Effective from 22 July 2024, the new law establishes a legal framework in respect of the transfer of non-performing loans (NPLs) from EU-established credit institutions to credit purchasers.

In addition, the NPL Law creates a new category of professionals of the financial sector (PFS): the credit servicers.

Scope: The NPL Law regulates the transfers of creditor’s rights under NPLs or the NPLs themselves, by EU-established credit institutions to a credit purchaser.

In accordance with the NPL Directive, the NPL law applies to three types of entities, specifically:

• Credit purchasers: Natural or legal persons other than a credit institution that purchase creditor’s rights under the NPL or the NPL itself, during their trade, business, or profession.
• Credit servicers: Legal persons appointed by the credit purchasers that do not hold the necessary authorisation to carry out credit servicing activities. The credit servicers manage and enforce rights and obligations of credit purchasers under the NPLs and perform credit servicing activities, on behalf of the credit purchasers.
• Credit service providers: Third parties to which credit servicers may outsource some of but not all the credit servicing activities.

Credit servicing activities include collecting or recovering payments from borrowers due under the NPLs, renegotiating with borrowers the terms and conditions under the NPLs, managing any complaints in respect of the NPLs, providing information to borrowers relevant to the NPLs.

The NPL Law does not apply to credit servicing by credit institutions, AIFMs, and professional lenders, as well as NPLs purchases by EU credit institutions and transfers made before 30 December 2023.

• EU credit institutions must provide prospective credit purchasers with pre-contractual information before entering an NPL transfer agreement, including any associated guarantees, to enable the assessment of NPL value and recovery likelihood.
• Credit purchasers, on their side, must ensure the confidentiality of the received information.
• Non-EU credit purchasers must designate an EU-based representative to ensure compliance with the obligations under the NPL Law.
• EU-based credit purchasers must contract with a credit servicer or credit institution for NPL servicing unless they hold the necessary authorisation.
• The NPL Law mandates specific details in credit servicing agreements, including service descriptions and remuneration.
• The NPL Law introduces credit servicers as a new category of PFS. These entities manage and enforce NPL rights and obligations, requiring authorisation from the Commission de Surveillance du Secteur Financier  (CSSF).
• Licences for credit servicers are granted entirely to legal entities meeting specific regulatory requirements, including anti-money laundering and counter-terrorist financing policies and capital and corporate governance requirements. For example, credit services are required to have a minimum share capital of €75,000 or €150,000 if authorised to handle borrower funds. Credit servicers must also operate under detailed agreements and maintain records.
• The CSSF will monitor and assess ongoing compliance with the NPL Law by credit servicers, including those operating in other EU member states.
• Credit servicers can benefit from the EU passporting regime, hence operating across EU Member States, by way of the establishment of a branch in another Member State or the provision of services on a cross-border basis into another Member State, without any further licensing requirements and/or regulatory restrictions.
• Credit servicers have the right to outsource part of their activities to credit service providers, a type of entity not subject to CSSF authorisation and not permitted to receive and keep funds from borrowers. Such outsourcing must be governed by a written outsourcing agreement ensuring compliance with relevant laws and must not limit the CSSF’s supervisory capabilities.
• Despite outsourcing, credit servicers remain fully responsible for their obligations under the NPL Law and subject to recordkeeping obligations. They must inform the CSSF and, where applicable, the competent authorities of the host EU member state before outsourcing activities.

The NPL Law aims to provide a structured legal framework for managing and transferring NPLs, thereby opening new opportunities within the financial sector. The NPL Law enables credit institutions to offload NPLs from their books by transferring them on a secondary market, thereby avoiding excessive accumulation of such NPLs on their balance sheets. It also aims at streamlining the handling of NPLs, ensuring transparency in transfers, and maintaining a high level of protection for consumers and other borrowers. Moreover, Luxembourg-based asset servicing companies may find new opportunities to serve credit purchasers at the European level, leveraging their existing expertise in portfolio management.

If you need assistance in navigating the new provisions of the NPL Law, you can request a free consultation with our Banking and Finance and Regulatory teams in Luxembourg.

The NPL Law (in French) can be found here.