The Netherlands have a traditionally strong residential mortgage loan securitisation market. The total amount outstanding of Dutch securitisations in 2020 was EUR 40.6 billion. In total EUR 5.9 billion of securitisations was sold to investors in 2020 via Dutch special purpose vehicles: EUR 2.8 billion are residential mortgages, EUR 1.4 billion buy-to-let mortgages and EUR 1.6 billion other securitisations. The total amount outstanding of securitisations of buy-tolet mortgages has doubled to EUR 3.3 billion in 2020. This reflects the growth of the private rental market and the interest of international investors in the Dutch housing market.
1. Funding
A securitisation transaction’s funding can be structured in several ways. The Special Purpose Vehicle (SPV) needs funding to purchase the receivables or assets, either through debt, equity or a combination of both, with the issuance of notes being the mostly used. The SPV issues (different tranches of) notes to mainly professional investors. The SPV will receive the notes’ face value, which the SPV then uses to purchase the receivables, thereby fulfilling its obligations (principal and interest payments) as laid down in the note documentation.
2. Parties
An original lender is the party which – directly or indirectly – concluded the original securitisation agreement. In general, this original lender will be the contractual counterparty and the loan obligors’ point of contact. Before the transfer to the SPV, the loans’ obligations are owed to the lender of record.
The originator is either the entity that was ‘involved’ in the original agreement or the entity that purchases a third party’s exposure (most likely the original lender’s) on its own account and then securitises them. The definition of originator is therefore broader than that of an original lender.
The SPV is set up for the acquirement of a portfolio of assets, obtaining financing for their acquisition and enter into agreements for this financing and acquisition. To ensure that the SPV’s assets aren`t seen as assets of the originator, the SPV is a stand-alone company without connections to the originator’s group. Most Dutch SPV’s are set up as a private limited liability company. To establish its independence, a licensed trust company – pursuant to the Dutch Trust Companies Act – will be appointed as the SPV’s director. The SPV is made bankruptcy remote by different measures to mitigate this risk.
The sponsor is either a credit institution or an investment firm other than the originator. As such, the sponsor establishes and manages a securitisation that purchases exposures from third-party entities. The sponsor can also – after establishing a securitisation that purchases exposures from third-party entities – delegates the day-to-day active portfolio management to an entity authorised to do so.
The servicer fulfils all kind of administration and payment collection services, such as collecting principal and interest payments from loan obligors, distributing payments and administrating the loan portfolio. Often, the original lender is appointed as servicer, but it can also be done by a third party specialised in servicing. The services often include primary, special and master servicing.
The investors in a securitisation transaction are the noteholders in case of a note issue or, in the case of a fund structure, the participants. The investors carry the asset pool’s risk (but not the risk retention part) and are often (institutional) financial institutions.
The security agent preserves the rights of investors and acts as their representative. Typically, a Dutch foundation acts as a security agent. Such a foundation has limited purpose, is set up as bankruptcy remote entity and often managed by an independent trust company licenced under the Dutch Trust Companies Supervision Act.
In securitisation transactions, a collection foundation – often managed by the servicer – can be appointed. Under Dutch law this is often a foundation, tasked with performing all payment collection and disbursements services through separate accounts, so the transaction’s cash flows can be easily distinguished from the servicer’s cash flows.
And finally, other parties which can be involved in a transaction include among others calculation agents, swap counterparties, liquidity providers or asset managers.
3. Assets
While a great variety of assets can be securitized, the vast majority of financial transactions involve the financing of residential, commercial or buy-to-let mortgage loans. But assets can also include among others corporate loans, acquisition finance, car loans or credit cards. Assets can be distinguished by their type but also by their quality. And while most assets are performing, there is a market for securitisations of non-performing loans (NPL’s).
4. Transfer of loans
A securitisation’s key object is to separate the portfolio of receivables from the originator’s assets and transfer them to the SPV. The most commonly used method is through a true sale. After the transfer the SPV will be the receivables’ beneficiary and it’s entitled to all cash flows coming from those receivables. In a true sale transaction, the transfer’s validity should be certain (no clawback provision) so future repayment claims due to an invalid transfer can be avoided.
This asset separation and legal transfer is usually realised through assignment. The assigned asset pool serves as a security for the investors for the investment’s repayment, making the assignment the central legal figure in a securitisation.
Dutch law distinguishes transfers of receivables resulting from loans by way of assignment (article 3:94 of the Dutch Civil Code; DCC) and those by way of contract transfer (article 6:159 DCC). In other words, on the one hand one sees transactions where the originator wants to part from the client leading to a new lender of record; on the other hand, there are transactions where the originator realises the receivables’ value resulting from the loan but remains the lender of record.
4.1 Assignment
Under Dutch law, assignments are either disclosed or undisclosed. In case of transfer through disclosed assignment, the receivables are transferred by notifying the loan obligors of the transfer. If the assignment is undisclosed the SPV becomes entitled to the receivables. There’s no notification requirement towards the loan obligors, but the undisclosed deed of assignment must be included in a notarial deed or registered at the Dutch tax authorities. Transactions including consumer receivables are often done by undisclosed assignment for commercial reasons and – except in certain (default) events – no notification will be given. As long as that is the case, payments under the receivables are made to the original lender (lender of record). The consequence of assignment is that the lender of record and the beneficiary of the receivables are no longer the same person.
Transfers only aimed at providing security are void because of a lack of valid title on the basis of article 3:84(3) DCC. The general opinion is that as long as parties intend to accomplish a true sale of the receivables and the SPV receives full title to them – and not just a security interest – the transfer will be valid.
Another important aspect for Dutch securitisation transactions is to be certain that there are no contractual transfer prohibitions. If they do exist, the transfer’s validity depends on the contract’s wording. If they imply proprietary effect, the assignment becomes invalid.
4.2 Transfer of Contract
Contract-based transfers transfer the loans with all associated rights and obligations to the SPV which will subsequently be the lender of record; in case of assignment the transferor stays the lender of record and the transferee only obtains the receivables, including the (ancillary) rights and obligations attached to them (articles 6:142 and 6:144 DCC).
A transfer of contract can only happen with the loan obligors` cooperation. Since there`s no guarantee one will get all loan obligors` commitment to cooperate in advance, it`s common practice that the relevant receivables are also assigned by disclosed assignment as a safety precaution.
4.3 Merger and Demerger
Next to transfers of contract, parties can choose for a merger and demerger. The transferor engages in a demerger, creating a separate, demerged entity, containing the contracts and portfolio that will be transferred; assets not be transferred remain in the original entity. The new demerged entity will then immediately merge with the transferee (for example the SPV) or the transferee will immediately purchase the shares. And while neither the loan obligors` consent nor their notification is required, demergers must be announced and creditors may object to them.
4.4 Ancillary Rights
Rights attached to the receivables that are key for their exercise and collection and that determine their substance and existence (e.g. granting final discharge and making repayment arrangements) accrue to the party entitled to the receivables; they are therefore transferred to the assignee as an ancillary right upon assignment of the receivable.
In general, loan obligors shouldn`t become aware of the assignment and the lender of record is not concerned – apart from realising the loans – with completely severing customer relations. By transferring the loan’s receivables through undisclosed assignment, the acquiring party (the SPV) becomes entitled to them, while no notification is required. However this has the consequence that the lender of record and the receivables` beneficiary are no longer the same persons.
Making the distinction between those rights and obligations that are transferred to the acquiring party and those which remain with the lender of record is not always clear-cut. But experience shows that investors are particularly interested in the receivables` return and less keen on unforeseen costs during the lifetime of his/ her investment.
The lender of record on the other hand must protect the loan obligors` interests on the basis of its own (contractual/legal) duty of care. Therefore the lender of record wants to avoid the situation where, on the one hand, it has a duty of care towards the loan obligors, while on the other hand the investor doesn`t want to cooperate, because this is usually at the expense of his/ her (prognosticated) return. See also Supreme Court 10 July 2020, ECLI:NL:HR:2020:1276; Promontoria-case in paragraph 7.13.
5 Security
5.1 Security Rights
In a securitisation the SPV becomes entitled to the receivables and also requires the benefit of any security rights to secure those receivables. If they are transferred, accessory and ancillary rights (such as security rights) follow the receivables by operation of law with the exception of a purely personal right. Therefore, the SPV will have in principle the benefit of the security granted for the receivables. Additional security rights, e.g. a right of pledge on the disbursement account receivables, can be provided in a security transaction to the security trustee on behalf of multiple investors.
Under Dutch law a parallel debt (a separate and independent debt obligation) is created between the SPV and the security agent. This debt is equal to and linked to the SPV’s debt to the investors. This parallel debt of the security agent is secured by the security rights. The security agent must act in accordance with the transaction documents in relation to the enforcement of security rights and the distribution of payments in accordance with the payment’s listed included priority.
In general the SPV provides comprehensive security rights to the security agent under the parallel debt, for example an undisclosed first ranking right of pledge on receivables, bank accounts and any rights under the transaction documents.
5.2 Bank Mortgage
Bank mortgages are frequently included in Dutch loans with a bank as lender. Often, they exceed the provided loan and cover all payable amounts that might exist between the borrower and the bank. In case of assignment of a receivable secured by a bank mortgage, it’s uncertain whether the rights of the bank mortgage follow the receivable. Bank mortgages – being a specific type of security – don`t automatically follow the receivable but depend on the parties` intention. The bank mortgage right might be partially transferred and held by both the SPV and the original lender. Under Dutch law this constitutes a joint estate on which the Dutch rules pertaining to joint estates should be taken into account.
6 Regulatory aspects
6.1 Securitisation Regulation
In the European Union securitisations are regulated by the Securitisation Regulation (2017/2402/EU). They can be regarded as fully European when its originator, sponsor and SPV are established in the EU. If that`s the case and they meet the criteria of ‘simplicity, standardisation and transparency’, securitisations can be qualified as STS-securitisations. This STS-label ensures preferential capital treatment for banks and certain investment firms.
6.2 Offering of Credit
Article 2:60 of the Financial Supervision Act (FSA) forbids to offer (mortgage and consumer) credit without a Netherlands Authority for the Financial Markets (AFM) licence. This ‘offer of credit’ is a broad concept. For example, it includes the option of having a proposal to acquire a professional business to “act as counterparty” in a consumer contract; it also includes managing and administering such a contract in the pursuit of a professional practice or business. This broad definition means that a party holding or obtaining the receivables under a credit agreement qualifies as credit provider who must have – in principle – a licence. But if a credit manager handles the receivables after the transfer, the Exemptions Regulation comes into play, defining this person as a (licensed) credit provider or credit intermediary. Often, the lender of record is the credit manager, but he/ she could also be a third party servicer.
6.3 Credit Intermediation
Article 2:80(1) FSA prohibits to intermediate in credit without an AFM licence. This prohibition goes a long way, since it includes all commercial activities for ‘concluding’, amongst others, loan agreements between consumers and providers. In principle, servicers in securitisations or other whole loan sale transactions must act within the scope and licence requirement for credit intermediation.
6.4 Ban on commission
Article 4:25a(2) FSA and article 86c of the Market Conduct Supervision Financial Institutions Decree ban commissions in respect of mortgage loans. This means consumers must pay the servicer (as credit intermediary) directly. Since 2020 – as a consequence of the amended the Exemption Regulation – credit managers are exempted from this ban on commission.
6.5 Single-track Interest Rate Policy
Based on the single track interest rate policy-rule, a consumer mortgage loans provider must apply the same interest rate for the same fixed-interest period to new and existing loan obligors with similar risk profiles. The consumer’s risk profile depends primarily on the loan to value (LTV), loan to income (LTI), and whether the National Mortgage Guarantee covers the mortgage. On the other hand, regional differences are allowed to exist and discount campaigns are possible. The lender of record is therefore not allowed to apply different interest rates to loan obligors based on the underlying investors.
6.6 Credit granting
If the underlying assets of the securitisations are mortgages, the Mortgage Credit Directive (MCD; 2014/17/EC) applies. The Consumer Credit Directive (CCD; 2008/48/EC) comes into play if the underlying assets are consumer loans. In these cases, it should be noted that if the receivables of consumer loans or the loan contract are transferred, the consumer needs to be informed. That doesn`t mean that this is a constitutive requirement for transfers. And if the original lender continues to manage the credit on behalf of the SPV this notification is not required at all: the original lender remains the consumer’s point of contact.
6.7 GDPR
Data protection rules are relevant in respect to securitisations. Following the assignment of the receivables, the SPV would in principle receive personal data of loan obligors, consequently qualifying as data controller under de General Data Protection Regulation (2016/579/EU; GDPR). As such, the SPV would have to comply with the GDPR obligations, including the requirement to provide information to the data subjects (the loan obligors) in accordance with article 14 GDPR. This notification is at odds with the principle of the undisclosed assignment, whereby the loan obligors aren`t informed of the assignment. To ensure compliance with data protection rules, securitisation transactions often have arrangements in which the SPV receives data tapes without any personal data, circumventing the controller qualification. The loan obligors’ personal data will either by placed in escrow or be encrypted. In the latter case, a trustee holds the data key which can only be released in connection with defaults or enforcement of the portfolio.
6.8 PSD2
If a collection foundation is used in a securitization transaction, the question can arise if this foundation provides payment services and requires a license under the revised Payment Services Directive (2015/2366/EU; PSD2). The general assumption though is that this is not the case if the collection foundation is explicitly designated as the payment address and the loan obligors pay liberating to the collection foundation.
6.9 AIFMD
If the SPV finances the purchase of the receivables with capital raised through the issuance of units (participations rights) instead of notes, it can qualify as an alternative investment fund, regulated by the Alternative Investment Fund Manager Directive (2011/61/EU; AIFMD). That means that – in principle – the fund manager requires a licence. However, for the SPV the fund manager might be exempted for securitisation SPV’s based on article 2(3)(g) AIFMD, if the securitisation meets the set definition. Small scale securitisation – meaning the AUM do not succeed EUR 100 million or EUR 500 million and are unleveraged and closed-end for the first five years – could use of the AIFMD light regime of article 2:66a FSA, if certain conditions are met.
6.10 Prospectus
The Prospectus Regulation (2017/1129/EU) pertains to securitisations that are funded by the issuance of notes as well as to those funded by issuing units (participation rights), provided these qualify as securities. For the issuing of notes and participation rights, a prospectus drawn up in accordance with the Prospectus Regulation is required as well as the AFM`s approval. However, an exception applies if the securities are offered to less than 150 persons, or only to professional investors or when they have a EUR 100,000 countervalue. These exceptions don`t apply if the securities are to be listed on a regulated market.
6.11 MiFID II
Following article 3 of the Securitisation Regulation, sellers of securitisation positions (meaning exposures to a securitisation) can only sell those positions to retail clients if a suitability test has been passed. This test must follow the rules of the revised Markets in Financial Instruments Directive (2014/65/EU; MiFID II)
6.12 EMIR
The European Market Infrastructure Regulation (648/2012/EU; EMIR) contains multiple obligations for parties in an over-the-counter (OTC) derivate contract. Financial counterparties are subject to a clearing obligation through an authorised central counterparty for all eligible OTC derivative contracts. However, a Dutch SPV qualifies as a non-financial counterparty as long as it is not licensed as, for example, an alternative investment fund. If the SPV is a group company with its total gross notional value of the non-hedging OTC derivative exceeding the thresholds, the SPV could nevertheless be subject to the clearing threshold. If the SPV is exposed to the clearing obligation, it would also be required to post margin while different risk mitigation obligations apply as well.
6.13 Case-law Duty of Care
The Promontoria-case (Supreme Court 10 July 2020, ECLI:NL:HR:2020:1276) evolved around the question whether in case of assignment of loan receivables by a bank to a non-bank, the non-bank as assignee has a specific duty of care towards the borrower; and if so, how does that duty of care relate to the public law rules applicable to a bank and the bank’s duty of care? The Supreme Court ruled that the duty of care attached to the legal relationship isn`t part of the assigned receivable and doesn`t accrue to the assignee. However, the non-bank may have its own duty of care, obliging it to handle the borrower the same way as can be expected of a reasonably acting bank.
6.14 Credit Rating
The assets in a securitisation can be subject to credit ratings if parties desire such a rating. Rating the assets leads to obligations deriving from the Credit Rating Agencies Regulation (1060/2009/EC).
6.15 Brexit
Since 1 January 2021 the United Kingdom has its own securitisation regulation next to the EU Securitisation Regulation. While similar, these regimes aren`t identical. So for securitisations including both UK and EU parties, it’s necessary to check compliance with both regulations. For assessing the scope of the securitisation, the scope of both the Securitisation Regulation and the UK securitisation framework need to be taken into account.
7 Developments
7.1 Capital Market Recovery Package
The Capital Market Recovery Package aims to amend certain rules in the EU capital market to support the post-Corona economic recovery. The package also amends the Securitization Regulation (EU 2021/557), including amendment of the retention requirements for NPLsecuritisations. In the case of NPL-securitisations the servicer can also be the retainer, if they can demonstrate their expertise and control systems to service these exposures. Apart from the amendments deriving from the Capital Market Recovery Package, the securitisation framework is subject to a comprehensive review, scheduled for 2022.
7.2 Sustainable Securitisations
On top of the European Commission’s regulations and directives regarding sustainable finance that have already been introduced, more have been announced. And these will also have their impact on the securitisation market. The Capital Market Recovery Package amendments state that by 1 November 2021, the EBA will publish a report on developing a sustainable securitisation framework. In this framework sustainability transparency requirements are integrated in relation to the Sustainable Finance Reporting Directive (2019/2088/EU; SFDR) and the Taxonomy Regulation (2020/852/EU). Also, from 1 June 2021 originators in securitisations may publish information about the main negative impacts on sustainability factors of the assets of the underlying exposures assets. And finally, the introduced proposal for an EU green bond standard (COM(2021)391) could also apply to originators of securitisations which are funded through note issues.
7.3 Tokenisation
A final interesting development is the rise in popularity of cryptocurrency, stable coins and other blockchain based ‘securities’. This phenomenon, described as tokenization, can also impact the securitisation market – in fact, there are already examples of financial institutions using tokens in their transactions.
Tokens are digital securities, stored in an online ledger with strong encryption which could have benefits when compared to more traditional securities.
Unless they qualify for example as ‘units’ as defined in the AIFMD, tokens and cryptocurrency themselves are not yet regulated, but a proposal has been submitted to establish an European framework for markets in crypto assets (COM(2020)593; MiCA). Funding a securitisation through an initial coin offering might well be the future, but not without properly assessing the regulatory framework in advance.