Articles

Proposed new Law on Credit Servicers and Credit Purchasers

Apr 17, 2024

The Ministry of Finance has proposed a new Law on Credit Servicers and Credit Purchasers which is currently under public consultation.

It would be a transposition of the EU Directive 2021/2167 (also known as the “NPL Directive”) into national legislation and with the deadline for transposition already far behind, Cypriot authorities are racing towards due implementation.

The new Law introduces new important players in the field of credit acquiring:

A “Credit Servicer” is defined as a legal person that manages and enforces the rights and obligations related to a creditor’s rights under a non-performing credit agreement, or to the non-performing credit agreement itself, on behalf of a Credit Purchaser, and carries out at least one or more credit servicing activities, and includes a Credit Purchaser who is authorised as a ‘credit servicer’ due to the fact that it chooses to manage the rights and obligations of the credit it purchases itself.
A “Credit Purchaser” is defined as a natural or legal person, other than a credit institution, that purchases a creditor’s rights under a non-performing credit agreement, or the non-performing credit agreement itself.

Under the proposed law:

A Credit Servicer requires authorisation. The Law sets out the requirements which need to be met for the granting of such authorisation.
A Credit Purchaser does not require authorisation UNLESS it chooses not to appoint a Credit Servicer but to service the rights and obligations of the credit itself.
Credit Purchasers must appoint either a credit institution or a Credit Servicer to carry out credit servicing activities in respect of a creditor’s rights under a non-performing credit agreement, although they may choose to manage the credit themselves.

The obligations of a Credit Servicer would be:

-The performance of credit servicing activities. These are defined as:

collecting or recovering from the borrower any amount due related to a creditor’s rights under a credit agreement or to the credit agreement itself;
renegotiating with the borrower any terms and conditions related to a creditor’s rights under a credit agreement, or of the credit agreement itself, in line with the instructions given by the Credit Purchaser;
administering any complaints relating to a creditor’s rights under a credit agreement or to the credit agreement itself;
informing the borrower of any changes in interest rates or charges or of any payments due related to a creditor’s rights under a credit agreement or to the credit agreement itself.

-It will be prohibited from receiving and holding funds from borrowers, in its capacity as a Credit Servicer.

-After the transfer of the creditor’s rights under a non-performing loan (“NPL”), inform the borrower thereof within 15 days. The said notification must include the information specified in article 11(2) of the new Law.

-To enter into a written credit servicing agreement with the Credit Purchaser (if not the same entity)

-Its employees, officers, representatives etc are subject to confidentiality provisions.

-Abide by the rules, directives and guidelines to be issued by the Central Bank of Cyprus and any reporting obligations to be contained therein.

The obligations of a Credit Purchaser would be:

To designate a credit institution or a Credit Servicer to perform credit servicing activities in respect of its rights under an NPL and inform the Central Bank of Cyprus accordingly. This does not apply in the case the Credit Purchaser is a licensed Credit Servicer and elects to ‘self-service’.
To submit data on the total credit which its holds in the Credit Registry to be set up and used in Cyprus.
To be subject to reporting obligations to the Central Bank of Cyprus.
Its employees, officers, representatives etc are subject to confidentiality provisions.
To use the implementing technical standards to access information received by credit institutions, concerning the creditor's rights under the NPL or the NPL itself and the collateral, in order to enable the Credit Purchaser as a potential purchaser to carry out financial due diligence and evaluation.
In addition to any obligations it would have under the Law, it will also be subject to applicable provisions of consumer protection law, contract law, civil law and criminal law.
Additional obligations are imposed in case the Credit Purchaser wishes to sell any of the NPLs purchased.

The new Law is intended to replace the Sale of Credit Facilities and related Matters Law (N.169(I) of 2015, also known as the “CAC Law”) in its entirety, although provisions relating to the obligation for notification to borrowers and competent authorities (i.e. articles 18 and 19 of the CAC Law) have been transferred to the new Law (as articles 22 to 29). Credit acquiring companies already in possession of a valid authorisation from the Central Bank of Cyprus, will automatically be defined and authorised as Credit Servicers presumably as at the date specified in the new Law.

Although the NPL Directive is to be applied only to non-performing credit agreements, the Cyprus Law extends to both performing and non-performing credit agreements purchased from EU credit institutions. The new Law also extends to the rights and obligations of the security provider.

The Central Bank is tasked with issuing directives and guidelines regarding the operations and activities of Credit Purchasers and Servicers. This encompasses aspects such as the authorization of Credit Servicers, suitability assessments for board members and key function holders, organizational structures, and outsourcing arrangements.

The timeline for the enforcement of the new Law remains uncertain, as do the challenges posed by the transition from former CACs to the new regulatory regime. However, once in place, the new legislation will bring this sector one step closer to the EU regime on credit purchases.