Loan portfolio sales: developments and areas of uncertainty in relation to non-performing loan claims
One of the mechanisms that banking institutions have been using to deleverage in recent years is the sale of portfolios of non-performing loans (“NPLs”). A recent analysis estimated the principal of the loans transferred in this type of process at €21,900 million (2014) and €20,000 million (2015) in Spain alone. Estimates for 2016 in Europe made by some experts amount to €80,000 million. The purchase of NPL portfolios from banking institutions in Spain, mainly by international investment funds, and the subsequent claiming of the loans by the investor through the Spanish courts, is giving rise in some cases to situations that deviate from the normal and habitual treatment and acceptance of transfers of NPLs sold to funds and their subsequent foreclosure.
Such situations, which are still uncommon and isolated, are caused by certain proposals which suggest that the NPLs should simply be classed as “litigious”, which would offer the debtor certain options, to be discussed below. These same proposals would mean that an investor acquiring one of these NPLs in a portfolio sale would be obliged, if it wishes to initiate or continue the foreclosure of the loan at court, to disclose—practically as if it were a confession—each and every one of the circumstances surrounding the transaction, including the ever-sensitive economic terms; sensitive because the NPL market, which has been very active recently, is highly competitive and leaks of confidential data can alter its normal functioning.
The classification of these NPLs as “litigious”, as suggested by some, would make it possible for debtor to extinguish the loan by repaying to the fund the price paid by the latter to the bank, as well as the costs, expenses and interest incurred in the transaction. Apart from the devastating effect of this proposal on the NPL market, the possibility of redeeming an NPL due to its having been sold to a third party comes up against a number of obstacles, the first and most fundamental being the general assumption that a non-performing loan and a litigious loan are not the same thing, nor are they similar. The second obstacle, also major, is the traditional view that the transferred loan cannot be redeemed if the sale of the portfolio to which it belonged was made for a global price, without stipulating individually the price paid for each loan it comprises (which is habitual in granular portfolios, i.e. those made up of hundreds or thousands of loans.)
Although to date we have not heard that the servicers (the managers contracted by the funds to manage and collect the NPLs acquired) are encountering general difficulties at court, this type of proposal will foreseeably give rise to the occasional dispute when such loans are claimed and foreclosed. The dispute may arise strictly at a procedural level, because the fund acquiring the NPL is denied the possibility of taking the place of the bank that sold the loan in the foreclosure proceeding, or because the debtor whose loan is or will soon be foreclosed is allowed to dispute whether the fund is in fact entitled to initiate or continue the claim, with a battery of arguments that, in the best-case scenario, would delay the collection of the debt and thus have an impact on the return estimated by the fund and, in the worst-case scenario, would prevent the fund from obtaining the repayment of the loan it lawfully purchased from the bank.
We have had news of various preliminary rulings recently handed down by the Court of Justice of the European Union in answer to references submitted by certain Spanish courts, in which the underlying idea is, again, that the remedies available to the debtor of one of these NPLs whose foreclosure is initiated or continued by the fund that purchased the portfolio would be neither sufficient nor uniform from a territorial standpoint; in other words, depending on the debtor’s territory of residence, such debtor would, or would not, have access to certain tools in order to attempt to redeem the loan.
Examples of this presumed territorial asymmetry in the treatment of NPL portfolio sales would be the recent Additional Provision of Law 24/2015, of July 29, 2015, of the Cataluña Autonomous Community Government, which (despite the many questions it raises) appears to allow the debtor to redeem the NPL even if it is not litigious, provided that the loan is claimed and was secured with the debtor’s habitual residence; or the retrospective right of withdrawal regulated in the historic law of Navarra, which appears to permit (again, with major questions) the debtor’s release from the debt if it pays the purchaser of the loan the price paid by said purchaser plus the statutory interest and the expenses incurred by the latter on the claim of the loan. Apart from isolated examples processed in the past by the Mortgage Mediation Office, the Navarra Provincial Appellate Court salvaged this “statutory relic” in a recent decision, with a view to preventing the acquirer of a loan from continuing the foreclosure, despite this being directly at variance with the position taken by the same court in other decisions.
At present, it would be an exaggeration to say that these isolated proposals and actions are becoming a trend, but they are certainly the first symptoms that make it advisable, in the case of NPL portfolios already sold, to review the contractual mechanisms available to the investment funds in case such an incident arises. And for new transactions, or significant transactions still to be completed, it will be necessary to negotiate with the financial institutions selling the portfolios, so as to agree on the remedy and guarantee package that offers the greatest security to the funds, not only in cases in which the principal of the loan cannot be recovered due to an eventuality unrelated to the debtor’s solvency (such as the incidents mentioned), but also in cases in which the foreclosure of the loan at court cannot be initiated or continued due to procedural or substantial obstacles wholly unrelated to the diligent management of the loan by the purchasing fund, where it is reasonable that the fund should not have to bear the negative consequences.