Dear friends, dear interested,
Persistence pays off! The European Parliament’s Committee on Economic and Monetary Affairs (ECON) will tonight adopt a heavily revised version of the rules on the sale of non-performing loans. Thanks to us Greens, the draft bill now includes strong protections for distressed borrowers. This is good news for mortgage borrowers, small business owners and many others across Europe. The first draft of the European Commission for the so-called NPL Directive had not been very promising. The Green negotiators succeeded in turning a purely market-liberal legislative proposal into an instrument for better consumer protection in Europe. In the negotiations, which had been blocked for years, this was precisely the sticking point. Now a broad majority of Christian Democrats, Social Democrats, Liberals, right-wing conservatives and us Greens support the bill. The final vote on the compromise text will take place on Thursday.
Since the financial crisis, many banks in the eurozone have been plagued by high levels of so-called non-performing loans (NPLs). A loan is considered non-performing as soon as the borrower is in arrears over a longer period of time. Due to sometimes lengthy insolvency proceedings, such loans often remain on bank balance sheets for years after default. The ECB estimates that the total stock of non-performing loans at euro area banks could even rise to 1400 billion euros as a result of the Covid-19 pandemic in an adverse scenario. One strategy for banks is to resell non-performing loans to third parties. Such secondary markets for loans already exist in the European Union, but have so far been largely subject to the national laws of the member states. The Commission’s original legislative proposal from 2018 aimed to harmonise secondary markets across Europe. In particular, credit service providers with a national licence should be allowed to offer their services in all member states (so-called “passporting”).
The blind spot of the Commission’s proposal was consumer protection. The Europe-wide opening of secondary markets was to take place without any significant harmonisation of the protective provisions for borrowers. But the unilateral sale of a loan strongly affects the debtor: instead of his familiar bank, he now has to deal with an unfamiliar third party. In some cases, credit claims end up with companies that have no interest in cooperating with borrowers and instead try to squeeze as much as possible out of debtors with often rude methods. In the worst case, citizens lose their homes or small entrepreneurs their businesses to the greed of such companies. After the financial crisis, these business practices made headlines under the name of vulture funds.
The draft to be adopted by the ECON Committee now contains minimum standards for borrower protection to be implemented across Europe. We Greens had demanded this from the beginning. For example, creditors are explicitly forbidden to put pressure on debtors and to contact third parties, such as family members or employees. Non-performing loans are to be restructured in a borrower-friendly manner as a matter of priority, for example through refinancing or forbearance. If a loan is sold, the debtor must be informed of all details using a standardised form in easy-to-understand language. Any possible fees are capped. The national rules of the member states can still go beyond the prescribed minimum standards.
The strong consumer protection provisions were almost prevented by the Social Democrats. An earlier draft of the directive, which contained almost no rules on borrower protection, should already have been voted on in the ECON Committee during the last legislative period. This unacceptable draft had been negotiated jointly by Social Democrats and Christian Democrats. Only at the very last moment did the Social Democrats back down and withdraw support for a vote before the 2019 European elections. Since then, the legislative process has been on ice. It was only with a stronger emphasis on borrowers’ rights that there was movement in the negotiations again at the end of last year. While Christian Democrat negotiator Esther de Lange continued to resist stronger consumer protection rules in the current legislative period, support now came inter alia from the Social Democrats.
In the upcoming trilogue negotiations, the European Parliament, the Council of Ministers and the European Commission must agree on a common position. We Greens are at the table and will work to ensure that the rights of borrowers also play a central role in the final law.
However, despite the welcome successes, the sale of loans should remain an exceptional fallback solution. Highly liquid secondary markets, as envisaged by the European Commission in its latest action plan, are incompatible with basic consumer rights. A high degree of fungibility and market liquidity can only be achieved if borrowers and loans are reduced to simple numbers. We cannot allow that borrowers are being sold like inanimate goods. Moreover, the economics of such an anonymous procedure does not work. Building on the mutual trust between the original creditor and the borrower will achieve better outcomes in most cases. I will continue to work to strengthen these mechanisms in the future.
With green European greetings,
Original draft of the European Commission for the NPL Directive from 2018:
NPL Action Plan of the European Commission from December 2020:
My take on the NPL Action Plan:
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