New era for NPL service providers

1. Obligation program for NPL market participants

At the core of the German Act on Secondary Loan Markets is the Credit Services Institutions Act ("KrDIG-E"), which sets out the legal framework for participants in the non-performing loans (NPL) market. With regard to the market participants, the draft bill distinguishes between the "credit purchaser" and the "credit service provider" or "credit service institution". While credit purchasers under Section 2 (5) KrDIG-E are such persons or entities that purchase claims of the creditor from NPL in the course of their commercial or professional activities, the classification as a credit service provider or credit service institution is primarily based on their activity, the provision of credit services. "Credit services" are, pursuant to Section 2 (3) KrDIG-E, the following activities: 
 

1.    the enforcement of claims due under NPL,

2.   the renegotiation of rights and obligations or other conditions from NPL,

3.    the handling of complaints in connection with NPL, and

4.    informing the borrower of changes in interest rates, charges or due payments in connection with NPL.
 

Pursuant to Section 7 (1) of the KrDIG-E, the primary obligation of the credit purchaser is that, when purchasing an NPL or claims thereunder, he must engage a credit service provider to provide credit services if the borrower is a natural person or a micro, small or medium-sized enterprise. At the time of engagement, the credit purchaser must notify the German Federal Financial Supervisory Authority ("BaFin") and the Deutsche Bundesbank of the name and address of the credit service provider. A notification obligation also exists for the transfer of NPL or claims thereunder to another credit purchaser.

Credit service providers are subject to stricter regulation. They will be subject to supervisory rules based on the requirements for credit institutions or payment institutions. In the future, credit service providers will be subject to supervision by BaFin and will require a license to provide credit services pursuant to Section 10 (1) KrDIG-E. Requirements for the organization, the managing directors or the owners of qualifying holdings, as known from credit or payment institutions, have also been included in Sections 14 et seq. KrDIG-E. The same applies to the duty of disclosure of credit service institutions under Section 36 KrDIG-E in the event of one of the circumstances listed therein.

It is also worth to note the obligation of credit service institutions to set up a separate escrow account for the receipt of payments from borrowers, which is intended to serve to grant the credit purchaser access to the borrower's payments even in the event of the credit service institution's insolvency (Section 17 (2) KrDIG-E) and is already known in this form from the area of payment services. Outsourcing by credit service institutions is also regulated (Section 20 KrDIG-E).

Further rules of conduct and far-reaching information obligations vis-à-vis borrowers or information obligations vis-à-vis BaFin, which apply equally to credit purchasers and credit service providers, can be found in §§ 28 et seq. KrDIG-E.

2. License procedure

To continue offering credit services, companies that currently provide such services without a special license or only operate with a collection license under the German Legal Services Act (RDG) will need a license from BaFin in the future. Only licensed credit institutions, CRR credit institutions, certain companies licensed under the KAGB, and creditors licensed in the EU are exempt from the license requirement. All other credit service providers must submit an application for a license, to which a variety of information and documents must be attached in accordance with Section 10 (3) KrDIG-E. This includes, for example, a business plan and evidence of compliance with requirements for managing directors and owners of qualifying holdings.

Despite the shorter list of requirements (compared to the license application of credit institutions and payment institutions), this license procedure is also likely to be very complex, burdensome and time-consuming in most cases due to the abundance of documents to be submitted. In addition, Section 10 (9) KrDIG-E authorizes the Federal Ministry of Finance to issue a regulation on the type, scope and form of the application, which may contain further requirements. Meeting the formal requirements for a permit alone will therefore require careful preparation. However, this applies all the more to the necessary adaptation of organization and processes, up to and including the qualification of the acting persons, in order to fulfill the substantive requirements so that the license can be granted.

These requirements for license applications should not be underestimated, especially since the legislator is obviously taking the license applications for credit and payment institutions as a yardstick and BaFin will examine the applications accordingly.

3. Transitional provisions

The transitional provisions under Section 47 KrDIG-E are likely to pose a serious challenge for credit services institutions, insofar as they remain in force during the legislative process. Para. 1 stipulates that companies that already provided credit services before the Act came into force may only continue to provide them until a decision by BaFin becomes final or until June 29, 2024 at the latest. Para. 2 clarifies that in the event of an intended provision of services beyond this date, a notification must be submitted to BaFin within two weeks of the Act coming into force. The companies concerned cannot therefore remain inactive until mid-2024, but must follow the legislative process closely and act swiftly when the Act comes into force.

Section 47 (2) Sentence 2 KrDIG-E, which requires the submission of the application for the license by no later than four weeks after the Act comes into force, is likely to be even more serious. It remains to be seen what requirements BaFin will place on the completeness of the corresponding application. From a risk perspective, it is likely to be too late to act when the Act comes into force because of the time and effort required to submit all the documents. This is all the more true if the organizational and personnel prerequisites must first be created within the company in order to obtain a license. For this reason, the affected service providers are advised to prepare the application for the license at an early stage in order to fulfill all requirements and ensure timely submission. This applies in particular to companies with a complex ownership structure, which must be disclosed and provided with evidence as part of the incidental ownership control in the license procedure. Errors in this respect are also sanctioned by penalties and fines. Under Section 44 (1) No. 1 KrDIG-E, anyone who provides a credit service without a license is liable to a prison sentence of up to five years or a monetary penalty.

4. Conclusion

The German Act on Secondary Loan Markets brings with it a host of new obligations aimed at both purchasers of NPL and providers of services in connection with NPL. In the future, service providers will need a license from BaFin as credit service institutions in order to continue operating. Given the European requirements, it is to be expected that a regulatory regime will be introduced that is at least partially based on the requirements for credit and payment institutions. The companies affected will already have to make fundamental strategic decisions on how to deal with future regulation. In addition to preparing an application for a license in Germany, they may also consider obtaining a license in another European member state or changing their business model.

_{Published: September 2023}