Scope of application

In line with the NPL Directive, the NPL Law applies to three (3) types of entities, namely:

  1. Credit purchasers, i.e., natural or legal persons (other than credit institutions) who purchase a creditor’s rights under a non-performing loan (NPL) or the NPL itself, in the course of their trade, business or profession;
  2. Credit servicers, i.e., legal persons that, acting on behalf of the credit purchaser who appointed them and within the course of their business, manage and enforce the rights and obligations related to a creditor’s rights coming out of an NPL or the NPL itself, and carry out servicing activities; and
  3. Credit service providers, i.e., third parties to whom credit servicers may outsource certain credit servicing activities.

For the purpose of points (ii) and (iii) above, credit servicing activities comprise: (a) the collection or recovering from borrowers of payments due under a credit agreement; (b) the renegotiation with the borrower of any terms and conditions related to a credit agreement and/or a creditor’s rights thereunder, in line with the instructions given by the credit purchaser; (c) the administration of any complaints relating to a credit agreement and/or a creditor’s rights thereunder; and (d) the provision of information to the borrower of any changes in interest rates, charges and/or any payments due under a credit agreement.

In addition, the NPL Law explicitly includes in its application scope all transfers, from a creditor to a credit purchaser, of a creditor’s rights under an NPL and/or the assignment of the NPL itself, provided that such NPL has been entered into by a credit institution established in a European Union (EU) Member State.

By contrast, the following transactions / activities are out of the scope of the NPL Law (in line with the NPL Directive):

  1. credit servicing activities performed by credit institutions, Alternative Investment Fund Managers (AIFMs), and other professional “lenders” within the meaning of the Luxembourg Consumer Code;
  2. credit servicing activities performed in relation to credit agreements not issued by EU credit institutions;
  3. the purchase of a creditor’s rights under an NPL or of the NPL itself by an EU credit institution; and
  4. transfers of a creditor’s rights under a credit agreement and/or of the credit agreement itself that was effectuated before December 30, 2023.

Credit servicers as a new type of specialised PFS

The NPL Law implements the harmonised licensing regime for credit servicers, as such was introduced by the NPL Directive.

Credit servicers are introduced as a new type of specialised PFS under the LFS and are subject to authorisation and supervision by the Commission de Surveillance du Secteur Financier (CSSF).

The specificities of the pertinent licensing procedure and regulatory requirements are further analysed below.

Authorisation procedure

Under the LFS, as amended pursuant to the NPL Law, credit servicing qualifies as a regulated activity, subject to a prior written authorisation as PFS by the CSSF. The relevant licence therefor shall be granted exclusively to legal persons, subject to the fulfilment of regulatory authorisation requirements, including:

  1. capital requirements: minimum capital endowment equal to EUR 75,000;
  2. corporate governance requirements: at least two (2) directors, subject to an assessment of their professional standing and experience, robust governance arrangements and internal control mechanisms, including risk management and accounting procedures which ensure respect for borrower’s rights and compliance with the applicable laws, appropriate policy ensuring compliance with the rules for the protection and fair and diligent treatment of borrowers, procedures relating to the recording and handling of complaints, adequate anti-money laundering / counter-terrorist financing mechanisms;
  3. additional requirements for credit servicers wishing to be authorized to receive and hold funds from borrowers in order to transfer them to credit purchasers: i.e., higher minimum capital endowment equal to EUR 150,000, separation of borrower funds from own funds, protection of borrower funds from claims of other creditors, delivery of a written receipt / letter of discharge when receiving funds from borrowers, etc.

The details of the application procedure and the mandatory content of the relevant application file are provided for under new Art. 28-15(3) LFS. The CSSF shall assess the completeness of the application within forty-five (45) days upon its receipt and shall decide upon the granting or refusal of the relevant license within ninety (90) days upon receipt of a complete application file, and in any case within 12 months from the date of the application. The granted authorisation shall be indefinite, notwithstanding the CSSF’s power to withdraw it.

Recordkeeping obligation

Authorised credit servicers must maintain, for at least five (5) years from the date on which the relevant credit servicing agreement is terminated (but in any case for a period no longer than ten (10) years), records of:

  1. all relevant correspondence with both the credit purchaser and the borrower(s);
  2. all relevant instructions received from the credit purchaser in respect of a creditor’s rights under an NPL, or the NPL itself, that it manages and enforces on behalf of that credit purchaser under a credit servicing agreement;
  3. the credit servicing agreement itself.
Conduct of business obligations

In their relations with borrowers, credit servicers must always act in good faith, fairly and professionally, respecting and protecting the personal information and privacy of borrowers, avoiding harassment, coercion or undue influence and always providing them with clear and truthful information. The same obligation applies to credit purchasers (in the event that they perform credit servicing activities themselves and have not appointed a credit servicer).

In conjunction with the above, credit servicers (or credit purchasers, as the case may be) must comply with a notification obligation vis-à-vis borrowers, in the event of transfers of creditor’s rights under an NPL or the NPL itself; in particular, prior to the first debt collection, the credit purchaser or credit servicer involved must inform (in writing) the respective borrower(s) of the details of the relevant transfer, including at least the minimum content provided for under Art. 9(2) of the NPL Law (e.g., transfer date, identity and contact details of credit purchaser and credit servicer (if any), information on the authorisation of the credit servicer (where applicable), all payments due by the borrower(s) at the time of the notification, details on the competent supervisory authority for the borrower(s), etc.).

Outsourcing to credit service providers  

Credit servicers are entitled to outsource part (but not all) of the credit servicing activities performed on behalf of credit purchasers to credit service providers, a type of entity not subject to CSSF authorisation and not permitted to receive and hold funds from borrowers. Outsourcing is subject to the conclusion of a written outsourcing agreement and the prior notification thereof to the CSSF.

In any case, the credit servicer remains fully responsible for complying with the obligations arising out of the NPL Law (and corresponding NPL Directive), shall have direct access to all relevant information concerning the credit servicing activities delegated to the credit service provider and shall maintain records of any instructions provided to the credit service provider(s) and of the relevant outsourcing agreement(s) concluded therewith for a period of at least five (5) years following their termination but up to a maximum of ten (10) years.

As credit servicers qualify as PFS, outsourcing would also be subject to the provisions of Circular CSSF 22/806 on outsourcing arrangements.

Passporting rights

By contrast to the other types of specialised PFS provided for under the LFS, credit servicers are able to avail of passporting rights within the EU market. In particular, CSSF-authorised credit servicers shall be entitled to establish branches and/or provide services (covered by their Luxembourg authorisation) without establishment in any other EU Member Sate, without any further licensing requirements and/or regulatory restrictions (including a prohibition on receiving and holding funds from borrowers), subject to the submission of a prior passporting notification to the CSSF, comprising the minimum mandatory content provided for under the new Art. 28-18(1) LFS. The CSSF will then be required to communicate the notified information to the competent authority of the host Member State, within forty-five (45) days upon the receipt thereof.

In a similar vein, credit servicers authorized in any EU Member State are now entitled to provide the services covered by such authorisation in Luxembourg, through a local branch or on a cross-border basis, without establishment; such a passporting procedure shall be initiated before the competent supervisory authority of the home Member State, who will be responsible for notifying the CSSF.

Other key provisions

Obligation for credit purchasers to appoint a credit servicer

Credit purchasers are not subject to any CSSF authorisation; nonetheless, in relation to NPLs concluded with consumers (within the meaning of Art. L. 010-1.1 of the Luxembourg Consumer Code), they will be required to appoint an authorized credit servicer and/or an EU-established credit institution and/or a professional “lender” within the meaning of Art. L. 224-2(a) and 226-1(20) of the Luxembourg Consumer Code (Code de la Consommation), to perform credit servicing activities in respect of said NPLs (unless the credit purchaser is itself authorised to perform these services).

Third-country (non-EU) credit purchasers will be required to designate an EU representative for the purpose of transfers of a creditor’s rights under an NPL or of the NPL itself, as fully responsible for ensuring compliance with the obligations arising out of the NPL Law and the NPL Directive. Such representative shall (if appointed in Luxembourg) in turn appoint a credit servicer, as per the above, for the purpose of performing credit servicing activities relating to NPLs concluded with natural persons (including consumers and independent workers) and micro- and/or small- and medium- enterprises (SMEs) (unless the representative is itself authorized to perform these services).

The details (identity and address) of the appointed credit servicer(s) will have to be duly communicated to the CSSF at the latest on the date of commencement of the provision of the relevant credit servicing activities. The appointment shall be effected by way of a written credit servicing agreement, to be concluded between the credit purchaser and the appointed credit servicer, comprising at least the minimum mandatory content provided for under Art. 7(2) of the NPL Law (i.e., detailed description of the credit servicing activities to be carried out by the appointed credit servicer, remuneration, representation rights of the credit servicer, provision for the fair and diligent treatment of borrowers, etc.).

Disclosure obligations for credit purchasers and credit institutions

The NPL Law introduces bi-annual disclosure obligations vis-à-vis the CSSF for credit purchasers and credit institutions that engage in transfers of creditor’s rights under an NPL or of NPLs themselves, pertaining to the relevant details of such transfers (i.e., the identity of the credit purchasers involved, the aggregate outstanding balance, number and size of the creditor’s rights/NPLs transferred, any transactions involving consumers, within the meaning of the Luxembourg Consumer Code, available security interests (if any), etc.).

Credit institutions, in particular, will be required to comply with an additional disclosure obligation towards potential credit purchasers; prior to entering into any contract for the transfer of a creditor’s rights under an NPL or of the NPL itself, credit institutions will be required to inform credit purchasers on the details of the transferred rights / agreements, as well as any available collateral therefor. Draft implementing technical standards specifying the format and content of such notification were recently published by the European Banking Authority (EBA/ITS/2022/05), in accordance with Art. 15(1) and 16 of the NPL Directive.