EBA published Guidelines on legislative and non-legislative moratoria on loan payments applied in the light of the COVID-19 crisis

The outbreak of the COVID-19 pandemic and the response measures that have been adopted in many countries across the globe and within the European Union have significant economic consequences. In particular, many businesses, especially small and medium enterprises, and private individuals affected by the crisis may face liquidity shortages and difficulties in timely payment of their financial and other commitments. This could in turn have an impact on credit institutions, as delays in the repayment of credit obligations lead to a larger number of defaults and increased own funds requirements for credit institutions.

In these circumstances and in order to minimise the medium- and long-term economic impacts of the efforts taken to contain the COVID-19 pandemic, Member States (such as Austria) have implemented a broad range of support measures. These measures include, in many instances, some forms of moratorium on payments of credit obligations, with the aim of supporting the short-term operational and liquidity challenges faced by borrowers. As these moratoria in practice are adopted in various forms across jurisdictions (some Member States have introduced jurisdiction-wide moratoria based on specific legislation, whereas in many others moratoria have been implemented through voluntary industry-wide or individual initiatives by credit institutions, or combination thereof), clarification is necessary on the application of the definition of default in accordance with Article 178 of Regulation (EU) No. 575/2013 (“CRR”) and classification of forbearance in accordance with Article 47b CRR in the context of these various measures.

The European Banking Authority (“EBA”) has already clarified a number of aspects in relation to the use of public and private payment moratoria in its statement of 25 March 2020 (application of the prudential framework regarding default, forbearance and IFRS 9 in light of COVID-19 measures). It also, however, noted that further detailed guidance was necessary to ensure consistent application. Consequently, EBA published the “Guidelines on legislative and non-legislative moratoria on loan payments applied in the light of the COVID-19 crisis” (“EBA/GL/2020/02”). They aim to provide clarity on the prudential treatment of legislative and non-legislative moratoria on loan payments applied before 30 June 2020 and are addressed to competent authorities as defined in Article 4(2)(i) of Regulation (EU) No. 1093/2010 (“EBA-Regulation”) and to credit institutions as defined in Article 4(1)(1) CRR. However, EBA may extend this time limit at a late stage, should this be considered necessary.

Goal of the Guidelines

The Guidelines aim to clarify the following three points in the context of the COVID-19 pandemic:

• the criteria that payment moratoria have to fulfil not to trigger forbearance classification;
• the application of the prudential requirements in the context of these moratoria; and
• ensuring the consistent treatment of such measures in the calculation of own funds requirements.

Criteria for general payment moratoria

A moratorium is considered a “general payment moratorium” where all of the following conditions are met:

• the moratorium is based on the applicable national law (“legislative moratorium”) or on a non-legislative payment relief initiative of a credit institution as part of an industry- or sector-wide moratorium scheme agreed or coordinated within the banking industry or a material part thereof, possibly in collaboration with public authorities, such that participation in the moratorium scheme is open and similar payment relief measures are taken under this scheme by relevant credit institutions (“non-legislative moratorium”);
• the moratorium applies to a large group of obligors predefined on the basis of broad criteria, where any criteria for determining the scope of application of the moratorium should allow an obligor to take advantage of the moratorium without the assessment of its creditworthiness; examples of such criteria include the exposure or sub-exposure class, industry sector, product ranges or geographical location. The scope of application of the moratorium may be limited only to performing obligors, who did not experience any payment difficulties before the application of the moratorium, but it should not be limited only to those obligors who experienced financial difficulties before the outbreak of COVID-19 pandemic.
• the moratorium envisages only changes to the schedule of payments, namely by suspending, postponing or reducing the payments of principal amounts, interest or of full instalments, for a predefined limited period of time; no other terms and conditions of the loans, such as the interest rate, should be changed;
• the moratorium offers the same conditions for the changes of the payment schedules to all exposures subject to the moratorium, even if the application of the moratorium is not compulsory for obligors;
• the moratorium does not apply to new loan contracts granted after the date when the moratorium was announced; and
• the moratorium was launched in response to the COVID-19 pandemic and was applied before 30 June 2020. This means that the Guidelines apply also to moratoria launched before the application of the Guidelines. However, this deadline can be revised in the future depending on the further developments of the current situation associated to the COVID-19 pandemic.

Classification under the definition of forbearance

Where a general payment moratorium meets the above-mentioned conditions and applies to all of the exposures of an institution within the scope of the moratoria, such measures should not change the classification of exposures under the definition of forbearance in accordance with Article 47b CRR. The general payment moratorium should also not change whether exposures are treated as distressed restructuring in accordance with Article 178(3)(d) CRR. Consequently, the application of the general payment moratorium in itself should not lead to reclassification of the exposure as forborne (either performing or non-performing) unless an exposure has already been classified as forborne at the moment of the application of the moratorium.

Where credit institutions grant new loans to obligors subject to a general payment moratorium, this does not automatically lead to a reclassification of exposures as forborne. However, the classification should be considered on a case-by-case basis in accordance with Article 47b CRR.

Application of the definition of default to exposures subject to payment moratoria

Where a general payment moratorium meets the above-mentioned conditions, it should be treated in accordance with paragraphs 16 to 18 of the “Guidelines on the application of the definition of default under Article 178 of Regulation (EU) No 575/2013” (“EBA/GL/2016/07”). Consequently, for the purpose of Article 178(1)(b) CRR and in accordance with Article 178(2)(e) CRR, credit institutions should count the days past due based on the revised schedule of payments, resulting from the application of any moratorium. Likewise, for the purpose of Article 47a(3)(c) CRR institutions should count the days past due based on the revised schedule of payments, resulting from the application of any moratorium.

Throughout the duration of the moratorium, credit institutions should assess the potential unlikeliness to pay of obligors subject to the moratorium in accordance with policies and practices that usually apply to such assessments. Detailed requirements can be found in paragraphs 14 to 16 of the Guidelines.

In the assessments of unlikeliness to pay of individual obligors following the end of the application of the moratoria, credit institutions should prioritise the assessment of the following cases:

• where obligors experience payment delays shortly after the end of the moratorium;
• where any forbearance measures are applied shortly after the end of the moratorium.

Documentation and notifications

If a credit institution applies a non-legislative general payment moratorium, it should notify the national competent authority (“NCA”) of this and provide certain information.

NCAs should notify EBA of any use of general payment moratoria in their jurisdictions and provide certain information for each moratorium.

Credit institutions should collect and have readily available certain information.

Implementation – date of application

The Guidelines apply from the date of translation of the Guidelines into all EU official languages. The translation is currently pending.

Moratorium for consumers and microenterprises in Austria

Austria has followed the example of many other countries and Member States of the European Union and provided a relief (e.g., claims for repayment of capital or payment of interest due between 1 April 2020 and 30 June 2020 shall be deferred for a period of three months from the original due date) for borrowers who suffer loss of income as a result of COVID-19. The moratorium, which in our view meets the criteria of the Guidelines and must therefore be considered a “general payment moratorium”, applies to loan agreements with consumers and microenterprises which were entered into prior to 15 March 2020.

Further details regarding the moratorium in Austria can be found here.

Please note: This newsletter merely provides general information and does not constitute legal advice of any kind from Binder Grösswang Rechtsanwälte GmbH. The newsletter cannot replace individual legal consultation. Binder Grösswang Rechtsanwälte GmbH assumes no liability whatsoever for the content and correctness of the newsletter.