The sale of non-performing loans after GEO 52/2016

Starting with  2014, after  the entry into force  of new  prudential  rules  imposed  by the  Basel  III international  standards, as  well as by  Directive  2013/36/EU and  Regulation no.  575/2013, the transactions of sale of non-performing loans have gained even more the attention of investors. Romania ranked first in Central and Eastern Europe in respect of sales of non-performing easy loans or large ones with  transactions  valued  at  EUR  3.5  billion  in  2015  and  2016.  Considering  that  there  still  are important  Romanian  banks  with  a  rate  of  non-performing  loans  exceeding  10%,  the  market  is expecting that the transactions of sale of non-performing loan portfolios will continue in the next period.

Recent  legislative  amendments  brought  by  the  entry  into  force  of  the  Government  Emergency Ordinance no. 52/2016 regarding loan agreements granted to consumers for immovable property and  on  amending  and  supplementing  the  Government  Emergency  Ordinance  no.  50/2010  on consumer loan agreements (GEO 52/2016) could influence the structure of these transactions in the future. Go to usfinancer.com.

Although the purpose of GEO 52/2016 was, among others, to ensure discipline of the debt recovery activity in the context of the boom of the sales of non-performing loans, certain changes brought by it triggered uncertainties on the market. Therefore, following these legislative amendments, the transfer of non-performing loans will be treated differently depending on the type of debtor (loans offer to corporate clients or consumers), on the purpose of the loan (whether they were granted in relation  to  immovable  property  or  not),  the  moment  of  execution  of  the  agreement  (loans concluded before or after the entry into force of GEO 52/2016).

  1. Sale of non-performing corporate loans versus sale of non-performing consumer loans
  • Corporate loans

Although GEO 52/2016 aimed to regulate only consumer loans, it also brought amendments to Law   no.   93/2009   regarding   non-banking   financial   institutions   (Law   93/2009)   with consequences in respect of the assignment of corporate loan portfolios.

According  to  Law  93/2009,  lending  activities  on  a  professional  basis  can  be  carried  out  only regulated entities (such as credit institutions and non-banking financial institutions). Before the entry into force of GEO 52/2016, Law 93/2009 also provided that only such regulated entities can purchase loan portfolios and the main exception to this rule was that loan portfolios classified as loss, according to the provisions regarding the classification of loans, could also be transferred to unregulated  entities.  GEO  52/2016  repealed  these  provisions  regarding the  acquisition  of loan portfolios, while regulating only the transfer of consumer loan portfolios.

This amendment raised questions in relation to the possibility for unregulated entities to continue to purchase loan portfolios which were classified as loss (commonly known as non-performing loans). Given the rule that lending activities can only be undertaken on a professional basis by

regulated entities, the question being raised is whether purchasing portfolios of loans classified as loss constitutes professional lending or not. In this respect, the National Bank of Romania (NBR) is the only competent authority to decide if a certain activity could be qualified as professional lending.

In  January  2017,  the  NBR  issued  a  press  release  offering  its  interpretation  in  relation  to  this legislative  amendment.  According  to  the  NBR’s  opinion,  despite  the  provisions  regarding  the transfer of loan portfolios having been repealed, the acquisition of loans classified as loss according to the provisions regarding the classification of loans, as well as carrying out operations in view of recovering  the  amounts  owed,  do  not  qualify  as  professional  lending  and,  therefore,  can  be undertaken by entities other than professional lenders.

This intervention of the NBR offers some comfort to unregulated entities by establishing a general interpretation regarding the acquisition of portfolios of loans classified as loss. However, the NBR’s press release seems to suggest that the activity carried out by the purchaser in relation to the purchased loans must still be analysed on a case by case basis in order to determine if it presents the characteristics of professional lending.

In light of the NBR’s interpretation, we consider that the acceleration of the loan or the initiation of enforcement procedures after the purchase of the loans would fall outside the scope of the professional lending activity. The same interpretation would not apply for continuing to collect the principal, interest or fees and commissions after the purchase, at their due dates, in accordance with the initial contractual terms of the loan, with respect to which it could be argued that they represent professional lending activities that could be carried out only by regulated entities.

  • Consumer loans

With respect to consumer loans, GEO 52/2016 establishes the rule that only credit institutions or non-banking financial institutions authorized to offer that specific type of loan, or alternatively entities  authorized  to  issue  securitized  debt  instruments  in  accordance  with  Law  no.  31/2006 regarding debt securitization, will be able to purchase the consumer loans.

As an exception, receivables deriving from non-performing loans, which have been accelerated by the creditor or in relation to which the creditor has initiated enforcement proceedings, can be purchased by debt recovery entities registered with the National Authority for Consumer Protection, under the condition they have their registered headquarters, a branch or a representative in Romania.

2. The sale of consumer loans contracted in relation to immovable property versus those contracted for other purposes

GEO 52/2016 applies to consumer loan agreements regarding the sale, respectively, purchase of immovable  property, loan  agreements secured by  an  immovable  mortgage or  such agreements involving   a   right   related   to   an   immovable   asset   (Consumer   Loan   Agreements   for Immovable Property). However, GEO 52/2016 also amended GEO 50/2010 on consumer loan agreements   (GEO   50/2010),   narrowing   its   scope   of   application   only   to   consumer   loan agreements  other  than  the  Consumer  Loan  Agreements  for  Immovable  Property  (Classic Consumer Loan Agreements).

Although  the  legal  regime  applicable  to  the  transfer  of  loans  granted  under  the  two  types  of contracts should have been the same, there is a  notable difference. In particular, GEO 52/2016 defines  non-performing  loans  only  in  relation  to  Consumer  Loan  Agreements  for  Immovable Property as those for which there is a delay in payment of at least 90 days but does not provide a similar  definition  for  non-performing  loans  in  relation  to  Classic  Consumer  Loan  Agreements, regulated under GEO 50/2010. Consequently, when purchasing receivables deriving from Classic Consumer  Loan  Agreements,  we  raise  the  question  how  those  loans  will  be  classified  as  non-

performing. Considering that the scope of GEO 52/2016 is narrower than that of GEO 50/2010, we could not extend the definition provided for non-performing loans deriving from Consumer Loan  Agreements  for  Immovable  Property  to  those  deriving  from  Classic  Consumer  Loan Agreements.

One approach could be to classify loans deriving from Classic Consumer Loan Agreements as non- performing by using the notion of loans classified as loss which, according to and within the limits of  the  NBR’s  interpretation,  could  be  transferred  to  unregulated  entities.  As  opposed  to  the qualification of non-performing loans according to GEO 52/2016 (which uses as a criterion only the number of days of delay in payment), for classifying a loan as the financial performance of the debtors is also used as a criterion (according to which a loan may be classified as loss even in case of fewer days of delay in payment), as well as the initiation of judicial procedures against the debtor (enforcement or bankruptcy). Furthermore, when classifying loans as loss, all loans granted to one debtor are classified as loss if at least one of them fulfils the relevant criteria, even if the rest of them  may  not  meet  the  requirements.  This  is  known  as  declassification  by  contamination  (in Romanian, declasare prin contaminare).

3. The sale of non-performing loans depending on the date of the loan agreement

The new provisions regarding the Consumer Loan Agreements for Immovable Property, including those  regarding  their  transfer,  do  not  apply  to  agreements  which  were  already  in  force  at  the moment when GEO 52/2016 was adopted (i.e. 30 September 2016). This means that, in principle, the general regime applicable to the assignment of loans will also apply to the transfer of such loans, meaning the NBR’s interpretation of Law 93/2009 presented above. Therefore, these loans can be purchased by any regulated entity and  also  by any unregulated entity, not only by debt recovery entities.

In relation to Classic Consumer Loan Agreements, however, the applicability of the new rules is not limited to agreements concluded after the entry into force of the legislative amendments. Therefore, the transfer of such loans, even when such were granted before the entry into force of the new provisions, is possible only by complying with the applicable rules in force at the date of the transfer, meaning only towards regulated entities or unregulated debt recovery entities.

Therefore, depending on the criteria presented above, the following aspects could vary in the context of a transaction of sale of a non-performing loan portfolio: the entity which can purchase those loans, the conditions under which the acquisition can be performed and even the definition of the non-performing loan. These aspects will lead to additional efforts for structuring the transaction if it envisages the acquisition of a complex loan portfolio.

Nevertheless, despite these legislative amendments, the Romanian market continues to have potential for further transactions of sale of non-performing loans. Considering the recommendation that the NBR made to banks to diminish their rate of non-performing loans, we expect to witness more transactions of sale of non-performing loans in the following period.

This information is not legal assistance. For further details, please contact us.

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