(BaFinJournal) The German Secondary Credit Market Act (Kreditzweitmarktgesetz – KrZwMG) came into force on 30 December 2023. The law sets out new rules for the sale of non-performing loans. It also means that some companies that previously had no interactions with BaFin are now subject to its supervision. This article summarises the current legal situation and answers key questions for the credit services institutions concerned. From Henrik Gerlach, BaFin - Banking Supervision

The KrZwMG sets requirements for the sale of non-performing loans (NPLs) by credit institutions to credit purchasers as well as for the provision of credit services. It also sets tight deadlines for both BaFin and companies.

The purpose of the KrZwMG is to transpose Directive (EU) 2021/2167 into German law. The EU Directive has established uniform regulatory requirements throughout the European Union.

The Directive aims to reduce the high number of NPLs on the balance sheets of banks in the EU, to prevent future increases in NPLs, to pave the way for institutions to sell NPLs to other market participants on efficient, competitive and transparent secondary markets, and – in particular – to ensure a high level of protection for borrowers.

In order to prepare the market for this new legal landscape, BaFin held an information event in Bonn on 5 December 2023 at which it informed companies, consultants and association representatives about this new area of supervision and what it expects of market participants.

In addition, BaFin has published an extensive section on its website that provides stakeholders with information, guidance notices and forms relating to the KrZwMG as well as an FAQ subsection. BaFin is continuously updating and expanding this content.

Requirement to appoint a credit service

Under the KrZwMG, credit purchasers that have not themselves obtained authorisation to provide credit services are required to appoint a credit servicer. This may be the case if the borrower is a natural person – especially a consumer – or a small or medium-sized enterprise (SME).

Companies that can be appointed as credit servicers include, in particular, credit services institutions that have been defined as such under the KrZwMG. Such companies specialise in the servicing of non-performing loans and offer various services to credit purchasers. They collect due payment claims from credit agreements and also enforce them. In addition, they renegotiate key contractual conditions, assume the task of processing complaints and inform borrowers about changes in interest rates, charges and other payments that are due.

Credit services institutions require authorisation from BaFin and are subject to its direct supervision.

Authorisation from BaFin: requirements for credit services institution

Credit services institutions must fulfil specific requirements in order to obtain authorisation from BaFin. For example, management board members must have the necessary professional qualifications, be of good repute and have sufficient time to perform their functions properly. The members of administrative or supervisory boards must also be of good repute and have adequate knowledge and experience. The holders of qualifying holdings in credit services institutions also undergo an assessment of reputation.

In addition to the requirements outlined above, there are other specifications that credit services institutions must fulfil. For instance, they must have in place a proper business organisation that comprises internal control mechanisms and safeguards the rights of borrowers and protects personal data. If these companies accept money from borrowers, they must set up trust accounts to hold it. In addition, it is necessary to establish processes for recording and processing complaints by borrowers.

Register and European passport

On its website, BaFin maintains a register of all companies that are authorised to provide credit services in Germany. The registry includes credit services institutions that have received authorisation from BaFin as well as credit services institutions that operate in Germany using a European passport.

Companies operating in Germany using a European passport have obtained authorisation in another member state of the European Economic Area (EEA). They have notified BaFin via the competent authority in their home country of their intent to provide credit services in Germany. Due to harmonised regulations, they are subject to the same authorisation requirements and supervision as credit services institutions domiciled in Germany. Therefore, they do not need to apply to BaFin for authorisation under the KrZwMG in order to operate in Germany. Credit services institutions with an EU passport can start operating in Germany once BaFin has confirmed receipt of the relevant documentation from the competent authority of the credit servicer’s home country.

Similarly, credit services institutions that have obtained authorisation in Germany are allowed to operate in other EEA states. In both cases, the companies concerned and their operations are subject to joint supervision by the competent authorities of their home country and host country.

Outsourcing to third partie

The KrZwMG allows credit services institutions to outsource parts of their operations to external service providers. They must nevertheless ensure that such providers fulfil the legal requirements, especially those of the KrZwMG. BaFin can assess the arrangements for ensuring these requirements are fulfilled and can examine the operations of the external service providers.

It should be noted that BaFin only supervises credit services institutions in relation to the provision of credit services. Other services, such as legal and general collection services, lie within the remit of other authorities.

Obligations when selling or purchasing loan

The KrZwMG does not give rise to any approval or authorisation requirement for the actual sale or purchase of loans. The Act does not bring about any authorisation requirement for credit purchasers either.

It does, however, place credit purchasers and credit institutions that sell non performing loans under a number of obligations. This includes, most notably, a requirement for the credit institution selling the loan to provide information to the credit purchaser, obligations to notify BaFin and the Deutsche Bundesbank as well as obligations for the credit purchaser to provide information to the borrower.

BaFin and the Deutsche Bundesbank monitor compliance with these obligations.

Borrower complaint

Borrowers who believe that their rights have been violated can always lodge a complaint with the credit servicer. Credit servicers cannot request any money for processing such complaints and must take appropriate measures to resolve such matters.

It is also possible for borrowers to file a complaint with BaFin about credit purchasers, their representatives, credit servicers or external service providers. For more information, see the “Consumers” section on the BaFin website.

BaFin's right

In order to ensure that credit purchasers, credit servicers, credit institutions and external service providers adhere to the legal requirements, BaFin has a range of rights to obtain information and documentation as well as intervention rights. Credit services institutions must, for example, submit their annual financial statements for the preceding financial year to BaFin in the first quarter of each year. This enables BaFin to assess their economic situation and stability. BaFin must also be notified about any material changes at these institutions, such as appointments to the management board or changes of significant shareholders. In such cases, BaFin assesses the persons concerned. Compliance with the statutory obligations is also – depending on the specific circumstances – monitored by means of annual risk assessments by auditors or inspections by the Deutsche Bundesbank and BaFin.

BaFin can take various measures in response to violations of the law. It can issue warnings to management board members, demand their removal, order measures to ensure compliance with the statutory requirements or appoint special commissioners. In the event of severe violations, it can withdraw authorisation. If an institution is at risk of insolvency, BaFin can take provisional measures to ensure that its obligations to creditors are met. If an institution is not able to meet its obligations, BaFin can apply to open insolvency proceedings. BaFin also investigates credit services provided without authorisation. Furthermore, the KrZwMG contains provisions governing criminal penalties and administrative fines for violations, e.g. breaches of notification and reporting requirements or if companies do not follow orders issued by BaFin.

If BaFin takes measures against companies on the basis of the KrZwMG, it makes this known – depending on the specific case and legal basis – on its website, where it also publishes warnings about companies.

Transition period

Companies that were already providing credit services before the KrZwMG came into force can continue to do so during a transition period. However, they must undergo an authorisation procedure during this time. BaFin provides more details about the relevant notification and application deadlines on its website and strongly advises the companies concerned to contact it in a timely manner.