of charges may be applied by creditors to borrowers and when. The same applies as a result of national legislative measures set by national legislators as well in rulemaking instruments and supervisory guidance issued by NCAs across the EU. Much of the Report highlights these differences as it applies to the jurisdictions in scope of the peer review, and it will be for the co-legislators whether to decide to streamline any of these national options and discretions (if at all) during the legislative review of the MCD.

What should be a sigh for relief for many firms, but perhaps a missed opportunity in improving regulatory certainty and improved standard setting, is that the peer review did not include the Central Bank of Ireland (the CBI). It may be worth noting that the CBI's work during the 2008 global financial crisis, together with the Irish legislator, was quick to publish a comprehensive framework for supervision as well as rules and supervisory expectations of relevant firms (the Code of Conduct of Mortgage Arrears, as revised -CCMA), which in addition to setting out clear rules on available forbearance options and how and when they are to be used also included a clear mortgage arrears resolution process (MARP).

While the concepts developed by the CBI have in part been reflected by the principles in the EBA's Guidelines and other related work as well as in the ECB's own NPL Guide (see standalone coverage from our EU RegCORE on that topic), Ireland also promptly produced a consumer-focused guide to the CCMA and the MARP and its interplay with Ireland's Consumer Protection Code. It should also be noted that Ireland was also a forerunner in regulating credit servicing and debt management firms – concepts which have also in large part served as a base to the EU's Credit Servicing Directive. It remains to be seen whether the EU's co-legislators, EBA and/or ECB-SSM will look to the CBI's work when tightening pan-EU applicable rules and supervisory expectations in this area. The Report's recommendations and the identified best practices point to a direction of travel in NCAs as well as firms assessing how to improve standards and in many ways some firms may want to consider whether there are some lessons learned from experiences in jurisdictions beyond those covered in this peer review, such as Ireland, that may be relevant.

Follow-up measures and best practices highlighted in the Report

The Report sets out follow-up measures for individual NCAs as well as those which are applicable to all NCAs and not just those participating in the peer review. In particular the follow-up measures apply to both conduct of business and prudential supervision, notably in the management of non-performing loans and exposures (collectively NPLs). The implementation and the adequacy and effectiveness of actions in respect of the follow-up measures set out in the Report will be reviewed by the EBA in two years' time.

While these measures are addressed to NCAs, they will impact relevant supervised firms as all NCAs are expected to:

  • establish formal written procedures on the supervision of and engagement with MCD creditors that (i) facilitate a margin of flexibility to deal with changing circumstances and (ii) to tackle MCD creditors' preparedness for dealing with potential arrears related to market conditions and provide supervisory expectations and guidance on how to comply with the aims of Article 28 MCD (Arrears and foreclosure) Show Footnote – including but not limited to reasonable forbearance before foreclosure proceedings are initiated;
  • adopt policies that clearly indicate the responsibilities of internal units and promote the better cooperation and information sharing amongst different teams responsible for the supervision of creditors' treatment of mortgage borrowers in arrears. It should be noted that while the Report highlights best practices on information sharing highlighted in Portugal and the Netherlands, it stops short of suggesting how such efforts could individually across respective NCAs with or without the EBA acting as an enabler be replicated across the EU. The Report also does not address how inter-NCA information-sharing and cooperation could be strengthened;
  • include monitoring requirements stemming from Article 28 MCD and the Guidelines into their respective supervisory annual planning to the extent not already done so;
  • increase the use of consumer behaviour assessment to enhance support to consumers and provide guidance to creditors about how best to handle those in payment difficulties;
  • develop and implement indicators that reflect risks borne by borrowers (including conduct of business issues – such as regulatory complaints or tracking supervisory interventions on conduct failings) instead of focusing primarily on prudential aspects;

While not accounting for the specifics (in particular functioning) of Banking Union supervision, the EBA sets out a number of individual follow up measures for specific NCAs in-scope of the peer review include:

  • Cyprus, Greece, Lithuania and Slovakia should review the level or resources dedicated to supervision of creditors' treatment of mortgage borrowers in arrears in particular given the likelihood (across the EU as a whole) of a higher number of borrowers falling into arrears;
  • Greece should set up a separate supervisory unit with a focus on conduct supervision including the treatment of mortgage borrowers in arrears. In the EBA's view this would enable supervision focused on consumer protection objectives independently of prudential supervisory priorities Show Footnote;
  • Cyprus but equally Lithuania and Slovakia (all with various differing areas that they should improve on) should expand its supervisory tools and processes to monitor creditors compliance with the Guidelines, notably the obligation for early detection of payment difficulties amongst borrowers and/or pre-arrears and to take pre-emptive measures;
  • Cyprus and Hungary should enhance their supervision of how creditors prepare for dealing with any increase in arrears or foreclosures related to changing market and economic conditions from a conduct of business and consumer protection perspective and monitor information disclosures communicated to borrowers; and
  • Cyprus should expand its supervisory toolkit and not solely rely on self-assessments conducted by creditors as well as conduct more intrusive, frequent and systematic engagement, including on-site inspections and include conduct activities in respective annual supervisory plans. Cyprus should also establish monitoring risks to borrowers (including using conduct as opposed to primarily prudential regulatory themed inspections) as well as creditors' compliance with Article 18 MCD.

The Report also repeatedly highlights best practices evidence in the Netherlands that other NCAs may consider emulating. Specifically, the Netherlands, has developed a broad range of measures and training tools, specifically the "Supervision Academy" to ensure that staff has adequate technical skills and knowledge to conduct efficient supervision on MCD matters, but falls short of suggesting how the EBA in its coordination role of NCAs could assist all NCAs in replicating that individually or centrally with the EBA at the helm.

The Netherlands was also applauded by the EBA in having best practices in place that include a specific team supervising the product approval and review process, conducting different reviews in this thematic area and which can provide valuable input when supervising creditors' treatment of borrowers in arrears.

Moreover, the Netherlands' use of "instructive letters on compliance", a formal enforcement tool which guides creditors in interpretation, was welcomed. So too were the use of off-site measures to check compliance with the MCD and the EBA Guidelines (in particular 1 and 2 thereof) and publishing findings in a report for other supervised firms to learn from.

Additionally, the Report highlights the best practices that are employed in the Netherlands by publishing examples of what the Dutch NCA considers to be "good communication" with borrowers from a consumer behaviour perspective.

Lastly, the Report also highlights the use of mystery shopping (as evidenced by the review of Slovakia's and Portugal's use thereof) to check and improve compliance with supervisory outcomes. Mystery shopping is a tool that the EBA itself is more generally encouraging greater use of by both NCAs and supervised firms Show Footnote.


The conclusions reached in the Report may mean that relevant supervised firms will need to review and update their internal policies and procedures as well as legal documentation used when engaging with counterparties and clients who are mortgage borrowers in arrears or at risk of foreclosure. This is because the EBA has recommended that NCAs establish formal written procedures on the supervision of and engagement with MCD creditors, adopt policies that clearly indicate the responsibilities of internal units and promote better cooperation and information sharing and increase the use of consumer behaviour assessment and guidance to creditors.

The EBA's identification of best practices that might be of benefit for other NCAs and firms to consider adopting, such as developing and implementing indicators that reflect risks borne by mortgage borrowers, including conduct of business issues and using a variety of conduct of business focused supervisory tools and communication channels adds further pressure for firms to pre-empt such a change to improve compliance ahead of any EBA thematic review (market wide) or other individual firm-specific supervisory engagement by respective NCAs.

Furthermore, the EBA has set out individual follow up measures for specific NCAs, such as reviewing the level of resources dedicated to supervision of creditors' treatment of mortgage borrowers in arrears, which may also affect the expectations and requirements for the supervised firms in those jurisdictions as well as sharpen the tone and intrusiveness of scrutiny over the forthcoming supervisory cycles.

Given the above, relevant supervised firms may need to ensure that their internal policies and procedures are aligned with the aims of Article 28 MCD and the EBA Guidelines on arrears and foreclosure, as well as the supervisory expectations and guidance of their respective NCAs and that their legal documentation reflects the reasonable forbearance measures and consumer protection principles that apply to their dealings with mortgage borrowers in arrears or at risk of foreclosure. Some firms may equally wish to consider looking further afield and assess experiences and best practices from the CBI's introduction of the CCMA and MARP and assess whether there are transferrable lessons learned that may be applied to and reflected in (i) client (borrower) and counterparty-facing terms and conditions and/or other legal documentation as well as in (ii) internal policies and procedures. With the operationalisation of the EU's Credit Servicers Directive as well as the MCD's legislative review as well as more broadly a general tightening of standards as well as elimination of jurisdiction-specific divergences to be expected during 2024 and beyond, supervised firms, regardless of which EU-27 jurisdiction they operate in, may want to take prompt pre-emptive action to improve compliance and how that is evidenced in their documentation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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