The European Consumer Organization (BEUC, Bureau Européen des Unions de Consommateurs) expressed concern regarding the European Commission Action plan: “Tackling non-performing loans (NPLs) in the aftermath of the COVID-19 pandemic” released in December.
While the Action Plan recognises the need to protect vulnerable borrowers – including by setting up an advisory panel of industry and consumer organisations – BEUC is concerned about EU plans to give debt collectors an EU-wide operating passport, but only to be supervised by their home country.
“Reducing the number of non-performing loans for the sake of financial stability should not come at consumers’ expense. When many consumers across Europe are struggling to keep on top of their loan repayments due to the pandemic, allowing debt collectors to act EU-wide with minimal oversight will drive vulnerable consumers into the clutches of vulture funds.Monique Goyens,
BEUC recommendations on this topic:
- CREDIT INVESTORS AND DEBT COLLECTORS should not be given an EU passport if they are buying consumers’ non-performing loans
- CONSUMERS should be given the possibility to buy their own debt before it is sold to third parties at discounted prices
- CREDIT INVESTORS AND DEBT COLLECTORS should be strictly regulated to protect distressed borrowers from unfair treatment
Even though the protection of vulnerable clients is of course a reasonable issue, the concerns expressed and the “rhetoric” of the vulture funds appear to be based on a lack of knowledge of the dynamics underlying the credit management processes.
In the first place, the European Commission’s interest in the creation of a secondary market for impaired credits at European level and in the development of individual national markets has a clear and evident rationale:
- the management of impaired loans is a non core business for financial intermediaries and when outsourced to specialized subjects it allows gains in effectiveness and efficiency
- the disposal of the distressed credits is key tool mechanism to make banks’ balance sheets more transparent (it eliminates the risk of wrong forecast on expected recoveries on non performing loans )
- competition between debt buyers and special servicers reduces their profit margins to the benefit of banks .
Therefore, allowing debt buyers and special servicers to operate and compete at across Europe helps banking sector to improve transparency and profitability (lower margin for service providers and debt buyers mean better economics for banks)
The second recommendation, that consumers should be given the possibility to buy their own debt before it is sold to third parties at discounted prices, cannot be applied for 2 main reasons. First and foremost, the moral hazard: accepting significant discounted payoff from delinquent clients would be a counterproductive strategy for lenders and dangerous incentive for debtors with performing claims that could be tempted to ask for the same benefit.
Secondly, you can’t sell the debts to delinquent borrowers because you cannot know in advance which ones are able and will be willing to pay. Debt buyers typically acquire portfolios composed by a large number of borrowers but are paid only by a small fraction of them. To find out which debtors are going to pay you need to run a workout process.
Finally the third recommendation seems to be redundant: most countries do have a strict regulation to avoid unfair treatment during credit collection process (e.g. Italian law on stalking) while ethical behavior codes and best practices are a top priority and a fundamental discussion within credit management industry.
In conclusion, the Commission’s program for the reduction of NPLs, especially in the part that favors the growth of secondary markets, does not constitute a threat to vulnerable consumers, but rather an important opportunity to improve transparency and resilience of banking sector in order to maintain its vital function to provide funding to to families and businesses.
Savethedate January 29th, there will be the first CVSTREAMDAY: a TV and Digital conference in which will be released a preview of the NPE market data collected by Credit Village’s NPE Market Watch . Read the article in italian.
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GLG – Gerson Lehrman Group – Council Member