Mandatory data requirements in the new EBA NPL data templates could deter European banks from selling NPLs
EBA has launched a public consultation on the draft Implementing Technical Standards (ITS) regarding the data templates for non-performing loan transactions (EBA NPL templates) which closes on 31 August 2022. The EBA NPL templates are expected to become mandatory in 2023 for European banks acting as sellers of NPLs.
In accordance with Directive (EU) 2021/2167 on credit servicers and credit purchasers (the Underlying Directive) the draft ITS templates shall be used for loans that became non-performing after 28 December 2021. For older NPLs banks should use the new EBA NPL templates on a best-efforts basis.
( EBA 2022 ,
NPLM 2022 )
In this commentary we highlight the importance of mandatory fields in the new EBA NPL templates and share some concerns that we expressed to EBA in response to the consultation with regards to mandatory data fields, the availability of no data options and potential additional information that investors may require.
EBA has produced loan-level templates for sellers to provide standardized information to potential buyers of NPLs for the purposes of financial due diligence and valuation. The objective of the standardized templates is to increase efficiency in the market for NPLs by providing a common data standard across the EU enabling cross-country comparison and reducing information asymmetries between the sellers and buyers of NPLs. We find the templates useful and generally fit for purpose. However, we believe that standardized data will reach their full potential for increased market efficiency only when such data becomes available to all market participants in form of a central data hub as proposed in the 2020 Action Plan on NPL of the European Commission.
Each data field in the proposed EBA NPL templates is labelled mandatory or non-mandatory and there is a proportionality principle that means that more data fields are mandatory for larger loans above the threshold carrying amount of EUR 25,000. EBA proposes to use no data options ND1 to ND4 for non-mandatory fields like the no data options used in securitization disclosures. The chart compares the no data options proposed by EBA for NPLs and those used by ESMA for securitization. The ITS mentions that for mandatory fields only the no data option ND4 is available which means the “data field [is] not applicable in relation to the underwriting criteria specified in the description of the data field or in relation to the borrower type or the loan type. “
Among other comments regarding the technical details of the data templates, we identified two major concerns with the current ITS regarding the mandatory data and additional data requirement that investors may have. We think the instructions in the ITS need to be clearer and more explicit on both points.
Mandatory data and the proposed no data options
First, we are concerned that the large number of mandatory fields will act as a deterrent to data providers who are not willing or able to provide all mandatory fields. The introduction of the materiality threshold of EUR 25,000 reduces the number of mandatory fields for smaller exposures but does not eliminate the risk that mandatory fields will deter banks from selling. The objective of the Underlying Directive is to make the market for non-performing loans more efficient. A data template which resulted in a deterrent for banks to sell NPL would be in direct contradiction to the stated intent.
The templates define data fields as part of the standardization and the mandatory/non-mandatory label signifies the importance of the data field which provides useful guidance to sellers and buyers. However, sellers need a clear confirmation that a deal will still be compliant with the ITS even if the data for one or more mandatory fields are missing. Investors and transaction platforms can handle incomplete information. The decision about how much information is sufficient to conclude a sale at an acceptable price should be left for sellers and buyers to negotiate and not subject to rigid legal requirements.
The proposed option that allows data providers to use ND4 no data option for all mandatory fields must be discussed more explicitly. In our experience with securitisation data, the no data option indicating not applicable (ND5 for securitisations) is often used when the data is not available even if the data field is applicable from an economic perspective. If it is the intention of EBA to permit ND4 without additional applicability checks, then this should be clearly stated in the instructions in which case in effect no data field will be mandatory and there will be no deterrent. If EBA believes that certain data fields cannot have missing data, then the ND4 option must be disallowed for those fields. To avoid a deterrent for banks to sell NPLs, we argue that the number of mandatory fields without a no data option should be very small (e.g., just the identifier fields and the Total Balance). Sellers could be asked to justify their use of ND4 for mandatory data fields on a deliver-or-explain basis. Adding a list of mandatory fields that are not delivered or incomplete with a brief explanation is considerably less effort for the seller than being forced to collect the information.
Handling additional information not covered by the templates
Our second concern arises from our experience with NPL securitisation transactions where the standardized regulatory disclosures based on ESMA templates exist in addition to non-standardized data tapes and investor reports. In the case of NPL securitisations, it is the non-standard data which are the focus of investors as they contain critical information not part of the ESMA securitisation templates (for example, business plan projections and detailed collection and expense cashflows). We think it is important to avoid a situation like in NPL securitisations, where buyers and sellers work with non-standard data for due diligence and valuation and prepare the standardised data only for compliance reasons. Standardized data that are not used in practice would be an additional burden on market participants without any efficiency gains.
The consultation paper recognises that investors may request further information not included in the NPL data templates. We believe that the instructions need to be more explicit on how such further data can be provided as part of the same data tape. To avoid the need of a second data tape, it should be clear that the EBA NPL templates are a standardized core set of information which may not capture all relevant information. The instructions should clarify that sellers and investors can extend the templates as deemed necessary without risking non-compliance. This means the data covered by the templates must be reported in standardized form using the specified field names and value choices and formats. However, the data tape can be extended with additional data fields that are clearly named and such additions do not invalidate the compliance of the data tape with the Underlying Directive and the ITS. For example, any additional data field or data table could be marked with a prefix “ADD_” and if, for instance, data providers want to report a mortgage identifier, which we deem important for property secured loans, then they can add a field called “ADD_Mortgage Identifier” field to the data tape in Templates 2 and 4 without risking non-compliance. As another example, Template 5 could be provided in the proposed format where past and future cash flows are reported in pre-defined periods only. In addition, the seller could provide an extended data table with monthly historical collection data in a format covering more and longer reporting periods called “ADD_Historical Collections”.
The public hearing organised by EBA as part of the consultation process identified several topics where investors may require more information such as a history of forbearance measures or any information on deficient claims or time barring. We identified other items not covered currently which include the ESG related data fields related to the counterparty, cash in court, discounted payoffs, the percentage allocated to the lender of pooled collateral ownership, a property status field indicating whether the property is real estate owned with or without completed regularization, additional fields covering the operating and capital cost of real estate, service charges and insurance.
In summary, the new EBA NPL templates are an important new development in the European market for NPLs requiring significant adjustments throughout the industry. To ensure that the data templates improve market efficiency and do not act as a deterrent for banks to sell NPLs, we argue that more clarity is required on mandatory fields, the use of no data options and incorporating additional information requirements from investors that are not covered by the standardised templates.