EU ambassadors approved the position of European Council on a proposed directive for a common framework and minimum requirements for out-of-court mechanism to recover the value from loans guaranteed with collateral in case the borrower is not able to pay it back. The proposed new mechanism for out-of-court accelerated collateral enforcement would have to be agreed between a credit institution and a borrower upfront, normally when the loan is granted. Effective out-of-court enforcement can help prevent the accumulation of non-performing loans (NPLs), as it provides banks with legal instruments to recover collateral more quickly.
The proposed new mechanism would only be available for business loans. Consumer loans would be excluded, as would loans for which the borrower's primary residence is used as collateral. Where this new mechanism has been agreed between the parties and if the borrower defaults on the loan, the collateral would be valued and either sold (by private sale or public auction) or appropriated (via a transfer of ownership to the creditor). The proceeds up until the outstanding sum would then be turned over to the creditor. The proposed rules aim to balance the creditor's and the borrower's interests in various ways, including the following:
- The creditor needs to give the borrower a certain amount of time to make the due payments and avert enforcement.
- The borrower has the right to go to court to challenge the enforcement or creditor’s right to enforce the collateral.
- The creditor only gets to keep the proceeds to the extent necessary to cover the outstanding amounts on the loan. Excess proceeds are paid out to the borrower or other creditors.
- Member states may decide that where proceeds from the collateral fall short of the outstanding amount on the loan, the loan shall nevertheless be considered as fully settled.
The original proposal for the directive by EC also included a part on the development of secondary markets for NPLs. The European Council reached a position on this part already on March 27, 2019. Negotiations with the European Parliament can proceed as soon as the Parliament has agreed its stance. The proposal states that the directive shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.
- European Council Press Release
- Proposal on Collateral Enforcement Mechanism (PDF)
- EC Press Release
- Overview of NPLs
Effective Date: OJ+20 Days
Keywords: Europe, EU, Banking, NPLs, Collateral Enforcement Mechanism, Minimum Requirements Credit Risk, EC, European Council
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