Servicers vs Banks: What ultimately changed with the management of non-performing loans by Servicers?

Legal Insight

March 2024

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

(republished from Euro2day.gr)

Summary: Almost 10 years have passed since the enactment of Law 4354/2015 on the transfer of non-performing loans, and about 15 years since the mass initiation of the first securitizations (under Law 3156/2003). At the beginning of this new era of loan management by Servicers, the more optimistic among us thought that the borrower's position does not become more difficult, as their rights remain the same whether they are dealing with the bank or the Servicer. So, what is the truth? Can the borrower's position indeed not worsen? The real picture through two characteristic cases.

Almost 10 years have passed since the enactment of Law 4354/2015 on the transfer of non-performing loans, and about 15 years since the mass initiation of the first securitizations (under Law 3156/2003). At the beginning of this new era of loan management by Servicers, the more optimistic among us thought that the borrower's position does not become more difficult, as their rights remain the same whether they are dealing with the bank or the Servicer. Furthermore, both in the securitization law of 2003 and in the latest one of 2023 for the transfers of non-performing loans, it is explicitly stated that the transfer cannot worsen the debtor's position (see Law 5072/2023, article 21, paragraph 11: "In the cases of sale and transfer of claims of paragraph 1, as well as in cases of assignment of management, the substantive and procedural position of the debtor and the guarantor does not deteriorate...").

So, what is the truth? Can the borrower's position indeed not worsen? The reality is that differences exist; a Servicer behaves/strategizes differently from a Bank. A Servicer can more easily choose to act within the law's limits and proceed with actions it knows may be deemed invalid or abusive, especially when the cost of compliance is greater than the expense of the sanction. Thus, it operates more as a simple private lender and less as a financial institution.

I will provide two recent examples for clarity:

A. A few weeks ago, a decision by the Athens Court of First Instance (no. 71/2024) was published, which annulled an auction that took place about 2 years ago. The debtor had arranged his loan before the auction, but the auction was conducted normally because the Servicer ultimately demanded an advance payment, which was not stipulated in the signed arrangement. The result was a completed auction and a property (residence) of the debtor coming into the ownership of the highest bidder, which happened to be a subsidiary of the Fund. This particular debtor has been in the courts for two years already and is expected to have a long road ahead (as the Servicer, who was defeated at first instance, will obviously proceed to file an appeal, etc.). He continues to use his residence but has been involved in a long, draining, and costly legal battle. Coincidentally, last week a colleague from Thessaloniki called me to report exactly the same problem with a client's property.

B. About a year ago, a process of seizing many properties worth several million euros of a Real Estate Management S.A., on behalf of a Servicer, began. At the start of this process, the S.A. achieved the issuance of a temporary order suspending the execution process by the Athens Court of First Instance, but despite this, the Servicer proceeded with the seizures and auctions. A few weeks ago, these auctions were suspended by a decision of the Single-Member Court of Appeal of Athens, after 7 trials that had taken place in the meantime (as the S.A. was forced to use all available means in light of the auctions). The reason for the suspension was, obviously, that although there was a temporary order prohibiting execution acts, the Servicer continued the execution process. Moreover, in a related complaint by the S.A. to the Bank of Greece, the latter responded: "Any further disagreement of yours constitutes a private dispute resolved in the competent courts, where you have already appealed."

Regarding these real stories, two observations must be made:

A bank would not proceed with the above actions. It would not risk its credibility and reputation. Of course, each Servicer has its sensitivities and policies, and it is not correct to generalize behaviors. However, their continuous engagement with delinquent loans contributes to showing greater tolerance towards practices of dubious legality.

More importantly: if for a debtor to be vindicated, it requires several years and a series of courts, the question arises: who has the financial ability and the mental fortitude to engage in this ordeal? Servicers have both the legal teams (which they have chosen after thorough knowledge of the market) and the financial ability to support long-term legal battles (and the negotiating power, of course, to achieve better financial agreements regarding the provision of legal services). However, the debtor usually cannot be sure of choosing the most suitable legal advisor, nor does he have inexhaustible financial resources, as he is already in a difficult financial position. Therefore, it is easier for him to give up.