Non-performing loans: the impact of the proposed rules on consumers

On the 14^th of March 2018 the EU Commission published its proposals for tackling the problem of non-performing loans (NPL), i.e. the Proposal on a Directive on credit services, credit purchasers and the recovery of collateral.

NPLs are loans on which borrowers are unable to make the scheduled payments for more than 90 days, or those loans that the financial firms assess as being unlikely to be repaid considering other criteria. The financial crisis made the problem of NPL particularly acute, when masses of borrowers (consumers and businesses) were unable to pay their debts. As a result, a large number of NPL piled up on the books of financial firms, tying up their capital and endangering their solvency; and depending on the size and number of firms affected potentially threatening the stability of the entire financial system. Consequently, the initiative for their regulation came under the umbrella of completing the Banking Union. The Proposal is also part of the broader effort to create a Capital Markets Union. 

The proposed Directive aims to tackle NPLs in two ways. First, it seeks to encourage the development of an EU-wide secondary markets for NPLs by establishing a harmonized legal framework for the sale of these products. Secondly, it seeks to increase the efficiency of debt recovery procedures through the availability of a distinct EU-wide common accelerated extrajudicial collateral enforcement procedure (AECE). Although the proposed Directive is not a special consumer protection instrument (it applies to both consumer and business NPL loans) consumer interest are taken into account under both pillars.

Under the first pillar, the Proposal put in place safeguards to protect consumers whose loans are being classed as NPL and are being sold to third parties. These third party buyers may be banks and non-bank institutions, and they may be based in a different Member State from the originator of the loan. This naturally raises concerns. Non-bank institutions, specialized debt collection firms are known for using unfair and harsh practices in collecting debt from consumers. Depending on the Member State, these firms may fall under a less stringent regulatory regime than banks, including looser conduct standards which they must adhere to. It also raises the danger that consumers would be subjected to a foreign legal regime if they decide to challenge the behaviour of the debt collector or if they are being sued. To prevent any harm stemming from these aspects, the Proposal clarifies that consumer protection rules that were applicable to the initial credit agreement, i.e. the agreement that consumers entered into with their banks, will continue to apply irrespective of who buys the loan and irrespective of the legal regime in force in the Member State where the loan is sold to.

The Proposal clarifies that consumer protection rules specially include the rights granted under the Mortgage Credit Directive, the Consumer Credit Directive and the Unfair Contractual Terms Directive. In the same way, all the consumer protection rules in force in the Member State of the consumer continue to apply, including statutory and other mandatory law. The legal framework seems to be understood more broadly than formal rules, including infromal procedures put in place to protect the most vulnerable, the overindebted consumers. In order to create a coherent legal framework, the new rules will ask for an amendment to the Mortgage Credit Directive. Similar to Article 17 of the Consumer Credit Directive, in the event of assignment of the creditor's rights to a third party, the Mortgage Credit Directive will be amended to state that the consumer shall be entitled to plead against the assignee any defence which was available to him/her against the original creditor.

Regarding the second pillar, consumers are protected by consumer contracts being exempted from this special enforcement regime. Consumer debt will have to be enforced by the existing enforcement procedures in Member States.

We can therefore see that the the new rules as they stand in the Proposal are not likely to have a significant effect on consumer welfare, they will neither provide more protection nor will they harm consumers. The level of consumer protection will remain the same as before the Directive: the effect of the Proposal is status quo on consumers. It is a distinct question to what extent the existing, underlying rules protect consumers, and whether this Proposal should complement or supplement the existing legal framework with more substantive intervention.

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