Balancing the books - can the offloading of non-performing loans really lead to good consumer outcomes?

On 7 June 2021, political agreement was reached between the European Parliament and the EC on the proposals for a Directive on Credit Servicers, Credit Purchasers and the recovery of collateral. The stated hope is that the directive will foster competition, raise the average sale price for non-performing loan ("NPL") portfolios and significantly reduce servicing costs for the benefit of borrowers.  

There is an interesting tension here - on the one hand the directive recognises that NPLs take time and money to administer and that the slow recovery of funds and enforcement of security take their toll on a bank's balance sheet. On the other hand, it clarifies that consumer protection, in particular the rights granted to consumers under the Mortgage Credit Directive ("MCD"), the Consumer Credit Directive ("CCD") and the Unfair Contractual Terms Directive ("UCTD") will continue to apply. For business customers, the position is more precarious with the introduction of a acceleration enforcement mechanism for secured MPLs.   

In the UK, those administering regulated mortgage and consumer credit portfolios are already required to be authorised by the FCA and so their activities are subject to the detailed rules and guidance set out in the FCA's handbook, no not much change here. But this is not the position across the EU so the proposed directive could have a fundamental impact on the provision of mortgage administration services in those jurisdictions which do not currently require authorisation.

The benefits of the directive to the banks are clear but will it lead to consumer benefits? The costs of administering consumer NPL accounts is high. Each payment agreement for reducing the arrears needs to be individually negotiated taking into account the personal circumstances of the consumer. The consumer protections embedded within the MCD and CCD make it clear that customers must be treated fairly and this means that vulnerable customers (and let's be honest, most borrowers with an NPL are likely to be vulnerable at that moment in time) need careful treatment. This all adds up to the fact that a low-cost cookie cutter approach will not comply with the consumer treatment requirements. 

To my mind, any reduction in servicing costs is more likely to result in consumer detriment - individual treatment does not lend itself to economies of scale. Perhaps it would be more honest to say that the new rules will ensure that bank originated NPLs are treated in the same way whoever owns or administers them. That can only be a good thing.