NPLs and the Secondary Credit Market Act

What the Secondary Credit Market Act does

The Secondary Credit Market Act (Kreditzweitmarktgesetz, KrZwMG) regulates the sale of non-performing loans (NPLs) originated by banks and the servicing of those loans for the buyers. It implements the EU Credit Servicers Directive, Directive (EU) 2021/2167, and covers three groups: credit institutions selling NPLs, the purchasers of NPLs and the credit servicers who manage, collect and restructure the loans for purchasers (§ 1(1) KrZwMG). The Secondary Credit Market Act creates a new licence category for credit servicers supervised by BaFin, imposes information and notification duties on sellers and purchasers and protects borrowers whose loans change hands.

The Act does not prohibit or restrict NPL sales as such; it aims to make them safer and more transparent so that banks can reduce non-performing exposures. It applies only to credit agreements granted by a credit institution established in the EEA, and it does not apply to acquisitions where the first acquisition or assignment of the loan took place before 30 December 2023 (§ 1(2) KrZwMG). For loan portfolios sold after that date, every participant in the chain needs to understand which duties attach to it.

Scope and key definitions

A credit servicing institution (Kreditdienstleistungsinstitut) is a business that, on behalf of a credit purchaser, provides credit servicing activities on a commercial basis or to an extent that requires a commercially organised business (§ 2(2) KrZwMG). Credit servicing includes collecting and enforcing payment claims, renegotiating the terms of the credit agreement, administering complaints and informing the borrower of changes in interest rates or charges, provided that a credit purchaser has acquired a non-performing credit agreement or claims under it (§ 2(3) KrZwMG).

Licensed German banks, CRR credit institutions from other EEA states, licensed or registered capital management companies under the KAGB and certain consumer credit providers supervised elsewhere in the EEA are not credit servicing institutions and do not need a separate licence (§§ 2(2), 11 KrZwMG). Lawyers acting as such, and court enforcement officers, are outside the Act altogether (§ 1(2) KrZwMG).

Duties of loan purchasers under the Secondary Credit Market Act

A purchaser that is not itself a credit servicer must appoint one when it agrees to acquire a non-performing loan to a natural person or to a micro, small or medium-sized enterprise as defined in the Commission's SME recommendation (§ 7(1) KrZwMG). The appointed servicer then performs the purchaser's obligations under the Act, consumer protection and contract law and related EU rules, but the purchaser remains responsible if no servicer is appointed or the servicer fails to perform (§ 7(3) KrZwMG).

The purchaser must notify BaFin and the Deutsche Bundesbank of the name and address of the servicer at the latest on the day the servicing begins, and of any change of servicer (§ 8(1) KrZwMG).

If the purchaser sells the loan on, it must report specified data on the onward sale every six months (§ 8(3) KrZwMG). Purchasers established outside the EEA must appoint a representative resident in an EEA state and name it to BaFin and the Bundesbank; the representative is responsible alongside the purchaser, and documents can be served on it (§ 9 KrZwMG). Buying NPLs does not itself require a licence under the Secondary Credit Market Act, but other licensing rules, in particular for lending and factoring under the KWG, must still be checked.

Credit servicer licensing and organisation

Anyone who provides credit servicing in Germany on a commercial basis needs a written licence from BaFin (§ 10(1) KrZwMG). Applicants must be legal persons or commercial partnerships with their registered office or head office in Germany (§ 10(2) KrZwMG). The application must include the company's commercial register extract and articles, details of managers, supervisory board members and holders of qualifying holdings with evidence that they meet the statutory requirements, and a viable business plan describing the planned business, the group structure, the organisation and the internal control procedures (§ 10(3) KrZwMG).

Licensed servicers must maintain a proper business organisation and are subject to ongoing supervision, including reporting duties, audits and BaFin's intervention powers. Servicers that collect money from borrowers must keep it on a separate trust account with a credit institution, protected against claims of the servicer's other creditors and insolvency (§ 17(2) KrZwMG). A borrower's payment to the servicer is treated as payment to the purchaser (§ 17(3) KrZwMG). Servicers holding an authorisation in another EEA state can provide services in Germany under a European passport (§ 23 KrZwMG).

The servicing agreement and outsourcing

Where the purchaser does not service the loans itself, the servicer acts under a written credit servicing agreement.

The agreement must describe the services in detail, set out the remuneration, define the servicer's authority to represent the purchaser, contain an undertaking by both parties to comply with EU and national rules on credit agreements, consumer protection and data protection, commit the servicer to respect borrowers' legitimate interests in good faith, and require the servicer to inform the purchaser of any intended outsourcing (§ 18(2) KrZwMG). Outsourcing individual servicing activities is permitted only under a written agreement and without impairing supervision or the servicer's control, and the servicer remains responsible (§ 20 KrZwMG).

Borrower protection under the Secondary Credit Market Act

Borrower protection is a central aim of the Secondary Credit Market Act. Purchasers and servicers must deal with borrowers in good faith, provide only accurate and understandable information, respect borrowers' personal data and confidentiality, and refrain from undue influence such as harassment, unlawful pressure or coercion (§ 28(1) KrZwMG). The rules on collection practices of the Legal Services Act for debt collection apply accordingly (§ 28(2) KrZwMG).

After a transfer, the purchaser or servicer must inform the borrower in text form, before the first enforcement measure and whenever the borrower asks, of the transfer and its date, the identity and contact details of the purchaser, servicer and any outsourcing provider, evidence of the servicer's licence, the amounts owed broken down into principal, interest, charges and other claims, a statement that all applicable laws continue to apply, and the competent complaints authority (§ 30(1) KrZwMG). Importantly, the transfer does not change the borrower's substantive rights: defences, set-off rights and consumer protection under the original loan remain available against the purchaser.

Supervisory enforcement and sanctions

The Secondary Credit Market Act is backed by criminal and administrative sanctions. Providing credit servicing without the required licence is a criminal offence punishable by imprisonment of up to five years or a fine, and up to three years where the offender acts negligently (§ 43 KrZwMG). The same applies where an outsourcing provider accepts or holds borrower funds in breach of the statutory prohibition. Breaches of notification, information and organisational duties are administrative offences that BaFin can sanction with fines.

Where credit servicing is provided without a licence, BaFin can order the immediate cessation of the business and the winding down of transactions, both against the company and against its shareholders and board members, and can appoint a liquidator (§ 38 KrZwMG). It can also warn the public, naming the company, where facts justify the assumption that unlicensed servicing is taking place (§ 41(2) KrZwMG). Businesses that serviced loans before the Act came into force could continue for a transitional period of six months, provided they notified BaFin and filed a licence application within seven weeks (§ 46 KrZwMG); that transitional period has long expired.

Duties of selling banks and data templates

Before concluding an NPL sale, a credit institution must give a prospective purchaser the information about the loan, the claims and any collateral that the purchaser needs to assess the value and the likelihood of recovery (§ 6(1) KrZwMG). The information must be provided in line with the implementing technical standards adopted under Article 16 of the Credit Servicers Directive, the EU NPL data templates, with some exceptions for transfers between credit institutions (§ 6(2) KrZwMG). Purchasers must keep the information confidential.

From the seller's perspective, the data duty interacts with banking secrecy and data protection. Bank sellers usually provide data in stages, first in anonymised form and then in a secure data room once bidders are shortlisted, and conclude confidentiality agreements before full disclosure. The legal basis for passing borrower data to purchasers, and for the assignment itself where the loan agreement restricts it, should be analysed for each portfolio.

Practical points for NPL transactions

• Portfolio scope: check whether each loan was originated by an EEA credit institution and when it was first transferred, because loans first transferred before 30 December 2023 fall outside the Act.
• Borrower types: loans to consumers and SMEs trigger the duty to appoint a credit servicer; corporate loans to larger businesses do not.
• Servicer selection: confirm the servicer's licence or passport and its capacity to service German secured loans, including enforcement of land charges.
• Security transfer: non-accessory land charges and security assignments must be transferred separately from the loan claims; see our insight on German security packages for lenders.
• Tax and accounting: consider real estate transfer tax on enforcement structures and the purchaser's licensing position for any new lending to borrowers.

How TRW & Co helps

We advise banks, investors, servicers and borrowers on the Secondary Credit Market Act and on loan portfolio transactions. We structure NPL and performing loan sales, prepare sale and purchase agreements and transfer documentation, assess licensing requirements under the KrZwMG and the KWG, support credit servicers in BaFin licence applications and organisational compliance, and review borrower communications. For borrowers, we analyse the validity of the transfer and the defences that remain available. We work alongside our financial regulation and real estate colleagues. This is general information, not legal advice. To discuss a portfolio, please contact us.