5.4.4 Liquidation activities

If no sustainable restructuring solution can be reached, credit institutions should still resolve the NPE. Resolution may involve initiating legal procedures, foreclosing assets, debt to asset/equity swap, disposal of credit facilities by sale, transferal to an asset management company or securitisation. Where the price obtained from the foreclosure of immovable property affects the amount owed by a consumer, credit institutions should take into account, when deciding on the liquidation measure and next steps, the provisions of Article 17(5) of Directive 2014/17/EU,³¹ to the extent applicable.

³¹ Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010 (OJ L 60, 28.2.2014, p. 34).

Liquidation activities should be monitored by the credit institution to help inform strategies and policies. Credit institutions should monitor disposals and monitor realised sales/transfer prices against net carrying amounts.

Credit institutions should monitor the volumes and recovery rates of legal and foreclosure cases. Performance in this regard should be measured against set targets, in terms of number of months/years and loss to the institution. In monitoring the actual loss rate, institutions are expected to build historical time series for each loan portfolio to back up the assumptions used for impairment review purposes and stress test exercises.

For exposures covered by collateral or another type of guarantee, credit institutions should monitor the time period needed to liquidate the collateral or to enforce a guarantee. Credit institutions should also monitor potential forced sale haircuts upon liquidation and developments in certain markets (e.g. property markets) to obtain an outlook on potential recovery rates.

Monitoring the recovery rates from foreclosure and other legal proceedings should help credit institutions to reliably assess whether the decision to foreclose will provide a higher net present value than pursuing a forbearance option. The data regarding the recovery rates from foreclosures should be monitored on an ongoing basis and feed into potential amendments to credit institutions’ strategies for handling their debt recovery/legal portfolios.

Credit institutions should also monitor the average duration of legal procedures recently completed and the average amounts recovered (including related recovery costs) from these completed procedures.

Credit institutions should carefully monitor cases where the debt is swapped with an asset or equity of the borrower, at least by using volume indicators by type of assets, and ensure compliance with any limits set by the relevant national regulations on holdings. The use of this approach as a forbearance measure should be backed by a proper business plan and limited to assets in relation to which the institution has sufficient expertise and the market realistically allows the determined value to be extracted from the asset in the short to medium term. The institution should also make sure that the valuation of the assets is carried out by qualified and experienced appraisers.