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Sales of red loans and the rights of the borrower - 6 years after the adoption of the relevant law


Legal Insight

June 2021

George Psarakis LL.M. (mult.), PgCert

(republished from Huffingtonpost.com)

Summary: This article outlines the basic rights of the borrower in the case of the transfer of red loans.

Three years ago we wrote an article on the transfers of "red" loans. At that time we had analysed in a question and answer format the main points of the sale procedure. We repeat the same questions, with the new facts as they have emerged from the practical application of the legislation. 

1. Which loans can be transferred?

The adoption of the relevant legislative framework in 2015 (Law 4354/2015) was initially adopted for so-called "red loans". This term refers to loans that are more than 90 days overdue or whose repayment is not possible without the liquidation of their collateral (mortgages, pledges, etc.).

However, it is not only 'red' loans that can now be transferred, but also those that are up to date. This possibility was added by the legislator in 2016 (Law 4389/2016), when and together with "red" loans it allowed the sale of up-to-date loans, which would improve the appearance of the "loan package" to be sold and perhaps help to increase its price.

Of course, the overwhelmingly larger proportion of loans ended up being transferred not under the 2015 Red Loan Act, but under a 2003 law on business financing through securitization. And that law does not introduce any restrictions on the nature of the transferred loans. 

2. What is the process of selling the loans? Is the borrower informed before the loan is sold?

The procedure under the 2015 Act is relatively simple:

a. within 12 months prior to the offer of sale, the credit institution must have invited the consumer borrower by means of an extrajudicial summons to settle the debt on the basis of a written proposal for an appropriate arrangement with specific repayment terms, in accordance with the provisions of the Code of Conduct. It is not necessary to inform him that if he does not agree to a settlement he will proceed to the sale of his loan. The above obligation does not apply if the borrower has been classified as uncooperative under the Code of Conduct or if the claims are disputed or already adjudicated, i.e. are already in the midst of litigation. This obligation now and after the 2018 changes only applies when debtors are consumers.  

b. Once the above invitation has taken place, a sales contract is drawn up between the Bank and the Buyer (Receivables Acquisition Company). This contract is drawn up in writing and registered in the special register of the Pawnshop of the Bank's headquarters (i.e. since almost all credit institutions are based in Athens, at the Athens Pawnshop) and subsequently the registration is announced "by any appropriate means" to debtors and guarantors. The transfer is not effected by the announcement to the borrower but by the registration of the sale in the book of the Pledge Registry. Therefore, what has been stated several times, that the borrower is informed before the sale and is not taken by surprise, is not accurate. The borrower is indeed taken by surprise, since he can legally be informed 'after the sale' and not before the transfer. In fact, this notification can also take place when the purchaser is served with a claim or a payment order, i.e. when the legal proceedings for the claim are initiated.

c. The Bank is, however, obliged by the Personal Data Protection Act to inform the borrower at the latest immediately before the transfer of the borrower's personal information from the Bank to the Claims Acquisition Company takes place. This is not defined by the Loan Transfers Act 2015, but by the Personal Data Protection Act; and this Act applies because banks selling the loans are obliged to transmit to the acquiring companies a set of information accompanying these loans which is related to the borrower's creditworthiness etc. On the basis of a decision of the Data Protection Authority, this information, with regard to 'red' loans, may be provided in bulk and through the press.  

However: all of the above, and in particular the obligation of prior invitation of the consumer borrower to settle the debt, applies if the bank makes use of the 2015 law for the transfer of "red" loans. However, this law is never used any more, but in its place credit institutions use, as mentioned above, the 2003 law on securitisation of receivables. One of the reasons why this law is used is, of course, the lack of a compulsory invitation to the borrower to settle the debt before the sale. Therefore, we have the following paradox: we passed a law in the crisis for the management of 'red' loans and for the protection of the borrower, but it is almost never applied in practice, because there is a 2003 law that is much more favourable to credit institutions in terms of the conditions for its application. Therefore, under the 2015 law on "red loans" the credit institution before the sale is obliged to negotiate with the consumer borrower, under the 2003 law (on securitisation) it is not.  

3. What is the fate of the loan once it has now been transferred to the new company? Does the borrower's position get worse?

The most basic question that lingered in the minds of borrowers in arrears in the early years of red loan transfers was what would change after the sale of their loan. One thing is certain, they are not exempt from paying their debt. But do they come out worse off? Will the pressure on them now be much greater than that exerted by the Greek credit institutions?

This issue was examined at length by the Parliament during the passage of the relevant law on the sale of loans in 2015, and a special regulation was even provided which states the following verbatim: "In cases of sale and transfer of claims under this law, as well as in cases of assignment of management, the substantive and procedural position of the debtor and the guarantor shall not be worsened and unilateral modification of a contract term, as well as the interest rate, shall not be allowed." Similarly, the 2003 law, which is finally used by credit institutions, provides for the following: "The sale and transfer of receivables pursuant to this Article ..........shall not alter the substantive, procedural and tax nature of the transferred receivables and the related rights as they existed prior to the transfer in accordance with the provisions applicable in each case".

Moreover, whether the 2015 Act or the 2003 Act is used, loans are now managed by the specialised Receivables Management Companies, which, 26 in total today, have also established an association ("Association of Loan and Credit Receivables Management Companies"). As regards the behaviour of these companies, it is worth mentioning the following: 

- Management companies are keen to liquidate their collateral as quickly as possible (pledges, mortgages etc.) in order to reduce the disinvestment period. This sometimes makes them more aggressive than credit institutions, which, because of the large number of files they have to deal with, do not proceed at a fast pace. It is enough to consider that the volume of arrears is now managed not only by the five main credit institutions but also by the 26 Claims Management Companies. In other words, the volume of cases previously managed by five main companies (banks) is now managed by 31 companies (banks and management companies together).

- However, due to the disengagement of credit institutions, it is true that the management companies are more flexible. Depending on the collection plan they have drawn up from time to time, they may at certain periods introduce specific proposals for certain categories of loans with debt write-offs up to a certain percentage, etc. 

 - However, the Management Company's proposal must be appropriate and viable for the borrower (see recent decision of the Athens Court of First Instance: "The defendant's proposal for a final settlement of the debt, without any documentation and clearly without taking into account the actual financial possibilities of the opponent, was made on the pretext of a pretext, i.e. in order to comply with the steps of the Delay Resolution Procedure of the Code of Conduct for Banks"). Any rejection of the borrower's counter-proposal must be justified, so that it can also be judicially reviewable (see recent judgment of the Athens Court of First Instance: "The counter-proposal of the opponent was rejected by the defendant, also without any substantiation and without the defendant coming back with a new proposal or even responding to the reasonable objections of the opponent regarding the need to redefine the debt..."). It is also not in line with the basic principles of the Code of Conduct for the Management Company to demand any amount of money in advance before considering the request for adjustment.

4. Is the borrower entitled to redeem the loan at the same price that the Bank will sell it?

There is no statutory provision requiring the Bank to offer the loan to the borrower at the same price it will then sell it for. This is plausible because (a) the sale price of each loan cannot be separated into a "package" of thousands of loans and (b) such a possibility would cause a massive delay in payments in order to buy out the loans at a low price from the same borrowers who are currently current.

However, this raises concerns from the point of view of consumer protection legislation. In 2018, the Court of Justice of the European Union issued a ruling on this issue following a preliminary question from the 38th Court of First Instance of Barcelona on the right of the borrower to buy back his loan.

The question was whether the business practice consisting of selling loans without giving the borrower-consumer the possibility to repay the debt by paying the amount of the sale (the price) plus interest and costs is compatible with European Union law. In his Opinion, the Advocate General of the Court of Justice, in addition to considering that that business practice could not be controlled on the basis of the relevant provisions of European legislation, did not consider that there was any question of a reduction in the consumer's guarantees, since his contractual rights were not altered by the sale of the loan.

The fact that the sale favours 'predatory funds' which act in a speculative manner, since it is carried out for a very low or even negligible price in relation to the original debt, is not linked to the content of the borrower's contractual obligations, which remain unchanged. The Court of Justice of the European Union has taken the same line. 

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