Non-Performing Loans
Law of 15 July 2024 on the transfer of non-performing loans (NPL)
On 18 July 2024, the law on non-performing loans (the “NPL Law”) was published in the Official Journal. The NPL Law transposes Directive (EU) 2021/2167, which sets out rules for credit managers and credit purchasers dealing with non-performing loans (“NPLs”). The NPL Law also introduces key amendments to the existing Luxembourg Law of 5 April 1993 on the financial sector (the “LFS”), marking a significant reshaping of how NPLs are handled within the Grand-Duchy of Luxembourg.
One of the most notable aspects of the NPL Law is the creation of a new regulated role in the Luxembourg financial sector, the credit servicer (gestionnaire de crédits). Credit servicers, acting on behalf of credit purchasers, will be responsible for managing and enforcing creditor rights related to NPLs. The NPL Law not only defines the role of credit servicers but also sets out strict conditions under which they can operate. Credit servicers must obtain prior authorisation from the CSSF before carrying out credit servicing activities. They will also be subject to ongoing supervision by the CSSF, ensuring compliance with regulations designed to protect borrowers and uphold the integrity of financial practices in the sector.
In addition to credit servicers, the NPL Law applies to credit purchasers (i.e. natural or legal persons acquiring creditor rights over NPLs) and credit service providers, which may handle certain outsourced servicing activities on behalf of the credit servicers. However, credit service providers are not subject to the same level of CSSF supervision. The law clearly excludes the services of a creditor’s rights under a credit agreement, or of the credit agreement itself, carried out by credit institutions, AIFMs and other professional lenders from its scope, along with credit agreements issued outside the European Union.
The NPL Law sets out a clear authorisation process for credit servicers. Applicants must meet specific requirements, including a minimum capital of EUR 75,000, robust governance structures, and the ability to manage complaints and risks in accordance with borrower protection regulations. For those credit servicers wishing to receive and hold borrower funds to transfer to credit purchasers, the capital requirements amount to EUR 150,000, and additional safeguards must be in place to protect borrower funds from external claims. Credit servicers are obliged to maintain detailed records of all credit servicing activities for at least five years after the termination of the relevant agreement, with a maximum record retention period of ten years. They must also ensure that their interactions with borrowers are conducted fairly and professionally, providing clear and accurate information while avoiding any undue pressure.
The NPL Law also empowers credit servicers to outsource parts of their activities to third-party credit service providers. However, these arrangements are closely regulated. Credit servicers remain fully responsible for the actions of the outsourced providers and must maintain control over relevant information. All outsourcing arrangements must be notified to the CSSF in advance.
A distinctive feature of the new regime is the introduction of EU passporting rights for Luxembourg-based credit servicers. Once authorised by the CSSF, these entities can offer their services across the European Union without the need for additional licences. Conversely, credit servicers licensed in other EU member states can operate in Luxembourg under a similar framework, provided they notify the CSSF.
To enhance the protection of borrowers, the NPL Law imposes disclosure obligations on both credit purchasers and credit institutions. Semi-annual reports must be submitted to the CSSF detailing the transfers of NPLs or creditor rights, including information about the nature and scope of the transactions. Credit institutions, in particular, must disclose information on transferred NPLs and associated collateral to potential purchasers.
By implementing the NPL Law, Luxembourg introduced a framework that enhances borrower protection with respect to non-performing loans.
NB: The NPL Law also applies to securitisation undertakings subject to the Luxembourg law of 22 March 2004 on securitisation. For more information on this specific topic, please follow the link to the article prepared by our Banking Team: