The paradox of the (non-)implementation of the law on red loans

Legal Insight

May 2021

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

(republished from Euro2day.gr)

Summary: The issue of the transfer of "red" loans and why credit institutions prefer the 2003 law on securitisation to the 2015 law on transfers, which was specifically enacted for "red loans".

In 2015, Parliament passed the law on transfers of "red" loans in the face of pressure from the problems of bank capital (in)adequacy and private over-indebtedness (Law 4354/2015). The aim was to establish a market for "red" loans in order to free credit institutions from the burden on their balance sheets and enable them to be in a position to re-inject liquidity into the market. All this is well and good and understandable. But how did we end up today, 6 years later, with the overwhelming majority of transfers of "red" loans having been made not under the 2015 law, which was passed on the spot by Parliament, but under a 2003 law?

In 2003, the Parliament passed a law concerning, among other things, the "securitisation of receivables" (Law 3156/2003). The aim was to adopt a framework for financing companies by selling their receivables. Thus, instead of a company taking out a bond loan, for example, it sold part of its receivables to third-party investors (see explanatory memorandum: 'The legislative regulation of securitisation is necessary for the modernisation of financing techniques in Greece for the benefit of Greek companies and the national economy'). Since then, the law has been used almost exclusively by credit institutions for the pure purpose of restructuring their balance sheets. This law did not, of course, concern 'red loans'; moreover, at that time there was not even the corresponding problem of non-performing loans ('NPLs'). For this reason, there was no specific provision for the protection of the over-indebted borrower. No one in Parliament at the time raised a similar issue.

On the contrary, in 2015, the procedures for passing the law on "red" loans in the Parliament started. MPs raise objections and proposals always in relation to the protection of borrowers fearing an aggressive approach of foreign funds etc. To this end, among other things, a special regulation is adopted concerning the obligation of the credit institution to negotiate with the borrower prior to the sale (cf. and the Explanatory Memorandum of Law 4389/2016: "Paragraph 2 of the new Article 3 expressly provides that within twelve (12) months prior to the offer for sale of the claims of credit or financial institutions, the borrower and the guarantor must have been invited by an extrajudicial invitation to settle their debts on the basis of a written proposal for an arrangement with specific repayment terms. The purpose of the arrangement is to prevent debtors from being caught unawares, who are given the opportunity to settle their debts before their claim is assigned to the transfer companies referred to in Article 1 of the draft law'). The majority rapporteur says in the House, "Another important issue is that the legislation under consideration expressly provides that twelve months before the offer for sale of the claims in this bill, the borrower and the guarantor must have been proposed to the borrower and the guarantor by an extrajudicial invitation to settle his loan in order to make it serviceable. The regulation is intended to prevent debtors from being taken by surprise, who are given the opportunity to settle their debt before the claim is assigned to a third party. 

The law on red loans is being passed. After one year, however, it is amended, one of which was the provision for a parallel application of the 2003 law. We read in the relevant Explanatory Memorandum: 'In this sense, credit institutions are provided with the institutional tools to use their portfolio, as they will be able to choose either the application of the law on securitisation of receivables (Law 3156/2003), where the securitisation of serviced receivables is also allowed, or the institutional framework proposed by the present draft law'. The question is, of course, whether the 2003 law can be used when 'red' loans, i.e. loans in arrears, are transferred; because as far as loans in arrears are concerned, it is a given that both laws can be used. The Ministry of Finance (without, of course, exercising legislative power in this respect) has come up with its own answer to this question in a statement: '...In particular, as regards the transfer of receivables for the purpose of securitisation, it is clarified that this is governed exclusively by the provisions of Law no. 3156/2003, irrespective of whether the portfolios to be securitised include receivables that are past due or not. Consequently, special procedural requirements provided for in Law No. 4354/2015 in Articles 1 -3 A for the validity of the transfer of receivables due to the sale to companies under point b of par. 1 of Article 1, do not apply in the case where the transfer of receivables is carried out for the purpose of securitisation in accordance with the provisions of Law 3156/2003".

Six years after the adoption of the law on transfers of "red" loans, practice has shown that the largest overwhelming volume of overdue loans is sold under the 2003 law instead of the 2015 law. But why do credit institutions prefer this 2003 law, which is already 18 years old, instead of the newer 2015 law adopted specifically for this issue? Apart from some tax issues, a key reason for preference is the absence in the 2003 law of a requirement for a prior out-of-court invitation of the borrower and the guarantor before the sale of the loan in order to settle their debts. In other words, the very provision that Parliament passed to protect the borrower, mitigating the political cost of the then publicity about the sale of loans to funds, etc., is in practice being circumvented by the credit institutions with the interpretative assistance of the Ministry of Finance. 

This issue of course of circumventing provisions protecting the borrower has already been raised in the courtrooms and answers are expected soon from the competent judiciary. The question that has been raised in simple terms is whether a bank can transfer a loan without first trying to reach a settlement agreement with the borrower; i.e. this is exactly what is done in too many cases: banks transfer loans to special purpose vehicles without first having followed the negotiation process, applying the 2003 law instead of the 2015 law.