Matt Carthy – Sounding the alarm on the EU’s proposed Directive on non-performing loans

I am writing to inform you of a serious threat to the rights of borrowers and consumers arising from a proposed new EU Directive, which aims to develop a secondary market for non-performing loans. (Proposal for an EU Directive on credit servicers, credit purchasers and the recovery of collateral).

This proposed EU Directive is designed to promote the use of vulture funds and securitisation vehicles in order to move this bad debt off the banks’ balance sheets and into the opaque and unregulated shadow banking sector.

This proposal will also empower banks to seize their customers’ collateral through an out-of-court recovery mechanism, and will result in borrowers, including mortgage-holders, being pursued more aggressively by vulture funds and debt collectors.

1. Background

Non-performing loans (NPLs) are bank loans that are subject to late repayment or are unlikely to be repaid by the borrower. EU standards now generally require banks to classify loans as non-performing if they are more than 90 days in arrears. The ability of borrowers to pay back their loans deteriorated significantly during the financial crisis and the subsequent double-dip recession.

As a result, many banks saw a build-up of NPLs on their books, particularly in the countries worst affected by the crisis. While the average ratio of NPLs in the EU has decreased by more than one-third since 2014, the total volume of NPLs remains high, at around 900 billion euros.

Unfortunately the role of the EU institutions has been one of undermining the rights of homeowners and borrowers, to the benefit of the banks and vulture funds. Every attempt to regulate the debt vultures that we’ve seen in the Irish state in recent years – every draft piece of domestic legislation – has been referred to the European Central Bank for its ‘opinion’. The ECB’s opinion always seems to be that the banks should be allowed to get rid of their bad loans by any means necessary.

2. ECB Guidance to banks on NPLs (March 2017)

The ECB published its Guidance to banks on NPLs in March 2017, setting out the manner in which it expects banks to manage their NPLs. This Guidance is non-binding but subject to a comply-or-explain system in which supervised banks must explain deviations upon supervisory request, and in which non-compliance may trigger supervisory measures.

The Guidance only applies to the largest banks in the EU, which are supervised by the ECB’s Single Supervisory Mechanism. The Guidance states that each bank with elevated levels of NPLs is expected to develop portfolio-level reduction targets with a view to reducing the level of non-performing exposures on its balance sheet in a timely manner. The Addendum to the Guidance calls for these banks to enact a reduction plan if their level of NPLs passes a threshold of 5% of their overall balance sheet.

The ECB Guidance has been used by banks in the Irish state to prompt and justify their mass sell-offs of mortgages to vulture funds. However, the ECB has repeatedly stated that it “has not expressed a preference for certain NPL reduction tools over others”, and that the combination of tools or strategy reduction drivers for a given bank is the responsibility of, and chosen at the discretion of, its management.

3. Commission proposal on NPL package (March 2018)

In March 2018, the Commission made a specific legislative proposal based on four key aspects:

• Provisioning by banks (banks putting aside their own capital to cover the loss of a bad loan);
• Developing a secondary market for NPLs (promoting the sale of bad loans to vulture funds, and promoting securitisation);
• Debt recovery (giving banks more power to enforce the collection of collateral through out-of-court recovery); and
• Non-binding guidance for Member States on how to establish a national Asset Management Company (a bad bank, including possibly using public funds).

Unlike the ECB Guidelines, the Commission proposal applies only to future NPLs, not the existing stock. It is mandatory instead of non-binding and applies to all credit institutions, not only the biggest banks under ECB supervision.

The package consists of three different proposals from the Commission: a Regulation (on provisioning), a Directive (on developing the secondary market) and a non-legislative blueprint (on setting up national Asset Management Companies).

4. Analysis of the proposed package

On the proposed Regulation, I am generally in favour of the idea that banks should be required to put aside their own capital to cover the losses they incur when the loans on their balance sheets turn non- performing. This would incentivise banks to adopt more prudent lending standards. It would increase financial stability and lessen the likelihood of future public bailouts being necessary.

However, we cannot apply a one-size-fits-all reduction target that will incentivise banks to offload their loans onto the secondary market. My view is that banks should be required to keep their NPLs on their book and to work through them with their customers by writing down, restructuring or forgiving the debt, particularly in cases of residential loans.

i) Promoting securitisation

I am extremely concerned by the proposed Directive on credit purchasers, credit servicers and recovery of collateral. “Credit purchasers” refers to vulture funds and securitisation institutions, “credit servicers” means debt collection agencies, and the proposal for “debt recovery” is for accelerated out-of-court enforcement of loans secured by collateral (though consumer loans are excluded from this aspect of the proposal), meaning banks will be able to seize their customers’ property without going through the courts.

The Directive aims to promote the use of vulture funds and securitisation vehicles in order to move this bad debt off the banks’ balance sheets and into the opaque and unregulated shadow banking sector.

Moving hundreds of billions of euros of bad debt into the shadow banking sector through the securitisation of non-performing loans is incredibly misguided, and will cause major new risks to financial stability. Mortgage-backed securities in particular played the key role in the 2007-2008 crisis.

ii) Giving free rein to debt vultures

It seems to me that the Commission is trying to replicate the Irish model in reducing non-performing loans and impose this model across the EU. That’s why it is so important for Irish campaigners to highlight the massive problems that we have experienced – from the NAMA debacle to the mass sell- off of distressed loans to unregulated vulture funds. It is not a model to follow but a lesson in what to avoid.

The debt vultures will be encouraged to spread their wings and move from just operating in Ireland and Spain to operating across the EU, while securitisation will be promoted as a so-called solution to the non-performing loan problem.

A private equity fund will be able to register in one member state and get a “passport” to operate in any EU state, while only being bound by the regulations in place in the state where it is registered.

iii) A second bailout for the banks

This EU proposal is nothing less than a second bailout for the banks. The non-performing loan problem is a legacy of the 2008 financial crisis. This problem was not caused by ordinary people and they should not be forced to bear the brunt of resolving it.

The Commission says the new Directive is necessary in order to allow banks to lend to small businesses once again. But all of the evidence shows that the ongoing economic problems in the EU are not caused by a lack of lending, but a lack of demand in the economy. The only way to boost demand is to increase public investment and foster real wage growth.

The real goal of this proposal is not to ensure banks lend again but to ensure they return to making massive profits again.

iv) Directive will tie our hands on future regulation of vulture funds

Suggesting that the Irish model is a success story that should be replicated across the EU is bad news for borrowers in the rest of Europe.

But the worst part of this proposal is that it will put major restrictions on all future attempts to regulate vulture funds at the Irish level. Our hands will be tied behind our banks.

Say, for example, that public pressure forces the government to finally act to put in place measures to regulate the vultures in a meaningful way.

Unless these laws comply with the EU Directive – which, let’s not forget, is designed to promote the sale of debt to vulture funds – the legislation will be struck down because it will amount to an infringement of the “right of establishment” or “right to provide services” of these private equity funds.

5. Campaigning for the Directive to be withdrawn

I have been heavily involved in trying to shape this package of proposals in the European Parliament and will be very much focused on this in the coming months. The Commission has clearly not taken consumer protection issues or fundamental rights into consideration when conducting its impact assessment for this proposed Directive.

The Directive should be withdrawn, and I am investigating possibilities for legal action in this regard. The European Parliament must block this proposal from becoming law.

Sinn Fein will be organising an EU-wide campaign against this Directive in the coming months, together with other progressive forces and consumer protection organisations.

If the Directive is not withdrawn, we will attempt to insert the strongest possible protection of borrowers’ rights into this package, to ensure this proposal does not give free rein to vulture funds across the EU. Ensuring that strong protection for borrowers is included in this legislation is absolutely crucial.

Specific policy proposals we will campaign for if the Directive is not withdrawn include:

• Banks must include a mandatory clause in their residential loan contracts that provide the customer with the option of denying the bank the ability to sell on their loan to a third party (no consent, no sale).
• Banks must provide their customers with the option of purchasing their own debt at a reduced rate – rather than the bank selling this debt to a vulture fund at this same reduced rate.
• Vulture funds and debt collectors operating in the EU cannot be given a “passport” to operate in one state but be bound only by the regulatory framework of the state in which they are registered.

I hope that all those campaigning here in Ireland for better protections for homeowners and farmers against evictions and the sale of their loans to vulture funds will also get involved in this campaign at the EU level. We need your voices to be heard by the European Parliament and Commission, and in particular, we need to force our own government to oppose this proposal at the Council level.