Informazioni

Implementing Technical Standards from EBA for NPL Transactions

By Burkhard Heppe

Chief Technology Officer

Published Tuesday 17 May, 2022

On May 16, 2022, EBA launched a public consultation on the draft Implementing Technical Standards (ITS) regarding the data templates for non-performing loan transactions.

The revised templates are expected to become mandatory for credit institutions in the course of 2023 for the provision of information to investors under the directive on credit servicers and credit purchasers (Directive (EU) 2021/2167). The consultation closes on 31 August 2022 and there is a public online hearing on 15 June 2022. Following the consultation period, the draft ITS will be finalised and submitted to the European Commission by the end of 2022 (EBA 2022).

In this news flash we offer a summary of the key points and some initial comments.

EBA has designed the loan-level templates for sellers to provide standardized information to potential buyers of NPLs for the purposes of financial due diligence and valuation after a prior market consultation in May 2021. Most of our comments on last year’s templates are still valid and can be found in NPLM (2021). 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 thus reducing information asymmetries between the sellers and buyers of NPLs. By defining standard templates, EBA aims to reduce the entry barriers for small banks and investors wishing to transact in NPLs. The ITS templates are complemented by a data glossary and instructions for filling in the templates.

NEW DEVELOPMENTS AND KEY POINTS TO TAKE AWAY

  • There is currently no mandatory data standard for NPL transactions. The draft ITS will not become mandatory for credit institutions before 2023 and no specific start date has been communicated yet.
  • In accordance with Article 16(7) of Directive (EU) 2021/2167 the draft ITS templates shall be used for loans that are originated on or after 1 July 2018 and that became nonperforming after 28 December 2021.
  • The ITS refer to credit institutions as sellers. It is not clear whether non-bank sellers will adopt the templates on a voluntary basis.
  • The ITS templates do not apply to NPL securitisations since those are covered by the Regulation (EU) 2017/2402 and (EU) 2020/1224. The disclosure templates for NPL securitisation are materially different from the proposed ITS transaction templates.
  • While NPL securitisation must deliver standard loan-level data disclosures in XML format, no XML schema is defined for the ITS templates.
  • The draft ITS set out requirements for the exchange of confidential information as well as governance requirements for the credit institutions to ensure that the information being provided is complete, accurate and consistent.
  • Data fields in the ITS templates are classified as mandatory or non-mandatory depending on the exposure size of the loan with loans of less than EUR 25,000 having fewer mandatory fields (principal of proportionality). Data fields vary in their scope of application by nature of the borrower (private individual or corporate), and nature of the loan (secured or unsecured).
  • The draft ITS do not introduce any supervisory reporting requirements but shall be used for the exchange of information by the parties involved in an NPL sale process.
  • The draft ITS templates define data fields regarding the counterparty and counterparty group (Template 1), the relationships between the counterparties and the loans and collaterals (Template 2), the contractual characteristics of loan itself (Template 3) and any collateral and guarantee provided with the associated enforcement procedures (Template 4) and historical collection and repayment schedule of the loan (Template 5).
  • The credit institutions shall determine which information may be considered confidential based on data protection, data confidentiality and bank secrecy legislation.
  • Any information deemed confidential shall be shared with the appropriate confidentiality arrangements in place and through secure channels like electronic virtual data rooms.
  • For non-mandatory data fields as identified in the data glossary, when information required by the template is not available, the data field shall not be left blank. Instead, defined codes for no-data options shall be used to explain the reasons why the data is missing similar to the no-data options used in European securitisation disclosures.

FIRST COMMENTS FROM NPL MARKETS

  • We support EBA and the European Commission in their effort to create a standardized NPL data template and we will participate in this consultation as we did last year.
  • We agree that some data fields are more important for due diligence and valuation than others (NPLM 2021). However, we are concerned that the introduction of mandatory data fields will create a barrier for banks to sell their NPLs. Investors may accept loans with incomplete data possibly at a lower price. Sometimes the cost of collecting all mandatory fields is not justified by the potential expected price increase. We deem it essential that mandatory fields do not create an insurmountable hurdle for sellers where some data is not available. EBA must clarify the consequence of a seller not being able to provide all mandatory fields.
  • In our experience with standardised disclosures for securitisation transactions, the introduction of the no-data option for non-mandatory fields complicates the data preparation significantly without offering much additional value to investors.
  • We agree with the objective of EBA to reduce the complexity of the earlier NPL transaction templates published in 2017 and 2018. However, we are concerned that some simplifications have gone too far and some important data fields have been deleted. For example, the contract-mortgage-property relationship has been replaced with a contract-protection relationship which is not general enough to capture the complex mortgage structures sometimes found in commercial real estate loans. For more specific comments see NPLM 2021.
  • The draft ITS state that “credit institutions should be aware that they may not be able to organise the sales of particular non-performing loans (or portfolios of such) through electronic auction platforms or electronic transaction platforms, should such platforms require all mandatory information to be provided in order to allow the access to the platform and selling the portfolios though the platforms.” We disagree with this statement as it suggests that transaction platforms like www.nplmarkets.com may not be able to handle incomplete data when it is a common occurrence to which the market has adapted.
  • The consultation proposes that where credit institutions decide to split the NPL sale between a non-binding offer (NBO) phase and a binding offer phase, the information needed for the financial due diligence and valuation should be disclosed at the beginning of the second binding offer phase. This is not in line with market practice where investors receive a data tape after signing a non-disclosure agreement already in the first NBO phase. Certain sensitive fields can be redacted from the initial NBO tape, where required, but organising an NBO without a detailed data tape will fail to provide a reliable criterion to select investors for the binding offer phase. We refer to the upcoming Best Practice Sales Guidelines from the European Commission expected to be published in June 2022.

REFERENCES

EBA 2022. EBA consults on standardised information requirements to support sales of non-performing loans https://www.eba.europa.eu/eba-consults-standardised-information-requirements-support-sales-non-performing-loans

NPL Markets 2021. NPL Portfolio Transactions – Data Requirements https://nplmarkets.com/en/research/article/npl-portfolio-transactions---data-requirements