Regulated mortgages: If the buyer does not expect to enter into new regulated mortgage contracts they do not need any regulatory permissions – providing they appoint a regulated firm to administer the contracts purchased.

If a firm purchases a debt, and so becomes the creditor, it needs permission for exercising, or having the right to exercise, the lender’s rights and duties under a regulated credit agreement (Article 60B(2)).

Consumer credit: a firm wishing to be authorised will need to meet the threshold conditions, including suitability, business model and effective supervision. There are also specific conduct of business rules in the Consumer Credit (CONC) module of our Handbook.

Mortgages: Permission to be a mortgage administrator will require a firm to meet “fit and proper” criteria, specific form of incorporation, location of headquarters or incorporation, ability to meet operational, specific compliance and audit requirements as well as additional conduct requirements.

No [specific] requirements. The Act on collection of the payments gives some guidelines how to collect the payment with ordinary way

A person who collects debts on behalf of another person, or collects debts which have been taken over for collection, normally requires a permit from the Data Inspection Board.

The Data Protection Authority determines whether the conditions are met. Debt collecting must be conducted in a professional and judicious manner. The Data Protection Authority ensures that these rules are adhered to. This is achieved by inspections.

A person who collects debts on behalf of another person, or collects debts which have been taken over for collection, normally requires a permit from the Data Inspection Board. Before permission is granted, the company must have in its employment a person with professional legal experience of debt collection.

According to Art. 17 of Act 129/2010 Coll. the consumer credits can be transferred on a creditor with a full authorisation to provide consumer credits, bank, foreign bank or a branch of a foreign bank or on a third party in case of a claim of a past due consumer credit or a claim which became due before the consumer credit due date is transferred or assigned.

In case of transfer in the virtue of Art. 92(8) of Act No 483/2001 Coll. there are no requirements as it does not have to be a bank. For the transfer via refinancing of the loan the same requirements as for the loan originator apply.

The servicing of loans is not recognised as a separate activity and it falls under the definition of providing credit and loans. The servicing of a loan is considered as a banking activity requiring a banking license

There are no specific requirements for buyers to legally acquire a loan except in case of consumer credit – the buyer has to be authorised to provide consumer credit. A bank may also transfer a consumer credit to a buyer established as:

In order to legally acquire a performing loan, the buyer is required to be a creditor (is required a full banking licence in case of a credit institution or the registration as a non-bank professional creditor in the NBR registers). fit and proper criteria for non-bank professional creditors are regulated. entities need to be incorporated as joint-stock commercial companies. Regarding the NPLs for individuals, the transferee (which can be only an entity performing debt recovery activity) is required to have its head office, a branch or a representative in Romania for solving potentials disputes and for being held liable in front of public authorities. The persons responsible for managing the activity shall be of good repute, knowledge and competence requirements for staff should be required, the remuneration structure of the staff should not be solely contingent on the achievement of recovery targets, nor should it be correlated solely with the amounts recovered.

The entities performing debt recovery activity need to be registered with the National Authority for Consumer Protection. In case of refinancing full banking licence is required, according to the banking legal framework, when the loan servicer is not allowed to carry out lending activities in accordance with the relevant applicable legal framework.

Under Portuguese banking law there is no specific legal framework regulating the transfer of bank loans. However, since lending is legally qualified as a restricted activity, only credit institutions or financial companies may acquire such loans on a professional basis without it being considered indirect lending. Nevertheless, the transfer of bank loans is not considered indirect lending if those are already non-performing loans. Therefore, the answers below rely on the assumption that the transferred loans in question are not non-performing loans, since none of these restrictions would otherwise be applicable.

According to article 5(2) of the Portuguese Securitisation Law, the Portuguese Securities Market Commission (Comissão do Mercado de Valores Mobiliários or CMVM) can authorise a loan servicer other than the Seller. The Law does not establish specific requirements, but the servicer is required to meet certain ‘fit and proper’ criteria, and adequate human and operational resources. For the servicer to grant new credit (fresh money), it must be a credit institution, since only credit institutions may grant credit professionally.

Specific requirements need to be fulfilled, for instance in the case of purchase of receivables (factoring) but also other set ups might be possible (SPV) and depending on the funding and construction/transactions performed, a full banking license might be necessary

It depends on the activities performed; in case of pure outsourcing, no specific requirements necessary. Otherwise i.e. in the case of factoring, a banking license would be required. If a banking transaction is performed as listed in Art. 1 BWG, a banking license is required

There is a duty for companies to have a license if they offer credit. In case of a transfer of a loan, the new owner is the one who ‘offers’ the credit. In such a case a license is needed. There are however waivers, such as for Special Purpose Vehicles (SPVs). In that case the new owner has outsourced the management to a party that has a license as a credit intermediary or a waiver, for example for credit institutions

In the Act on Financial Supervision (Wet op het financieel toezicht (Wft)) there is a duty for companies to have a licence from the Authority of Financial Markets (AFM) or a waiver, if they act as an agent in the establishment of (loan) agreements between lenders and consumers In some cases debt collectors need a license (to renegotiate terms of an agreement on behalf of the lender), but this is not always the case since waivers also apply (for example if the agent purely collects payments).

The Civil Law does not regulate such matters. Only general provisions for different kind of contracts are included in the Civil Law which are applicable to any contractual party.

A provider of debt recovery services is entitled to recover a debt in the name of or on behalf of a creditor, if it has registered as a merchant or a performer of professional activities and has received a special permit (licence) for debt recovery. The Consumer Rights Protection Centre shall issue the special permit (licence).

In case of performing household loans (either unsecured or secured), the acquirer must have a licence of a credit provider, i.e. a consumer credit provider licence, a banking licence or a restricted banking licence. In case of performing corporate loans, no specific requirements are in place.

a buyer of a loan is expected to be authorised by the Authority to carry out the activity of lending under the Financial Institution’s Act and/or the Banking Act [banking rule BR/14 principle 4.1]

Third party service permits are not known to exist. BR/14 requires that if the service being outsourced is lending, a banking licence is required

(D) A financial institution, which is a subsidiary of a credit institution incorporated in a member state and which provides its services in the Republic or operates in the Republic through a branch, under the provisions laid down in section 10Bbis of the Business of Credit Institutions Law.

(C) A credit institution that is authorised and supervised by the competent authority of another member state, which has the right, by virtue of section 10A of the Business of Credit Institutions Law, to provide services or to establish a branch in the Republic.

In order to obtain authorisation, the company must submit information to the Central Bank demonstrating amongst others, that it fulfils certain “fit and proper” criteria, operational and organisational requirements and any other information as deemed necessary by the Central Bank which are reflected in the Law.

According to the Law regulating the Sale of Credit Facilities and Other Related Issues, only the following legal persons are allowed to acquire credit facilities that are less than 1 mln:

-A risk assessment by the bank that has to carry out for the tasks will outsource

For outsourcing applications (the bank will outsource the servicing of loans to a third party) the following are required:

Non-banks should fulfil simplified capital requirements. An investor needs to partner with a local management company in order to comply with national regulation, the securitization law strictly requires the establishment of a local SPV

Dans le cas de créances non échues, l’acquéreur exerce une activité réglementée et doit donc avoir été autorisé dans les conditions suivantes : -banking licence, meet certain "fit and proper" criteria, specific form of incorporation, location of headquarters or incorporation, ability to meet operational requirements, ability to meet certain compliance and audit requirements, accounting requirements (i.e. do buyers have to comply with IFRS or national GAAP provisions?)

The servicer is not legally required to comply with specific requirements, as there are no specific regulations on the servicing activity. Whether the outsourcing is deemed to affect core functions or services, credit institutions shall formally notify the competent authority, at least one month in advance, of their plans to delegate those functions or services. This notification shall be accompanied by the related analysis of risks and of the mitigating measures. The competent authority, depending on the nature or criticality of certain functions or activities, may establish additional limitations on the delegation.

They are capable of loan/credit acquisitions only under the condition that they have signed a loan management agreement with a servicing company properly licensed and supervised by the Bank of Greece. Loan Transferring Companies themselves are not required to obtain any operating license.

·They are Greek companies under the legal form of Société Anonyme or companies established in any other EEA (European Economic Area) Member-state or companies domiciled in third countries, which may at their discretion operate in Greece through a branch, provided that they are not domiciled in countries with “favourable” tax regimes or “non-cooperating” according to Greek tax law 4172/2013.

All companies should be AML compliant and have a detailed report setting out the basic principles and methods ensuring the success of forbearance/restructuring solutions; such report shall not be required where the firm carries out servicing business on behalf of a credit or financial institution supervised by the Bank of Greece that is primarily obliged to meet this requirement.

The “simple” servicing companies have less requirements such as a lighter fit and proper framework and a few governance requirements such as a written policy to prevent conflicts of interest and initial capital of one hundred thousand euro (€100,000).

For the refinancing servicing companies the requirements are the same as other financial institutions operating in Greece, i.e. leasing, factoring and consumer credit companies. More specifically, it is required that these companies need to comply with the fit and proper requirements for their management body members and for their shareholders, with governance requirements equivalent to banks and initial capital of four million five hundred thousand euro (€4,500,000).

The Bank of Greece Executive Committee Act No 118/19.5.2016 specifies the criteria, conditions and supporting documentation with respect to the licensing procedure for the establishment and operation of the servicing companies. According to the above mentioned Act, the servicing companies are distinguished into two different categories: the “simple” servicing companies and the ones that are authorized to provide refinancing.

• They must be granted a special operating license for the above purpose by the Bank of Greece, which also remains the sole competent authority exercising supervision throughout their active operating status

• They are Greek companies under the legal form of Société Anonyme or companies established in any other EEA (European Economic Area) Member-state which operate in Greece through a branch

There are no licensing or regulatory requirements in relation to the acquisition and holding of a loan portfolio. However, depending on the nature of the loans, the transferee may be required to:

The firm is to be incorporated in the State. The legislation also allows them to set up a branch in the State also, for example, if a firm is based in the UK, the firm can then set up a branch in Ireland.

Pre-Approval Control functions have to go through the fitness and probity regime by submitting an Individual Questionnaire.

Under the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 which was enacted on 8 July 2015 only entities that have an appropriate licence can conduct credit servicing. This legislation was brought in to ensure that borrowers whose loans were sold by a regulated lender to an unregulated entity maintained the same level of protection as they had prior to the sale of the loan. Under the legislation the unregulated loan owner is required to appoint an authorised credit servicing firm to service the loan portfolio. Entities that provide credit servicing include:

Both activities are usually considered as "factoring", thus, an activity requiring a license. However, the license requirement is only triggered when there is a framework agreement between the seller (bank) and the purchaser (factoring company) - aside from the concrete sale of claims. The framework agreement does not have to exist in written form. In the case of a transfer of individual NPL portfolios (without a framework agreement) to investors or servicers, the German Financial Supervisory Authority (BaFin) decides on a case-by-case basis whether it considers the activity in question to be "factoring" requiring a banking license.

The purchase of loan receivables in execution of a sales contract does not constitute credit business in the meaning of § 1 According to the constant administrative practice of BaFin the contractual transference of the loan relationship between originator and borrower on the credit buyer and borrower (only possible with the approval of the borrower) in execution of the sale contract isn’t looked as loan business.

Based on Art. 25a KWG and MaRisk (AT 9), the service provider has to provide sufficient resources and expertise to perform the outsourced activities and processes in an appropriate manner.

A buyer of a loan or a portfolio of loans is not required to obtain a full or restricted banking license or required to meet any “fit and proper” requirements. If the buyer is not already registered according to the AML regulation in Denmark, registration according to this is a requirement

The servicer is not required to obtain a full or restricted banking license. The servicer is furthermore not required to meet any “fit and proper” requirements.

The minimum threshold of the registered capital and the equity of the financial institution shall be maintained above BGN 1 000 000 (500 000 EUR) on an ongoing basis. The origin of the capital funds shall be legitimate and transparent

If the activity of acquiring loans represents 30% and more of the activity of the buyer and it is by occupation, a registration into a public register of the BNB is required under art. 3a of Law on credit institutions. The legislation determines requirements about the qualification, experience and reputation of the managers and qualifying shareholders.

The “creditors licensed or registered in application of this Book” are creditors of consumer credits and creditors of mortgage loans (both licenses to be issued by the FSMA). No other institutions or persons were specifically designated by Royal decree so far.

With respect to the transfer of mortgage credits, article VII.147/17 of the Code of Economic Law confirms that: “Without prejudice to the application of articles 1250 and 1251 of the Civil Code, a mortgage credit with movable use (e.g. to acquire a vehicule) or the receivable resulting from such credit agreement can only be assigned to, or, after substitution, only be acquired by a creditor licensed or registered in application of this Book, or can be transferred to or acquired by the National Bank of Belgium, the Protection Fund for Deposits and Financial instruments, credit insurers, institutions for investment in receivables within the meaning of article 2 of the Law of 3 August 2012 on various measures to facilitate the mobilization of receivables in the financial sector, or other persons specifically designated to that purpose by the King”.

The “creditors licensed or registered in application of this Book” are creditors of consumer credits and creditors of mortgage loans (both licenses to be issued by the FSMA). No other institutions or persons were specifically designated by Royal decree so far.

With respect to the transfer of consumer credits, article VII.102 of the Code of Economic Law confirms that « The agreement or the receivables resulting from the credit agreement can only be assigned to, or, after substitution, only be acquired by a creditor licensed or registered in application of this Book, or can be transferred to or acquired by the National Bank of Belgium, the Protection Fund for Deposits and Financial instruments, credit insurers , institutions for investment in receivables within the meaning of the Law of 3 August 2012 on undertakings for collective investment which satisfy the conditions laid down in Directive 2009/65/EC and institutions for investments in receivables, or other persons specifically designated to that purpose by the King”.

There is no direct supervision by the Belgian prudential supervisor towards the servicer. The necessity to comply with certain specific requirements is however organized indirectly, through the supervised institution, which remains fully responsible for the outsourced services and activities, and which will therefore itself take all necessary measures to supervise the activities provided by the external servicer (and, e.g. its ability to meet operational requirements and specific compliance and audit requirements, cf. article 66 of the Banking Law).

The ECB Banking supervision's (SSM) "Stocktake of national supervisory practices and legal frameworks related to NPLs" collected data from national competent authorities of the 19 euro area MS in December 2016. The survey indicates that the regulatory framework in all participating countries allows banks to outsource NPL loan servicing activities, although this practice remains uncommon in many Member States. The Stocktake also shows that legal and regulatory frameworks present a favourable environment for NPL transfer and the entry of specialised investors into the local market. The few countries that had legal impediments, such as portfolio transfer restrictions on non-banking institutions or barriers to the entry of foreign investors, have amended their regulatory frameworks.

Overall, the IMF survey suggests that potential buyers of NPL face relatively few explicit restrictions. Most countries allow that third-party (including foreign) banks, as well as institutional investors buy NPLs from local banks. The survey responses also document that obstacles to market entry existed in some Member States still in 2015 (see Figure 6), though some conditions have changed in a few Member States since then, most obviously with respect to the activity of loan servicing firms.

In 2015, the IMF (2015a, b) conducted a survey among 19 country authorities as well as 10 banks operating in these countries about institutional obstacles related to (1) the supervisory framework, (2) the legal system, (3) distressed debt markets, (4) informational shortcomings, and (5) the tax regime. At the request of country authorities, the individual country replies were not revealed, i.e. the table below does not display which country gave which rating. While the responses reveal a considerable variation, the concerns were on average somewhat more severe with respect to the legal framework and distressed debt market than for other issues addressed by the NPL Action Plan. While the questions on the legal framework were related to insolvency procedures and enforcement of NPLs, the issues identified with market development related to:

Losses form NPL sales were also seen as a key obstacle to the development of NPL markets. Disposals can lead to losses due to several reasons. First, and foremost, disposing assets that are not adequately provisioned leads to financial losses, especially when market conditions are depressed. Apart from the subjective assessments mentioned above, under-provisioning may also arise due to regulatory or fiscal disincentives (i.e. non-deductibility of provisioning losses). Forbearance rules may also allow banks to graduate NPLs to performing status, even on a temporary basis, circumventing the need to provision more. As a second manner in which disposals may generate losses, banks using advanced internal ratings-based (A-IRB) models may suffer from higher capital requirements in the future as the losses appear in their historical data sheets. Lastly, heightened preference for an accelerated NPL reduction may flood the market with similar types of assets and lead to fire sales.

Higher recovery expectations of the originating bank is seen by several respondents as the main cause of a high ask price in the context of NPL sales. It is quite common that buyer and sellers have different valuations of the underlying assets, especially in the case of NPLs where data quality and availability issues may exist (see above). However, valuation gaps may exist even in the absence of those issues. For example, the buyers and the sellers may have different discount rates to discount the future cash flows, effectively widening the bid-ask spread especially in countries where recoveries take substantial amount of time. As another example, investors and originating lenders may have different stances in assessing recoveries. Investors often aim to conduct a detailed and "dispassionate assessment" of the expected recovery, relying exclusively on recent collateral valuations, payment histories of lenders, and other forms of verifiable data on expected future cash flows. Originating lenders, on the other hand, may conduct a more subjective assessment, possibly due to the presence of "endowment biases", blending in their current financial positions (i.e. the ability to absorb losses) or any past/future commercial relationship with the borrower.

The cost and availability of loan servicers has been identified amongst the entry obstacles most participants. Third-party services represent an alternative for buyers of NPLs to manage the loans and client relations. Having a third-party servicer also allows the investors to sell the assets to other investors in the future, effectively providing them an outside option. However, in some jurisdictions the servicers have to be licensed and possibly supervised, much like the investors. As another key complaint, several respondents noted that these requirements, apart from being onerous, differed substantially, undermining the economies of scale advantages that many international services rely on. Despite these concerns, however, several respondents note that debt servicers are becoming more common-place across the EU, especially over the last two years, embracing new asset classes.

A number of respondents also highlight that local social, political and economic conditions may also be important determinants of entry decisions for investors. The underlying economic conditions are clearly an important factor for the expected value of the NPLs. A lower unemployment rate and higher growth rate have a positive impact on cure rates, effectively increasing the expected returns for investors. Political conditions can be determinant in two distinct ways. First, much like macro-economic conditions, political stability can help ensure high future returns. Second, and perhaps more importantly, collateral enforcement may be made difficult due to political and social atmosphere. This is especially the case in countries enforcing loan contracts are seen as putting people out of their homes, i.e. where retail mortgage NPLs are concerned, and where there is a public perception of unfair practices or financial misconduct by banks. To that extent, certain investors may be concerned with reputational risks arising from the use of recovery procedures, including foreclosures or more intrusive collection practices. Conversely, originating banks may also perceive NPL disposal harmful on their existing relationships with their customers.

In addition to licensing and authorization requirements, taxes on loan transfers have been identified as a second impediment to the development of the secondary NPL markets. There are a number of tax contingencies that may arise from the transfer of loans. First, losses on asset disposals may not be tax deductible for the originating bank and may give rise to taxable income for debtors. Second, in some countries asset transfers may give rise to withholding taxes on interest income, stamp duties, or other administrative costs, such as notarial costs and collateral registration fees.

Specific entry barriers and the inability of certain investors to purchase assets have also been identified as important obstacles to the development of secondary markets. To that extent, certain jurisdictions allow a sale of NPLs only if the investors are financial entities or even banks, which inhibit entry from a wider spectrum of investors. NPL transfers may also be subject to specific authorization requirements and approvals of local authorities in the case where foreign entities are involved, which increased transaction costs. These restrictions are at times more poignant for foreign, in particular non-EU, investors. As noted above, in some jurisdictions the consent of the debtor may also be sought prior to the transfer of assets. These restrictions are particularly present for the transfer of retail NPLs. The presence of entry barriers and transfer restrictions may impede investor interest and, at best, focus investors' interest in sufficiently large markets where they may reap net benefits from obtaining the required licenses and authorization.

The improvement of judicial and operational capacity could help improve recovery expectations in certain regions. Small claims courts do not exist in some member states, which undermines efficiency of the legal procedures for credit recovery and lengthening the collection term and cost. The length of bankruptcy proceedings in certain member states vary substantially depending on the assigned court, which are perceived to be due to differences in the capacity of those courts in dealing with NPL resolutions. In addition, property appraisals conducted in the context of secured NPL securitisations are characterised by high levels of uncertainty. Valuation uncertainty is driven partly by the illiquid nature of the assets securing the loans. This uncertainty is exacerbated by lengthy recovery procedures.

Several respondents also noted that there are severe cross-border differences in the legal procedures and their application. In particular, differences over the application of legal foreclosures, insolvency procedures, consumer protection laws, as well as out-of-court procedures constrain the gains from economies of scale for larger international investors. National differences and legal impediments over the dunning process (i.e. methodical communication with borrowers to ensure the collection of accounts receivable) are also reported. The respondents also note that there are legal impediments to access of the creditors to contact data of the debtors for non-creditors. As a whole, these procedural differences make it difficult for cross-border investors and services to automate and standardize the maintenance of NPLs.

The efficiency of out-of-court procedures is also partly dependent on the ability of creditors to enforce the collateral. If creditors can foreclose the collateral with relative speed and reasonable costs, this can also incentivize borrowers to lower negotiate with the creditor voluntarily, as in the case of out-of-court procedures. In many countries, the out-of-court enforcements or sales, much like their legal counterparts, involve lengthy notification periods. More importantly, in many member states debtors have the ability to stall the process through legal action, which was identified as a main reason lowering the use of out-of-court sales in Spain. One respondent highlighted that out-of-court financial collateral agreements are made difficult as the borrowers have the ability to request, and re-request) valuations by third parties.

Most respondents identified lengthy and onerous legal procedures for enforcing loans as a key obstacle to the development of NPL secondary markets. Lengthy and costly enforcement procedures introduce legal uncertainty and lower the net present value of the expected recovery proceeds, thereby driving up the bid-ask spread. Several respondents highlighted that a major issue was the ability of borrowers to oppose and obtain stay on legal enforcement actions. Lengthy enforcement procedures also increase the risk that the collateral may deteriorate in value, particularly for loans backed by industrial plants or industrial warehouses. Borrowers whose loans were sold have the right to settle their loans at the price of assignment, without distinguishing whether the loan is performing or non-performing. In addition to unlocking NPL sales, addressing these issues can also lower strategic defaults and incentivize borrowers to engage voluntarily with creditors.

The uniformity of the data on the NPLs and the underlying collateral are also identified as an obstacle undermining general data quality. In some countries, banks cannot transfer data outside the country, inhibit cross-border entry. Similarly, the non-uniform nature of loan-level data on NPLs and legal documentations limit the gains from economies of scale that would be available to international players. Several participants welcome the renewed focus on achieving data uniformity at the EU level, but point at areas that have not received adequate attention. For example, a number of respondents identify the lack of comparable, reliable and granular information on real estate market transactions as a major shortfall, rendering benchmark comparisons difficult.

Banking secrecy and consumer privacy issues are identified as the main reason for the limited flow of information to buyers. As highlighted by one respondent, the need to overcome the inherent information asymmetries has to be balanced with privacy concerns. In many jurisdictions, banking secrecy rules prevent banks or other entities managing credit exposures to disclose client-specific information to third-parties. This effectively prevents the transfer of loan-specific data prior to a sale, unless valid client consent is available, even when the loan is non-performing. The transfer of the portfolio to another entity, such as securitization special purpose vehicles (SSPVs) or external servicers, to conduct the pre-sale due diligence on behalf of the investors to circumvent these rules against divulging client-specific information is deemed too costly, further adding to the bid-ask spread.

The unavailability of high quality data has been picked as the main obstacle to the development of secondary NPL markets by most respondents. The inability of a prospective buyer to discern the quality of the assets, which is intrinsically known to the seller, leads to an outcome where only the low quality assets, or "lemons", are traded. These information asymmetries lower bid prices, obstruct the price discovery process, and may even impede altogether the development of a secondary market. To overcome these challenges, prospective investors typically conduct a detailed review of the relevant portfolio prior to making an offer for the for-sale portfolio. Ideally, the analysis should be similar to the credit risk and recovery assessments made by the banks originating the loans, involving the assessment of the expected future cash flows, collateral realization and costs related to servicing, selling, or enforcing the contract. Such an analysis is usually hampered when investors lack access to data on payment histories, recovery rates, or collateral valuations on comparable exposures.

The public consultation preceding this impact assessment asked stakeholders to identify obstacles to the development of secondary markets and to communicate their assessment of the obstacles' importance to marekt development. This annex provides an overview of the main obstacles emerging from the consultation responses. Following are the main obstacles that came out of the consultation, organized around four main pillars: data quality and availability; legal system & collateral enforcement; costs of entry & asset transfers; and recovery expectations & disposal losses.

It seems to be standard practice in most of MS that the seller describes the loan without disclosing confidential and personal data in the initial transaction phase and may only disseminate such information in a second stage or when the contract has been concluded. Those who have access to confidential information must keep it confidential.

Bank secrecy provisions generally contain an exemption that allows the bank to disclose data which are necessary and proportionate for selling the loan. In the case that the debtor gave consent, which seems to be a general practice, the bank would have more leeway to disclose personal data. This exception is explicit in HR and HU for the selling of receivables. Other Member States hold that the disclosure of debtor's protected information can in certain cases be considered as a legitimate interest of the transferor, which would be an exemption to bank secrecy provisions according to their national law (ES, FR, IE, RO, SI, DK, CY, FI, BE, MT, CZ). The strictest regimes appear to be in BG and AT where the transfer of confidential data is only allowed under the debtor's consent or an authority's decision.

Another common pattern in Member States' replies is that the bank remains responsible vis-à-vis the client for the treatment of the data when it outsources some activities to a servicer. The Member States which are more specific on this hold that the creditor, in most cases the originating bank, has to sign an agreement with the servicer that regulates the use of personal data. The servicer shall not use the personal data for other purposes than those established in such agreement. On the other hand, if the bank transfers the loan and deletes all personal data, it is not responsible vis-à-vis the client anymore (ES, FR, IE, AT, HU, FI, BE). Some MS hold that the bank retains responsibility when it transfers the loan to entities which are not subject to bank secrecy (CZ, MT SK and LT). Three MS (PT, SI and EE) only mention that the transferor retains responsibility vis-à-vis the client but they do not specify how.

Lastly, although there are some differences across the EU, the timeline for the authorisation or registration process of the relevant investment funds lasts between 20 working days and 6 months depending on the type of fund. In addition, most Member States did not report any specific tax provisions in place which may restrict and/or disincentive the transfer/sale of loans as long as funds engage in pure investment activities (in contrast to commercial activities).

Managers of large alternative investment funds (in excess of AIFMD requirements) do not encounter specific minimum capital or other additional regulatory constraints, such as governance requirements, legal structures or restrictions to the outsourcing to third-party servicers in most Member States. However, PT imposes some fit and proper criteria on managers and it requires some legal corporate structure to the funds such as a management body, a supervisory body and an external auditor. Managers and funds in ES and DE shall comply with some governance requirements and investor protection regulations if they want to become entities supervised by the competent authority and enjoy tax advantages. In all Member States, the relevant investment funds are supervised by either the financial supervisory authorities or Central Banks.

It is common that only institutional/professional investors are permitted to invest in loan-participating funds. However some Member States entitle non-professional investors when they invest an amount above a certain threshold (€20.000 in LV, €100.000 in ES and CZK 1 million in CZ). Some Member States (ES, DK, DE) also extend this investment option to non-professional investors under strict conditions such as signature of risk knowledge or investment limits.

Both open-ended and closed-ended funds are authorised to buy loans with the exceptions of BE and FI where only closed-ended funds are entitled. In ES, closed-ended funds can invest in participative loans only under some conditions and up to certain thresholds. The particular legal forms of the funds are quite different in every Member State and they adapt to the different legal traditions.

In most Member States, loans are eligible assets for alternative investment funds (in the meaning of AIFMD). In BG national investment funds cannot invest in NPLs, although AIF under the threshold of the AIFMD have no restrictions. In HU, loans are only eligible forms of investments if they are in the forms of derivative instruments and only UCITS are entitled to buy loan-based derivatives. There are special funds in SE that market shares to retail investors, which are not allowed to invest in loans.

It is possible to identify other additional regulatory constraints on the transferor. First, IE requires a notification to the debtor two months in advance for some type of loans (natural persons and SMEs) due to provisions on consumer protection. Secondly, CY permits both the debtor and the guarantor to submit a proposal to purchase the loan 45 days after the notification. A third factor is data protection and bank secrecy as mentioned below.

Only three MS (BE, HR, LV) require authorisation on the transferor by the supervisor authority. Nonetheless, other countries require authorisation under some conditions (HU, DK, AT, LT) such as the volume of the deal (HU), competition law concerns (AT, LT) or both parties are financial institutions (DK). Getting approval from the supervisor, when required, lasts between one (LV) and six months (AT). Although Member States are not very concise about the requirements that trigger the authorisation, it is possible to identify transferees' book and market value (HU) and financial stability risks (HU and BE).

Non-EU institutions face the same requirements as EU-domiciled investors in the majority of MS. EL requires foreign firms to operate in the country through a local branch and neither being from a tax haven nor from a non-cooperating country. Other exceptions are AT, HU, and BE (in case of companies domiciled in a tax haven), but they did not give further details in their reply.

Although some countries require banking licenses when the loans are performing (FR, PT, SK, LT), NPLs are exempted. Nine Member States (HR, ES, FI, IE, DK, SK, PT, LT, UK) hold that the buyer of NPLs does not encounter additional regulatory constraints. Some additional specific requirements can be triggered depending on the type of loans (consumer credit or loans under a certain threshold) due to consumer protection provisions (SI, BE, SK, NL) or the nature of the activity (credit business or factoring) (DE, AT). Three Member States (BG, RO, EL) require fit and proper criteria, including a specific form of incorporation and the location of either head offices or a branch in the country. EL requires investors to sign a loan management agreement with a servicing company properly licensed and supervised by the Bank of Greece (see above). HU requires a restricted banking license and CY a full banking license. Thus potential licensing/permit requirement may be required because of the buyer's commercial activity in five Member States (DE, AT, EE, SK, BE). The type of loan could also trigger some specific requirements (SI, BE, SK, BG).

In general, the transfer of the collateral rights does not require a specific form. Nonetheless, if the collateral is registered because it is pledged or it is a mortgage loan, the transfer of the collateral in some MS requires access to the register as well (PT, IE, BG, DK). Other MS require the same specific form as the loan contract (SI, LV, LT). In some MS, there are ways to transfer the loan without a specific form, but the notarial certification and registration is either a general practice or it is required to have access and benefit from the previous registration (ES, FR, DE, CZ, BE, AT). Some MS declared that their laws do not require any specific form (UK, FI, SK, EE). In HU, there is not a specific form, unless the loan portfolio is above HUF 1bn.

The validity of the transfer of the loan seems to require notification in PT, CZ (when it is pledged), EE, BG, HU, SK, CY, FI, HR, IE (2 months in advance for loans that affect individuals and SMEs) and EL (the main terms must be registered with the competent Pledge Registry and following such registration, the borrower and, if applicable, any guarantor should be notified). In the rest of countries, notification is not mandatory, albeit the transfer of the loan does not produce effects against the debtor without it. The consequence would be that either the payment to the first creditor would discharge the borrower's debt or the transferees could not enforce their rights against the debtor. Therefore, debtor's notification is standard practice even in those MS where notification is not mandatory.

The collateral is generally transferred with the loan, thus it does not require a separate consent (SI requires consent when the collateral is in transferor's possession). There are no problems to transfer the loan when it is subject to enforcement actions (Only UK requires the court's approval). The transfer of NPLs to non-financial institutions is allowed in nearly all MS with the sole exception of CY that only permits to sell the loans to banks and financial institutions as eligible buyers).

In principle, all Member States have at least one type of contract (either transfer of the credit rights or transfer of the loan contract) that allows the transfer of loan without the debtor's consent. Under the freedom of contract, debtor's consent can be either stipulated in the contract or exempted when it is required. When consent is required, it can be provided in standard forms and both in abstract at the time of the loan and at the time of the transfer (LT holds that consent in abstract would be legally problematic). Those Member States that differentiate between the transfer of the credit rights (or receivables) and the more common transfer of the loan (or all the rights and obligations of the contract) require the debtor's consent for the latter (ES, PT, FR, IE, SI, AT, DE). As a rule, Member States would provide that the debtor shall enjoy the same legal position vis-à-vis the transferee of the loan than against the transferor. The only countries where debtor's consent is generally required by operation of law are SK and BE. Nonetheless, in SK, if the debtor has been more than 90 days in arrears (NPLs), consent is not required. In BE, if both assignor and assignee are financial institutions that transfer big portfolios of loans, debtor's consent will be overridden by an authorization from the competent authority. BG prohibits the transfer of consumer's credit loans unless already envisaged in the contract.

The type of documentation required for any licensing application can be very diverse. This can entail generic information disclosure requirements (e.g. in CY, IE, LV, UK, HU), such as a description of the services, details of the service provider, the business plan, compliance plan, internal audit plan, specific conditions of the contract. EL prescribes a minimum capital paid in (EUR 100.000 for simple servicers and EUR 4.5 million for those that provide refinancing). On top of such general information, more details can be required about, for example, the amount of initial capital freely available (AT), or qualifying shareholder information (AT, IE). HU requires financial institutions applying for authorization to enclose (in addition to more general information): the proposed area of operations, a minimum amount of the initial capital for credit institutions. Furthermore, if the applicant is established abroad, a number of extra requirements are in place, e.g. a statement on having a main office in Hungary from which governance of the financial institution takes place.

Authorities that have the ability to grant licences to third-party servicers are the Member State's Central Bank (CY, HU, IE, EL), the Consumer Rights Protection Centre in the case of LV, the Financial Market Authority in AT, and the Financial Conduct Authority in the UK. In SE, the data protection authority also has a role.

In Member States where third-party servicers need to go through a licensing process, the timeline differs from one country to another: 1 month in LV, 2 months in EL, ca. 3 months in AT, 5 to 6 months in HU. The UK has a statutory deadline of 12 months for deciding on submitted applications for regulatory permission. In IE, it is not possible to define timelines as yet, as the country's new authorisation regime was introduced only in July 2015.

When a licensing/permit requirement exists on the part of the servicer, the exact criterion triggering the related procedure differs from one Member State to another. In IE, an authorisation is required when a firm is servicing loans on behalf of an unregulated entity. In EL licensing requirements differ between “simple” servicing companies and those that provide refinancing. In AT, factoring requires a licence, because the purchase and the acceptance of the risk associated with such receivables are decisive. In HU, the trigger is when a commercial activity is involved.

Non-EU loan servicers are permitted in almost all Member States, except EL and they do not face additional requirements. In EL, non-EU loan servicers are not permitted and non-Greek EU loan servicers must act through a branch. Nonetheless, in AT, in case of pure outsourcing, stricter requirements can apply especially with regard to data protection issues, as the legal situation outside the EU is less harmonized. Whereas there are no explicit restrictions for non-EU loan servicers in SE, the supervision of the data protection authority may create a practical obstacle for some non-EU firms.

In the large majority of Member States, loan servicers are not legally required to comply with specific requirements. Loan servicers are in the vast majority of Member States neither required to obtain a full (except for SK, RO and NL in some cases) nor a restricted banking license (except for HU and FR). In almost all cases, servicers do need to comply with certain fit-and-proper requirements. In IE and EL, servicers are required to comply with specific requirements and only entities that have an appropriate licence can conduct credit servicing. In LV, a provider of debt recovery services requires a special license. In the UK, the servicer of mortgage loans and consumer credit is required to meet some fit-and-proper criteria. EL explicitly requires loan servicers to follow consumer protection including special care for the socially vulnerable groups.

As regards undertaking formal enforcement actions, in the large majority of Member States the creditor cannot outsource. Investor-linked servicers are not permitted to undertake formal enforcement actions on the creditor’s behalf. In EL, however, loan servicers are entitled to all necessary legal remedies and can proceed to any other judicial action for the collection of the debts under their management.

If outsourcing is deemed to affect core functions or services, it is not allowed or tied to strict requirements. For instance in DE, loan monitoring can only be subject to outsourcing if concrete criteria are defined for such activities; however credit decisions cannot be outsourced. In ES and MT, outsourcing of core activities requires authorisation by the competent authority. Some Member States do not allow to outsource refinancing, which is considered part of a credit/lending decision (e.g. in DE) or they require strict conditions to the outsourced institution (e.g. in RO).

In EL, if the outsourcing creditor is not a supervised bank of financial institution, it can outsource only to a servicing company that is properly licensed and supervised by the Bank of Greece.

If a subset of servicing functions is to be outsourced, there are general provisions on outsourcing applicable in the majority of Member States. For instance, the creditor is expected to assess whether the firm to which it outsources fulfils fit-and-proper criteria and compliance with the most relevant rules applicable to them (anti-money laundering, customer protection regulations, etc.). The creditor remains liable for any breaches by the provider of outsourced services of any regulatory requirements in relation to the servicing of the loans (e.g. in IE, DK, NL). Furthermore, there are often minimum requirements in terms of risk management (e.g. in DE, IE, EE).

In almost all Member States, there are no explicit prerequisites that a creditor has to satisfy before outsourcing certain servicing functions. As a general rule, it is not permitted to outsource core activities, which may be subject to a banking license and regulatory supervision, albeit these core activities differ depending on the Member State.

Some Member States do put forward certain definitions/descriptions. EE establishes minimum requirements for loan servicing, which involves activities of granting loans, analysing, monitoring and evaluation. IE defines “credit servicing” as “managing and administering the credit agreement". The EL law stipulates the indicative content of the management /servicing activities for NPL servicing companies as the legal and accounting monitoring, collecting, conducting negotiations with debtors. In LV, debt recovery activities fall under dedicated definitions and are regulated. In the UK, a distinction is made between regulated mortgages (‘mortgage administration’) and consumer credit with definition for 'debt collecting' and 'debt administration'.

In most Member States, there are no formal legal definitions of 'servicing', 'managing' and/or 'debt collection' of loans, neither of other ancillary activities undertaken by banks after the granting of the loan. Loan servicing activities primarily fall under the freedom of contract.

Within the context of the discussions in the FSC Subgroup on NPLs it was deemed necessary to investigate whether legal provisions might restrict the above mentioned activities in some Member States. Such restrictions may include rules for the transfer of credit contracts or restrictions applicable to purchasers of NPLs. In some cases, the transfer of a loan might only be possible with the debtor's consent. Likewise, access to information concerning the loan and/or the borrower may be restricted, for example due to considerations of data protection. Limitations can also apply to potential buyers by requiring a banking licence or by imposing other restrictions. The availability of NPL servicing also plays a role in the development of secondary markets for distressed assets. National rules, including licencing rules, governing the provision of third-party loan servicing, currently vary between Member States.

2.transfer of loans, including non-performing loans, to bank and non-bank entities and these entities' subsequent ownership and management of these assets.

Within the context of efforts to improve the functioning of secondary markets for distressed debt and to facilitate the disposal of non-performing loans (NPLs) by banks, the Commission sent a fact-finding questionnaire to Member States on 7 April in order to gather information on their respective relevant national legal provisions.

These results are consistent with the ECB Stocktake of national supervisory practices and legal frameworks related to NPLs (See Appendix). It should be noted however, that they reflect authorities views and our reading of what the rules intend. Market participants' perception of regulatory entry barriers and their effectiveness may differ and therefore it is warranted to cross check the conclusions with the replies from the currently running public consultation.

Responses suggest that bank secrecy and data protection can be a barrier to share data for due diligence, however the legal framework of most Member States generally contains an exemption that allows the bank to disclose data which are necessary and proportionate for selling the loan. Moreover, where the debtor gives consent, which seems to be a standard practice, banks have more leeway to disclose personal information.

The Member States' responses to the questionnaire do not reveal severe additional regulatory requirements to the transfer of loans. Some types of loans, namely consumer credit or loans under a certain value face some stricter requirements on the buyer due to consumer protection provisions. In addition, the buyer is required in some cases to get a banking license. The transferor does not encounter further regulatory barriers either, although some Member States require an authorisation in case of significantly large transactions due to competition law or financial stability concerns. The questionnaire has not revealed that investment funds face any restrictions when they acquire NPLs beyond some general rules to protect retail investors.

Member States have in general a favourable legal environment for NPL transfer and the entry of specialised investors. First, there is at least one type of contract in each Member State that can allow the transfer of loans without the debtor's consent. When consent is required, it is usually possible to provide it in abstract in the loan documentation and most loan contracts seem to make use of this possibility. Member States have indicated neither a separate consent for the transfer of the collateral, nor additional obstacles to transfer a loan when it is subject to enforcement actions. The transfer of NPLs to non-financial institutions is also allowed in all MS, except one. Lastly, notification to the debtor is required in ten MS, and it is a standard practice even in those countries where it is not mandatory.

In the large majority of Member States, there are no specific requirements for loan servicers when they enter the market, although in order to manage the loan, some countries require either a full or restricted banking license or compliance with some fit and proper criteria. Non-EU loan servicers are permitted in almost all Member States and they do not face additional requirements.

Most Member States lack legal definitions of loan servicing activities and concerns regarding consumer protection affect differently the activities that may be considered loan servicing. In many cases, a set of core activities performed by the creditor are defined by law and outsourcing them is generally allowed only under strict conditions such as an authorization by the competent authority or that the creditor remains, to some degree, responsible for the activity. Therefore, the particular activities that can be outsourced differ across countries.

Within the context of efforts to improve the functioning of secondary markets for distressed debt and to facilitate the disposal of non-performing loans (NPLs) by banks, the Commission sent a fact-finding questionnaire to Member States in April 2017 in order to gather information on servicing of loans by third parties and transfer of NPLs. Replies to the fact-finding questionnaire have been received from 25 Member States (MS). This text summarises the replies and represents a stock take of rules in place.

* Information on Assets under management (AuM) is not available for all countries and for all loan servicers.

Then, the servicer needs to get fees that are higher than its costs to be profitable. The servicing fee is a fixed percentage of the unpaid principal balance (UPB) of the underlying mortgage. The servicer may receive ancillary fees (late fees and loan modification fees) and interest earned on principal and interest and taxes and insurance collected and held by the servicer before distribution to the loan owner.

The structure of costs in a loan servicer can be divided between: Personnel 65%, Technology 30% and Ancillary 5%. Then, labour cost management, technology and innovation are essential to improve loan servicers efficiency (Accenture, 2016). However, such cost structure depends on the number of loans serviced. Thus, The Federal Reserve Report to the USA Congress shows a U behaviour for a mixture of performing and non-performing loans. Having servicers that deliver their services to a large number of loans improves their efficiency but a limit. For instance, if the EU homogenises its rules on third-party loan servicers it could be possible to take advantage of the economies of scale (Oliver Wyman, 2016).

The reason for the differences in servicing costs between performing and non performing is because the direct costs associated with NPLs include the cost traditionally associated with performing loans: call center, technology, scrow, cashiering, quality assurance, investor reporting and executive management, etc, most of them able to automatize; plus the costs specific for non-performing loans: collections, loss mitigation, bankruptcy, foreclosure and post-sale, unreimbursed foreclosure and real estate owned losses, and other default specific costs. Then, we observe that servicing NPLs is much more expensive and the costs associated to those loans have been growing in the USA at a faster pace that the cost of servicing performing loans (see Table).

The recent regulatory requirements by USA Congress and regulatory agencies to improve the quality of servicing have skyrocketed loan servicing costs due to the introduction of complexity and the lack of a harmonized and unified set of practical standards and requirements (Housing Finance Policy Center, 2017). According to a panel of experts on loan servicing in the USA, the direct costs of servicing a performing loan per year has gone from $58 in 2008 to $164 in 2012, $205 in 2013, $170 in 2014 and $181 in 2015. The main reason for the increases in direct costs is compliance because significant regulation and legal complexity if a big part of this business (Wheeler, 2015). However, loan servicing NPLs is a much labour intensity activity which translates into direct costs of servicing these loans that are more than 10 times the costs of servicing performing loans. Besides, the direct cost of a non performing loan per year has increased four times to what it cost to service 4 years ago. Its direct cost in 2015 was $2386 while it was $482 in 2008. Mortgage loan servicing is a business where scale increases profitability.

Such growth generated a considerable operational risk for loan servicers. Thus, subprime servicing industry was essential for development of the secondary market in subprime mortgage loans but at the same time, the accelerated growth of servicers facilitated the deterioration of the quality in subprime lending and securitization with a non-forecasted influence that servicers had on mortgage termination ((McNulty et al, 2017). Then, McNulty et al (2017) argue that the failure to regulate mortgage loan servicing is one of the causes of the USA bank failure. Servicers need to be held to a high standard. Public Administration has a role in consumer protection based on asymmetric information and market power. The borrower does not choose their mortgage servicer and cannot make changes if they don't like the servicer. (McNulty et al, 2017). In the USA case, it was not a good solution to split supervisory responsibility on loan servicers over several agencies. If the responsibility is split is possible that neither agency have incentives and/or resources to develop major expertise in the topic. (McNulty et al, 2017).

The public consultation and self-reported information from market participants suggest that EU Loan servicers are locally set with very heterogeneous environment that depends on Member States' national regulations (see Annex 3.2). The benchmark if loan servicers where homogenously regulated at the EU level could be what has happened in USA. Thus, Dodd Frank financial reform in USA prompted Banks to reduce their in house mortgage servicing that were acquired by Non-bank specialty servicers at a pace faster than their ability to handle the increased volume. Thus, non-banks' market share of USA loan servicing increased from 15% in 2008 to more than 33% in 2015. The Federal Reserve Board report (2016) argues that the banks difficulties managing their portfolios of NPLs along with enforcement actions and settlements on defaulted loans are the key drives of such a growth by non-banks. Third-party loan servicers were able to benefit from their specialization on servicing non-performing loans and their ability to harness technological innovation to reduce costs.

While average Assets under Management of the 16 EU firms in this panel are 1.5 billion EUR, they are 4.7 for the 12 foreign-owned EU firms. The latest profit data (which may cover different time periods depending on the reporting date) were on average 13% for the EU firms in the panel and 22% for the foreign-owned firms. The positive relationship between size and profitability may be caused by the importance of data procession and the translation of experiences made with business practices in one Member State to another one. The pattern is less evident for EU firms, even if some of them are active in several EU Member States.

Public information about profitability of these servicers is scarce. The Orbis database provides information about the profit margin of some of these groups in 2016, though not of the profitability of their loan servicing activity. Thus, among those groups where we have been able to calculate their profit margin the average value is 18% per year. The group with the highest profit margin was Blackstone that owns the loan servicer Acenden, with a 55% profit margin. Other groups with relative high profit margins were Apollo, KKR, Oaktree or Charter Court with profit margins above 40%. Even though we have incomplete data, our best approximation for the assets under management of these groups is well above EUR 1200 billion in 2016.

Another issue is the location of the headquarters for these groups. Thus, 15 out of 47 groups are from the USA, 9 are headquartered in the UK and the same amount in Italy, 3 from Sweden and from Germany; finally there are 2 groups from Australia, Netherlands and Spain.

Relative to the stock of outstanding NPLs, the number of loan servicers is small in IT, EL, FR, PT, CY and possibly ES and AT (see Figure A .5.5 ).

The financial group that serves most countries of the EU is EOS headquartered in Germany. It is present in 18 out of 28 EU MS. Others groups with present in more than 10 countries are Intrum (recently merged with Lindorff) and Hoist Finance, which are present in 13 and 11 countries respectively. There are 9 groups that provide loan servicing in 5 or more EU countries but less than 10. Finally, there are 20 out of the 47 financial groups identified that provide loan servicing just in 1 EU country.

We identified loan servicers in all countries of the EU, but Cyprus and Malta. On the other hand, UK and Italy are the countries where we countered most loan servicers, 24. Germany, Spain and Ireland have 15 or 16 loan servicers operating in their countries. Netherlands, France, Poland, Belgium, or Luxembourg have 5 to 8 third-party loan servicers. The rest of the countries have a number of loan servicers inferior to 3.

Many of the loan servicers in the EU are part of an investment group either because the investment company bought the loan servicer or because the loan servicer grew to become an investor itself. There are at least 47 companies offering loan servicing in the EU. Out of the 47, 40 deal with non-performing loans, 35 deal with performing loans and only 5 monitor a subservicer. Besides, 33 out 47 deal with residential mortgages, 37 with commercial mortgages and only 7 are in the business of asset finance. At the end of 2016, our best estimate of the volume of loans under management by these loan servicers in the EU is about EUR 508 billion.

Then, expanding NPLs secondary market requires a robust third-party servicing industry to support investment funds participation. Thus, the growth of non-bank servicer industry in the US was driven by the banks' difficulties in managing their portfolios on NPLs. Non-bank services advantages over in-house banks services come from their specialization on servicing NPLs and from their ability to reduce costs using technological innovations.

In order to repair their balance sheet, banks can sell part or their entire portfolio of NPLs to external financial actors (non-bank): investment funds. These funds are interested in the return such portfolio of NPLs could add to their business, but they lack the expertise on loan servicing that banks have in house. Then, the new owners of the loans need to hire a loan servicer. This could be either the bank selling the NPLs or an outsourcing company. To avoid the contamination that past wrongdoing by the banks that originated the loans could produce, the new loan owners usually choose loan servicing companies without relation with the loan originator, non-bank servicers. Besides, the new loan owners can increase loan recovery if they focus on loss mitigation to improve recovery ratios and to reduce time for cashing the loan. However, handling NPLs through loss mitigation requires discretion, expertise and a huge amount of manpower.

Loan servicing firms become a key player when the loan owners do not have the size and/or capabilities to cope with all the activities loan servicing requires. Loan servicing helps, also, when tighter financial regulation and increased capital requirements force financial institutions, mainly banks, to reduce their exposure to non-performing loans (NPLs). Thus, loan servicing provides an essential link between the capital market investors and ultimate borrowers.

·Loan servicing firms may also specialise in loan enforcement through out-of court or judicial action and benefit from either specialised legal expertise or from a longer time horizon than banks have available. Reputation effects may also impact on recovery because either the loan servicer can threaten more aggressively to enforce the loan or the debtor may perceive such a threat when he is informed about the change of creditor.

·If non-bank investors have higher willingness to take risks to banks, and as not being subject to bank regulation, or if they have special expertise in assessing particular market segments such as commercial real estate loans, SME loans or ship loans, they can contribute to a potentially higher valuation of NPLs than banks would. Some firms combine loan servicing with other services such as administration of commercial real estate.

·Non-bank firms sometimes specialise in this administration, realise scale effects in IT and may resort to restructuring loans to increase the recovery value by re-negotiating payment terms and maturities. Some loan servicing firms claim to increase recovery rates through cooperation and striving for amicable solutions.

A number of circumstances are listed below where NPL administration could be done effectively or/and efficiently by third-party servicers:

It is debatable whether moving debt administration from a bank to a third-party loan servicer yields economic benefits beyond addressing moral hazard issues which are present in a situation where the loan originating bank maintains the loan servicing. It does not hold in general that third-party loan servicers can extract more value from a portfolio of loans than a bank can. Administering an NPL portfolio is more costly than one of performing loans since it requires follow-up action such as sending letters and notices, entering into negotiations about debt rescheduling or taking legal enforcement action. Data from the US suggests that the servicing of non-performing mortgage loans costs about 13 times more than that of performing loans. High NPLs bind bank operating resources and potentially prevent banks from carrying out more productive uses. This effect is particularly material in smaller banks having less specialised staff. Larger banks tend to have separate business entities to keep costs under control whereas smaller banks often have no capacity to do so.

Federal Reserve Board et al. (2016) identifies two risks on loan servicers: business risk that can include legal compliance and reputational risk (due to regulations, including consumer protections) and valuation risk that refers to the firm's ability to estimate a value for its mortgage servicing activities and it is driven by interest rate and default risk.

It is also common to distinguish between primary servicers, if the loan servicer manages performing loans, special servicers, if the loan servicer manages NPLs, or master services if loan servicer monitors a sub-servicer activity. Master servicers are responsible for the oversight of primary servicers. Furthermore, loan servicers tend to manage three asset classes, specialising in one of them or any combination of the three: asset finance, residential mortgages and commercial mortgages.

There are in-house and third-party loan servicers, depending on whether the loans are serviced by the loan originator or by an external company. The latter is common when a portfolio of non-performing loans is managed. Besides, they are label as captive loan servicers when the loan service firm is owned by the loan originator or by the loan owner, or if they have a unique client or their portfolio is owned mainly by one loan originator.

Loan servicers' revenues come from the servicing fee. This fee can be either a fixed percentage of the unpaid primary balance (UPB) of the underlying loan, ancillary fees for late payment or loan modification, or interest earned on principal and interest and taxes and insurance collected by the servicer before distribution.

Loan servicing services include: sending monthly payment statements and collecting monthly payments, borrower billing, payment posting, collection and loan accounting, calculation of borrower interest and fees, set up and management of bank account structures to effect dominion of cash, generation of borrower notices, payoff letters and amortization schedules, maintaining records of payments and balances, collecting and paying taxes and insurance (and managing escrow and impound funds ), remitting funds to the note holder, and following up on delinquencies. Additionally they may also offer their services for: pricing loans, helping borrowers who default on their loans through loss mitigation options, due diligence advisory on the credit portfolio for disposals and acquisitions, recovery, collateral performance, foreclosure litigation, manage foreclosed properties, collateral reporting for lender credit analysis purposes, financial and collateral reporting tracking, property inspections and real estate evaluation, commercialization and sales.

Loan servicing is the administration of a loan or portfolio of loans from the time the proceeds are dispersed until the loan is paid off. Loan servicing business combines two lines of business: transaction processing and administration of defaulted loans. Transaction processing would benefit from economies of scale because can easily be automatized. However, the administration of defaulted loans needs a balance between automated defaulted loans (default management) and "hands on" default loans. The first option leads to foreclose whereas in the hands on procedure there is a loss mitigation goal that requires significant trained manpower. Loss mitigation includes loan restructuring, accepting a deed in lieu of foreclosure or approving a short sale.

During the life of a loan one can distinguish three different roles from the lender perspective: Loan originators, Loan owners and Loan servicers. These three roles can be play within the same institution (company) or by different companies. The scenarios where these three lender roles split in different combinations are those where a portfolio of loans is securitized or when the loan originator sells or outsources a portfolio of defaulted or non-performing loans (NPLs).

While there are some loan servicing firms that act in different Member States, they focus on countries with already sufficient demand for loan sales. Moreover, their main entry or expansion strategy has apparently been the acquisition of existing national loan servicers, implying that expansion to a new market is difficult without national incumbents already present. For selecting loan servicers, potential NPL buyers can rely on the advice of consultancies, the ranking of around 30 firms done by S&P, or loan servicers also active in the USA.

About 40 groups with 100 firms are in this business line in the EU, some of them are present in different countries, others are small or specialised in specific portfolios such as real estate and combine loan servicing with other related activities. Market reports witness a sizeable number of acquisitions in the loan servicing market in the last years, some from NPL investors. Some big loan servicers entered the business of buying loans.

The involvement of specialised information intermediaries does not totally reduce the bid-ask spread as they charge a fee for their services. Moreover, intermediation does not mean that market functioning is imitated. Intermediaries and big potential investors have an incentive to limit competitive pressure in order to benefit from a positive bid-ask spread and the scope to exploit the pressure on banks to sell, respectively.

A further mechanism in addition to information asymmetries is that consultancy firms or other intermediaries bring together potential buyers and sellers. They assist in assessing the value of the portfolio by scrutinising loans, collateral and data quality. They invest their reputation to overcome the effect of information asymmetry and contribute to reducing the spread between bid and supply so that demand and supply can meet. They also have an indispensable role because of their knowledge of past deals to which they contributed, which means these are the only players that have some kind of market overview of prices, loan quality, collateral and other conditions.

As regards the underlying information asymmetry as genuine reason for high bid-ask spreads, several mechanisms have emerged endogenously to reduce their importance. Market participants signalled that the outlook for repeated transactions creates an incentive for banks to fairly represent the value of the loans they offer for purchase. Collateralisation of loans also helps because it puts a floor on the value of loans, provided the potential buyer is able to ascribe a value to the collateral. Still, market participants flagged in the public consultation that data issues are a very important concern for them. A specific workstream in the NPL Action Plan is meant to address this issue.

Costs of capital and taxation. Non-banks may have higher costs of funding and be exposed to extra costs linked to the transfer of the loan such as for registration.

Poor data quality on loans and incomplete information on collateral value. Non-bank investors need to spend resources in understanding the value of the NPL portfolio that is for sale.

Reputational effects: Banks attach an extra value to loans from debtors, which whom they have a long-term business relationship. They may not want to undermine the reputation they had built up with customers important to them.

Administrative expenditure: Banks use administrative expenses and servicing fees in their financial statement of the year in which they are incurred while investors deduct such costs from the value when they calculate the net present value.

Different discount rates: As required by IAS 39, banks use the effective interest rate on the loans. Investors use their required returns, which typically exceed 15%.

Note: Profitability measure is the net internal rate of return of the latest available observation. In most cases 2017Q2. Missing observations are those funds for which no profitability number was displayed.

For some debt funds, profitability numbers are available. The number is however small, especially for funds with a geographical focus on Europe. According to the data available, average and median profitability was a bit higher in Europe than in America. At the polar spectrum of the distribution, differences in profitability are more pronounced, with low-profitability European investments being relatively more profitable than American ones and vice versa for high-profitability investments.

More information needs to rely on transactions reported in the press. For few selected transactions, media or analytical reports quote or derive price data. For example, Unicredit's sale of 17 billion EUR NPLs to PIMCO in August 2017 was reported to have yielded 13%, MPS sale of junior NPL tranches to the Atlante II fund at 21%, Carlites purchase of 900 million from Caixabank in 2015 at 25%, Algebris reportedly paid 35% for a secured 750 million EUR NPL portfolio from Italian Banco BPM in 2017, Axactor revealed it bought several portfolios of Spanish consumer loans between 6 and 7% in March 2016. For comparison, the FDIC, which is the public institution in the USA in charge or resolving banks, realised 8-30% sales price relative to book value on NPLs (see Table A.5.7 ).

The figure below shows average prices of NPL portfolio transaction taken from a consultancy publication. It demonstrates that prices vary strongly depending on the type of debt and the quality of the underlying collateral.

Price data is usually not disclosed and some cases are reported that deals were aborted because banks and prospective buyers could not agree on the price. If prices are lower than what banks provisioned they realise a loss, which reduces their capital and therefore inhibits their incentive to enter into a sales' deal. These coverage ratios differ strongly across banks, being smaller in small than in large banks and stand at around 44% at the EU aggregate level. Hence, for a price lower than 56% (100% - 44%), the "average" bank would have to record a loss. There is a perception that EU banks may under-provision their NPLs, derived from the observation that US coverage ratios were about 20 percentage points higher.

Though not all NPL buyers have been investment funds, they represent a sizeable market share. As regards the potential investor base for NPL, it is interesting to identify investment funds that specialised in comparable products. The table below shows the free capacity debt investment funds had, using a mathematical approach to allocate the known data about geographical focus and product focus to the individual cells. The approach shows that distressed debt investors in North America have almost two times investment capacity than European investors. Other asset classes are smaller and also more dissimilar to NPLs.

The table below breaks down investors into EU NPLs by the amount of national markets they were active in. The dominant number of investment firms was active in only one market and a few concentrated on 2 or three markets. The small number of investment firms active on four or more markets accounted for about a third of all transactions.

On the buyer side, there are about 120 debt managers that invest in distressed debt in North America and Europe. In Europe, almost 40% of the transaction deals was accountable to the biggest five buyers. More than 20 of the active investors were large investment funds with a market share of almost 50%. Most buyers are investment firms, but also a few banks bought loans.

The share of loans owed by consumers is unknown because loans are sold in large portfolios, which are often mixed and do not allow to calculate a breakdown by counterpart. The share was at least 11% according to AFME (2017), see Figure A.5.2. On banks’ balance sheets, about a third of the NPL had consumers as counterpart. There is little data bout the breakdown into consumer credit and mortgages, i.e. those being regulated through the Consumer Credit Directive and the Mortgage Credit Directive. Since consumer credits are smaller, NPL purchaser are more likely to outsource their management to loan servicing firms.

Of the 103 banks that disclosed transactions, about 40 had multiple transactions. NAMA and SAREB, the Irish respectively Spanish asset management company were the most important sellers. The loan portfolios banks sell cover very different asset classes and according to market sources some buyers are specialised in specific asset classes. The figure below gives a snapshot of market shares by asset class based from a sample of 365 NPL transactions signed in 2015-2017.

The NPL market has been highly concentrated. The breakdown of transactions by country suggests strong variation, with a strong clustering in four countries: ES, IE, IT and the UK. In the former three NPL sales contributed substantially to reduced high NPL ratios. There have been few transactions In other countries with high NPL ratios (CY,EL, PT, RO, SI) and sizeable market activity in countries with low NPL ratios (UK, DE, NL). In CEEC, markets for NPLs seem emerging, but are still at infant stage. The 10 largest transactions in 2015/16 accounted for one third of the transaction volume, while the other two third was distributed over about 480 transactions. Very few transactions were recorded with a volume below EUR 100 million.

·Non-banks may re-sell NPLs, so that the transaction volume does not reduce the NPL ratio of the banking sector.

·Buyers may be other banks, so that the NPLs remain in the banking sector.

·If a bank sells NPLs, the transaction might be so structured that it still retains exposure to the loan.

Moreover, details of transactions are not disclosed in several cases. Sometimes the buyer, seller and/or volumes are not made public. The data collectors' different strategies to circumvent this limitation may be accountable for difference in the statistics.

There is no official statistics on transactions data of NPLs. Official documents regularly quote data from consultancies, which report data in publications or on websites. These consultancies cannot scrutinise the data quality as rigorously as statistical offices could do. Moreover, a number of data limitations may distort the information content Bruegel 2017 lists the following:

Between 2014 and 2017, consultancies recorded transaction volumes between 100 and 150 billion EUR per annum in secondary markets for loans in the EU. The consultancies that collect data do not provide information about the share of NPLs in loan sales. The three approaches presented in Annex 4.2 suggest that the average share of NPL in loan sales could be 70 to 80%. The charts below indicate the evolution of loan transactions across the main EU markets by various sources.

Absent public data collections, the only available numbers of NPL transactions stem from publications of consultancy firms. These collect data from public sources and may also use information from their business relationships. They report that they cannot guarantee accuracy of the data and the observation of discrepancies between data coming from different consultancies underlines the difficulty to keep track of NPL markets. Commission research on NPL transactions found that only few and large transactions are reported in main media. Smaller transactions are reported on specialised websites, but often lack details about buyer, seller and/or amounts (see also Annex 4.2).

Fragmentation of market and legal conditions along the increases entry costs especially for international investors. Though there have been numerous transactions in NPLs in the EU in the last years, there is no single market for NPLs, but fragmented early stage national markets. This section reviews the available data on NPL transactions and puts them in perspective. A more comprehensive review of market conditions can be found in Bruegel (2017).

Finally, a + is allocated for a score in the range 1 to 4, ++ in the range 5-8, +++ in the range 9-12.

An overall ranking of effectiveness was derived by averaging the sum of plusses for investors and servicers. Efficiency is the difference of effectiveness and the average sum of minuses for investors and servicers.

The Table below summarises the ranking of the different policy options in Table 6 , Table 7 , and Table 8 .

4. Translating the scores for the assessment criteria into an overall ranking of the policy options

Instead of a conclusion, a word of caution is warranted. The outcome of the simulations with the pricing model is assumption-driven. The coefficients obtained in the cross-country analysis suffer from unsatisfying data and a very small number of observations. Hence, there are good reason to challenge each step in the simulations exercise and the results serve only to illustrate the issues and may help assess the relative performance of the different policy options rather than be taken as a guidance on how NPL markets can actually develop.

Besides, we have estimated the incremental volumes of NPL sales if option A for NPL investors and option B for loan servicers would be adopted at the same time with and without taking into account the improvement in the time to recover the non-performing loans.

Additionally, we have consider the improvement in the time to recover the defaulted loans because of these policies or even because other initiatives on NPLs, for instance AECE. As a reduction in the time to recover loans favours the shrinkage of bid-ask spread, we have estimated the incremental volumes of NPL sales if time to recover adjusts to the values proposed in the AECE Impact assessment.

Policy option C for NPL investors is to implement a common rule book for loan servicers. To quantify the impact of such policy on NPL market our assumption is that such policy will contribute to reduce loan-servicing costs by 10% in all countries due to the higher size of the market and the cost gap between each country and the benchmark will close the gap 50%. The best performers MS in terms of cost will suffer an increase in their cost due to the convergence to the benchmark. The benchmark is the average cost among those countries with the best cost records. The reduction in costs will contribute to reduce the bid ask spread in the NPL market which will increase the volume of NPL transactions.

Policy option B for NPL investors is to implement a common passport for loan servicers. To quantify the impact of such policy on NPL market our assumption is that such policy will contribute to reduce loan-servicing costs by 10% in all countries due to the higher size of the market and those MS with cost above the benchmark will close the gap by 50%. The best performers MS in terms of cost will be able to keep such advantage. The benchmark is the average cost among those countries with the best cost records. Such reduction will contribute to reduce the bid ask spread in the NPL market which will increase the volume of NPL transactions.

Policy option A for NPL investors is to have minimum common standards for loan servicers across EU MS. To quantify the impact of such policy on NPL market our assumption is that such policy will contribute to reduce servicer costs in some EU MS, those with more barriers: EL,IT,CY and AT. For these MS our assumption under policy option A is that they will be able to adjust their cost by 10%. Such reduction will contribute to reduce the bid ask spread in the NPL market which will increase the volume of NPL transactions.

To quantify the impact of NPL investors’ policy options on loan servicers market our assumption is that such policy will contribute to increase the number of third-party loan servicers in MS which we associate with a reduction in the barriers of entry and in the costs of providing loan servicing. Such reduction will occur through a convergence in the cost of servicing that will improve market efficiency, therefore more efficient that those MS individual markets consider isolated. Such reduction will contribute to reduce the bid ask spread in the NPL market which will increase the volume of NPL transactions.

Policy option C for NPL investors is to implement a common rule book for NPLs investors. To quantify the impact of such policy on NPL market our assumption is that such policy will contribute to reduce risk perception by investors, such that the worst performers will adjust their rate of return to the benchmark but at the same time the best performers will also adjust to the benchmark which will penalize then. We assume that all the MS will benefit of the European market framework with a reduction of 50 basis points in the rate of return demanded by investors, besides those MS with country risk above the benchmark will converge by 50% to the benchmark whereas those MS below the benchmark will move to the benchmark reducing the distance by 25%. The benchmark is the average lending rate of the countries with the lowest country risk. Such reduction will contribute to reduce the bid ask spread in the NPL market which will increase the volume of NPL transactions.

Policy option B for NPL investors is to implement a common passport for NPLs investors. To quantify the impact of such policy on NPL market our assumption is that such policy will contribute to reduce risk perception by investors, specifically in those EU MS with country risk above the benchmark (1.9%). We assume that all the MS will benefit of the European market framework with a reduction of 50 basis points in the rate of return demanded by investors, besides those MS with country risk above the benchmark will converge by 50% to the benchmark. The benchmark is the average lending rate of the countries with the lowest country risk. Such reduction will contribute to reduce the bid ask spread in the NPL market which will increase the volume of NPL transactions.

Policy option A for NPL investors is to have minimum common standards for investors across EU Member States. To quantify the impact of such policy on NPL market our assumption is that such policy will contribute to reduce risk perception by investors in some EU MS, those with more entry barriers: BG, EL, IT, CY, HU, AT, PL, and RO. For these countries our assumption under policy option A is that they will adjust their return adjusted by country risk to the benchmark of 1.9%. The benchmark is the average lending rate of the countries with the lowest country risk. Such reduction will contribute to reduce the bid ask spread in the NPL market which will increase the volume of NPL transactions.

To quantify the impact of NPL investors’ policy options on NPL market our assumption is that such policy will contribute to reduce risk perception by investors in EU Member States. Such reduction will occur through a convergence in the rate of return required by investors in a market that becomes European, because of the policy measures to improve market efficiency, therefore more efficient that those MS individual markets consider isolated. Such reduction will contribute to reduce the bid ask spread in the NPL market which will increase the volume of NPL transactions.

The options are: common principles, passporting and rule book for both NPL investors and loan servicers. The next step has been to quantify such policy options in the NPL market.

Once we have calculated the bid-ask spread in the NPL secondary for the current situation we estimated the effect that the different policy options could have on such spread. We distinguish between policy options that could increase the investor base and the policy options to improve the availability of third-party loan servicers. On the other hand, we have observed, using country data, that there is a correlation between the two year variation in the NPL ratio ( NPL loans / total loans) and the bid ask spread. Applying regression analysis we estimated that for 1% decrease in the bid ask spread there is a 0.88% decrease in the NPL ratio, which means that, “ceteris paribus”, there would be a reduction of 0.88% in the volume of NPLs every two years, or 0.44% each year (see Annex 4.2). Our assumption is that such reduction on NPLs will increase the volume of transactions on NPLs or NPL sales from banks to investors. To estimate the incremental volume of NPL sales for the next two years in each MS we multiply the reduction in bid ask spread times 0.88% (this is the correlation found) and times the volume of NPL in each country at the end of first quarter of 2017, the last available information from ECB.

Finally, our assumption for the buyer (investment fund) is that it will enter the secondary market if it can make a profit. When the buyers of NPLs enter the market they will use the services of third-party loan servicers. Then, the buyers of NPLs in the secondary market will take into account in their bid price the indirect costs, or costs associated with loan servicing, and the expected profit. For the expected profit, the IRR of the external investors (hedge funds, mutual funds, other non-bank investors, etc), we have made the assumption that the external investors identify buying NPLs as a risky business so they applied an excess return of 15% on top of the rate of return adjusted for country risk in each country. Then the IRR in each country is the sum of the excess return because of NPL specificities + the rate of return adjusted for country risk.

We have made the assumption that the bank provisions the difference between the Gross Book Value of the performing loan less the Gross Book Value of the non-performing loan. If the bank has a higher provision mean it is over provisioned if the bank has a lower provision it means the bank is under provision for that NPL. Banks that are in trouble because low profitability and higher capital needs tend to be under provision, which means they will ask for a higher price that if they were better provisioned.

The estimated cost of the insolvency proceeding or indirect costs are reported as a percentage of the value of the insolvency estate, borne by all parties. Costs include court/bankruptcy authority costs, attorney fees, bankruptcy administrator fees, accountant fees, notification and publication fees, assessor or inspector fees, asset storage and preservation costs, auctioneer fees, government levies and other associated insolvency costs. These costs will be mainly the fee that the third-party loan servicers will charge. Once again there are small differences or not differences at all in these values between NBER and Doing Business for all Member States but Austria, Denmark and Poland. In these three countries the indirect costs reported by NBER are substantially higher than the ones we use in our calculations.

To make the data on recovery rate comparable across countries, several assumptions about the business and the case are used. The recovery rate is recorded as cents on the dollar recovered by secured creditors through reorganization, liquidation or debt enforcement (foreclosure or receivership) proceedings. The calculation takes into account the outcome: whether the business emerges from the proceedings as a going concern or the assets are sold piecemeal. Then the costs of the proceedings are deducted (1 cent for each percentage point of the value of the debtor’s estate). Finally, the value lost as a result of the time the money remains tied up in insolvency proceedings is taken into account, including the loss of value due to depreciation of the hotel furniture. Consistent with international accounting practice, the annual depreciation rate for furniture is taken to be 20%. The furniture is assumed to account for a quarter of the total value of assets. The recovery rate is the present value of the remaining proceeds, based on end-2015 lending rates from the International Monetary Fund’s International Financial Statistics, supplemented with data from central banks and the Economist Intelligence Unit. It is important to note that the drivers of the recovery rate, i.e. the cost, the time and the binary outcome of the process (the company continues to operate or is sold piecemeal) are derived from questionnaire responses by local insolvency practitioners and verified by the World Bank through a study of laws and regulations as well as public information on insolvency systems. In other words, the recovery rates calculated by the World Bank are not directly based on an average of observed recovery rates.

Time remaining to collect the cash flow from the NPL loan is provided either by NBER and Doing Business. NBER data is from 2006 whereas data from World Bank is from 2016. The values are not the same but the differences are small for all the Member States but the Czech Republic and Romania.

We use the time to recover the loan, the recovery rate and the indirect costs provided by The World Bank in its publication Doing Business 2016. The values of these variables for each MS are calculated based on the time, cost and outcome of insolvency proceedings in a given economy.

The loan effective rate is calculated for every MS using the interest rate of new lending to non-financial corporations with a maturity of 1-5 years. This data is compiled by the ECB.

To provide an estimation of the differences in bid ask spread