The Secondary Credit Market Act is changing the market for non-performing loans

The purpose of the Secondary Credit Market Act (KrZwMG) is to implement into German law the Secondary Credit Market Directive ((EU) 2021/2167) of November 24, 2021, which relates to the obligations of credit service providers and credit purchasers in connection with NPL transactions. It entered into force on December 30, 2023. The implementation of the Directive will lead to a significant change in the NPL market. It is likely to be controversial whether this is a phenomenon of regulatory dialectics or rather a preventive supervisory measure.

In the years following the financial crisis, the significant level of non-performing loans on the balance sheets of European banks was identified by legislators as a key obstacle to a rapid recovery of both the financial sector and the real economy. This was based on the assumption that the high level of NPLs made it more difficult to provide new loans, as this tied up much-needed capital.

Written approval from BaFin

If you wish to provide credit services in Germany in the future on a commercial basis or to an extent that requires a commercially organized business operation, you will require written permission pursuant to Section 2 (2) KrZwMG in conjunction with Section 10 (1) KrZwMG. Pursuant to § 10 (1) KrZwMG, the written approval of BaFin is required. Pursuant to Section 10 (8) KrZwMG, BaFin must publish the granting of the license in the Federal Gazette (Bundesanzeiger) in accordance with the provisions of Section 32 (4) KWG. A transitional period of at least six months is provided for companies that were already active before the Act came into force. During this period, credit service providers may continue their activities under the previous law.

A prerequisite for the existence of a credit service is that the credit purchaser acquires non-performing credit exposures or receivables from the previous creditor. Section 2 (3) nos. 1 to 4 KrZwMG then regulates the collection and enforcement of the lender's payment claims, the renegotiation of rights and obligations or other material conditions arising from a non-performing loan agreement, the handling of complaints and the notification of the borrower of changes in interest rates, charges or payments due.

Appropriate business organization

An important objective in promoting an efficient secondary market for non-performing loans is the creation of a uniform framework for credit services institutions. To this end, the KrZwMG provides for qualitatively oriented minimum supervision without quantitative requirements for credit services institutions. In terms of qualitative supervision, Section 14 (1) KrZwMG requires credit services institutions to have an appropriate business organization based on proportionality aspects (type, complexity and scope of the respective business). From a practical point of view, a partial parallelism with the requirements for credit institutions can be assumed.

Regulatory compliance

Credit service providers must then set up a risk control system that enables them to assess and control their risk positions individually and correlatively. If the credit institution decides to outsource certain processes, it appears necessary to set up an outsourcing management system proportional to the outsourced activities. The established business processes must be comprehensively documented by the institution and assessed separately from a data protection perspective. All internal processes must be implemented within a control environment. At a minimum, the control environment must provide for dual control and include regulatory compliance, which ensures that legal and regulatory requirements are met at all times and that changes or adjustments to internal policies and procedures are monitored.

Strengthening Borrowers' Rights

In addition to the above-mentioned obligations to establish a proper business organization, Section 14 (2) to (4) KrZwMG also stipulates specific organizational obligations, many of which are based on consumer protection aspects and are aimed at the relationship between the borrower and the credit service provider.

In addition to the original aim of creating an efficient secondary credit market, another key objective of the law is to safeguard and strengthen the rights of borrowers and ensure that they are treated appropriately. Internal regulations and control procedures should always be aimed at this goal and at the protection of personal data. It also stipulates that credit services institutions must comply with regulations on the protection and fair and prudent treatment of borrowers and establish appropriate internal procedures for the management of borrower complaints.

Challenges for Credit Services Institutions

Companies operating in the NPL sector should immediately assess whether their business activities fall within the scope of the KrZwMG. The challenge for credit services institutions is to set up an appropriate business organization and to make it adaptable during the process of establishing the new regulatory framework so that it can be adapted to new requirements or any regulatory specifications at any time.

Published: February 2024