CYPRIOT banks will be able to sell loans to third parties licensed by the Central Bank of Cyprus, with the regulator reserving the right to intervene in the foreclosure process to preserve monetary stability, according to the provisions of two draft bills leaked on Monday.
The two bills were prepared by a committee comprising the Central Bank of Cyprus, the Banks’ Association, the Institute of Certified Public Accountants, the Cyprus Bar Association, and the Borrowers’ Association.
Current legislation in Cyprus does not allow for the sale of loans to third parties without borrower consent, and modernising the legal framework has been deemed a “prior action” by the Troika of international lenders in its latest progress review of Cyprus’ economic adjustment programme.
According to the fifth updated memorandum agreed between Cyprus and its lenders after the review, the Cypriot cabinet must have approved the final version of these bills by the end of June.
The first bill will regulate the activities of purchasers, meaning companies – such as hedge funds or investment funds – set up to buy loans from local lenders.
Only Cyprus-registered companies, or Cyprus-registered subsidiaries of EU-based institutions, may buy loans from Cypriot banks.
Based on the bill, every loan – whether serviced or not – could be put up for sale without borrower consent, although borrowers need to be informed prior to the transaction.
But eligible buyers must first fulfil a set of preconditions, including being registered in Cyprus – this will include Cypriot banks, as well as EU-based banks with a subsidiary registered in Cyprus.
Other preconditions include full disclosure of its shareholding structure and the identity of at least its 20 largest shareholders and directors, who will be feted under the standard of “a good reputation and adequate skills, knowledge and expertise to carry out their duties”.
A person’s ability to increase his or her stake in a loan-buying company will also be subject to CBC approval, and the regulator will be able to terminate the licence granted to a firm if it is found in breach of the law.
Buyers must inform borrowers of the impending sale of their loans at least one month prior to the transaction.
“The buyer replaces the seller [of the loan] in connection with all the rights relating to any collateral linked to the loan contract,” the draft bill reads.
And on the flip-side, the buyer has the same obligations emanating from the loan contract.
Loan and collateral transactions will not be subject to taxes, fees, or other expenses, and loan buyers must inform the borrower – and any guarantors – within five working days of the transaction.
The Central Bank reserves the right to intervene and regulate – or block – the liquidation of loan collateral when it identifies a threat to monetary stability.
Minimum capital reserves for licensed buyers are set at €1 million.
In terms of oversight, the Central Bank may perform on-the-spot checks at licensed companies, and even order the sacking of a licensed buyer’s director.
The CBC may also impose administrative or monetary fines double the benefit acquired from any violation of the law, up to €200,000.
The second draft bill regulates loan securitisation – or packaging and selling loans in tranches.
According to the bill, banks may sell bundles of loans to businesses, acting as middlemen, who then issue shares or bonds – ‘financial products’ – backed by the purchased loans.
Loan buyers will not pay sellers – banks – immediately upon acquiring loans, but only after the issue of bonds or shares.
Individuals or public institutions, including the government, may also sell loans to buyers.
The issuance of financial products will be subject to the provisions of current legislation on public offerings.
And any assets, mortgages, or collateral backing purchased loans will be considered transferred to the securitisation firm.
Processing personal data, done in good faith as necessary for securitisation, will be allowed with no prior permission from the Personal Data Commissioner.