Insights into the German Secondary Credit Market Act: A Comprehensive Overview for Credit Purchasers

The new German Secondary Credit Market Act (Kreditzweitmarktgesetz) (the “Act”) – effective 30 December 2023 – imposes obligations on sellers and purchasers of non-performing loans, if the initial sale of a non-performing loan is entered into by a German credit institution (or a German branch of a credit institution) as seller. It applies to all credit purchasers, including non-German institutions.

Credit purchasers should be aware of whether they are purchasing non-performing loans so that they can ensure compliance with the regulatory obligations under the Act and avoid potential penalties for non-compliance.

The German Secondary Credit Market Act is focused on non-performing loans on the balance sheets of fully licensed German (or EU) credit institutions. It technically focuses on German credit institutions and German branches of international credit institutions. The Act therefore applies if the initial sale of a non-performing loan is entered into by a German credit institution (or a German branch of a credit institution) as seller.

The Act applies to all credit purchasers regardless of their place of incorporation or regulation. However, the obligations may differ depending on the credit purchaser’s place of incorporation and regulation.

The Act applies to any loan, which also includes promissory notes (Schuldscheine) or even deferrals or other equivalent financing agreements. However, it does not apply to notes, bonds or other forms of securities.

The Act applies to non-performing loans, as defined in EU Regulation 575/2013. This definition includes, among other circumstances, where:

The Act entered into force on 30 December 2023. The obligations imposed thereunder do not apply to the purchase of a non-performing loan if the first transfer or assignment of such non-performing loan occurred prior to 30 December 2023. This means that even if the non-performing loan is transferred or assigned after 30 December 2023, the obligations do not apply as long as that non-performing loan was first transferred or assigned prior to 30 December 2023.

The Act can even apply to fact patterns without any connection to Germany (other than German seller) – eg, when a German credit institution sells a non-German law loan against a non-German borrower to a non-German purchaser.

Sellers must provide a prospective creditpurchaser of a non-performing loan with the information required to evaluate such non-performing loan before entering into a purchase agreement (including on security and the chances of realising proceeds).

This disclosure obligation does not apply to any subsequent sales if the seller is not a credit institution.

Sellers (both the initial seller and any subsequent seller) must report biannually (or, if required by the competent regulator, quarterly) certain details of the non-performing loan (eg, identity of the credit purchaser, outstanding amount of the transferred non-performing loan, security, name of borrower) to the relevant regulator(s).

In addition, before an enforcement of claims arising under a non-performing loan and at the request of the borrower at any time, the credit purchaser or the credit servicer must notify the borrower of the transfer of the non-performing loan and provide information on, among others, the loan and contact details of the credit purchaser and, if applicable, the credit servicer and representative.

Credit purchasers must appoint a credit servicer if the non-performing loan was entered into with a natural person or micro, small or medium-sized enterprise, as defined in Article 2 of the Annex to Commission Recommendation 2003/361/EC.

The credit servicer, on behalf of the credit purchaser, ensures compliance with the Act and other applicable laws (in particular consumer protection, contract and criminal law).

Credit purchasers are exempt from the obligation to appoint a credit servicer if they are a credit servicer themselves.

Non-EU/EEA credit purchasers are required to appoint a representative and credit servicer. The representative is responsible (jointly with the credit purchaser) for compliance with the requirements under the Act and acts as the credit purchaser’s process agent.

The credit purchaser must notify BaFin (Germany’s financial regulatory authority), and Deutsche Bundesbank of the appointment of a representative or credit servicer.

BaFin may take administrative measures against sellers and credit purchasers that violate the Act. Such measures may also be taken against the directors, supervisory bodies and/or other responsible persons.

Potential measures include the withdrawal of an authorisation to carry out activities, a request to dismiss the responsible managing directors and/or administrative penalties.

For certain violations, in particular the provision of credit servicing activities without a licence, the Act provides for criminal penalties.

Credit purchasers should be aware of whether they are purchasing non-performing loans so that they can ensure they comply with obligations under the Act.

To ensure that this information is correctly provided by the sellers, credit purchasers should obtain representations as to the loan’s classification as “non-performing” in accordance with the above criteria. It should also be ensured that the documentation provides for an obligation on the seller to provide the credit purchaser with any information required for it to comply with the Act. In addition, credit purchasers should analyse their own corporate structure and regulatory status to determine the permitted credit servicer and/or representative legal entities in their own group.