The financial crisis in 2008 has led to regulatory changes in the financial sector worldwide. The regulatory environment for banks organised in the European Economic Area ("EEA") in particular has been subject to many material changes since 2008, and further regulatory changes are in the process of implementation by the competent national and supranational authorities. For example, the intended implementation of Basel III into European law through the so-called Capital Requirements Directive IV1 is expected to require European banks to obtain additional regulatory equity and/or to reduce the risk-weighted size of their balance sheets. The likely result of such measures is that banks will reduce lending to companies, slowing economic growth in the EEA. The ability to dispose of loans is key to enabling banks to deleverage their balance sheets, thereby creating new lending business.
The sale, to non-bank third parties, of (performing and non-performing) loans is an important option for banks, and this can be accomplished through several established structures, such as securitizations, portfolio sales and assignments to specialized debt funds. Historically, a high proportion of new lending business was sold to the securitization markets (including CLOs), but these markets have been relatively inactive since the financial crisis. However, other non-banks (particularly funds) remain active buyers of bank-originated loans.
The assignment of loan receivables (and the sale of the loans themselves) to non-banks in Germany had been subject to uncertainties, both of a regulatory nature and under civil law. Recently, however, the German Federal Court of Justice (Bundesgerichtshof) published a decision that clarified the German civil law aspects regarding such assignments.
This article summarizes the regulatory background of the sale of loans (including the assignment of loan receivables) to non-banks, as well as the new decision by the German Federal Court of Justice.
Regulatory Background – Credit Lending
Neither the German Federal Court of Justice nor the German Federal Administrative Court (Bundesverwaltungsgericht) have yet decided whether the assignment of a loan receivable would result in the assignee being deemed to carry on a German credit lending business, which would require the assignee to hold a credit lending license pursuant to the German Banking Act (Kreditwesengesetz).2 In practice, however, market participants rely on a Circular issued by the German banking regulator (BaFin) to determine whether a license is required.
According to the Circular "Advice on the Credit Lending Business" dated 8 January 2009 ("BaFin Circular"), an entity only requires a license for a credit lending business if it grants a loan to a borrower. An important criterion for the determination as to whether a loan is granted is the existence of a (new) decision by the lender to grant the loan and/or the advance of the loan amount to the borrower. According to the administrative practice of the BaFin, this criterion is not met in case of the sale of a loan. Hence, the BaFin Circular states that the sale of a loan (or loan receivable) by the originator to a third party (including inter alia by way of disclosed or undisclosed assignments, sub-participations and demergers) in general does not trigger a license requirement for the purchaser, as the purchaser does not grant a loan to the borrower, but is rather acquiring the loan receivable from the originator. An additional argument set forth in the BaFin Circular is that the purchaser and the borrower do not enter into a loan agreement, but rather a loan agreement was initially entered into between the originator and the borrower and this loan agreement is still in place. The agreement between the originator and the purchaser is a purchase agreement and not a loan agreement and therefore does not trigger the license requirement for the purchaser.
According to the BaFin Circular, however, certain measures, if taken by the purchaser after the purchase of the loan receivable, are considered by the BaFin to constitute a new credit decision and therefore trigger a licensing requirement for the conduct of a credit lending business. The BaFin Circular sets forth certain scenarios that trigger or do not trigger such license requirement, the most important of which are the following.
Amendment of Interest Rate
The mere amendment of the loan terms to establish a new interest rate after the expiration of a fixed interest period, so long as all other loan terms remain unchanged, does not require that the purchaser hold a credit lending license. According to the BaFin Circular, the adjustment of the interest rate was already provided for in the original loan agreement since the duration of the loan was not contemplated to match the duration of the fixed interest rate.
The prolongation (i.e., the extension of the original maturity) of a loan, by a purchaser of a loan receivable, generally requires that the purchaser hold a credit lending license, since a prolongation is considered by the BaFin as the granting of a new loan. In case of a prolongation of a loan, under German civil law the purchaser must determine whether it wishes to extend the maturity date beyond the original term of the loan and the terms under which it is willing to do so. Such decision by the purchaser involves the same elements as an original credit decision and is therefore comparable to the granting of a new loan. Pursuant to the BaFin Circular, no license is required if the original loan agreement already granted the borrower an option to extend the loan's term.
According to BaFin practice, a deferral of the repayment date of a loan generally does not need to be considered as the granting of a new loan, and hence no credit lending license is required. In contrast to a prolongation, in the case of a deferral the purchaser and the borrower agree only to postpone the repayment date of the loan, and from a German civil law perspective, the unpaid loan amount remains payable at any time. If the terms of the loan are not otherwise amended in such a scenario, the decision to defer the payment date does not qualify as a new credit decision because the claim remains the same.
Decision by the German Federal Court of Justice
The German Federal Court of Justice ruled on 19 April 20113 that the assignment of a loan receivable to an entity that was not licensed as a credit institution was not void, even if it constituted a violation of the German Banking Act. In the case, the German bank in question had granted two loans to a German partnership. A few years later, the bank transferred the loans (which were not in distress) to a new subsidiary by way of a demerger. Afterwards, the subsidiary assigned the loan receivables to another German corporate entity. Neither the subsidiary nor the German corporate entity held a relevant credit lending license in Germany.
In its decision, the German Federal Court of Justice stated that loan receivables may be validly sold and assigned to entities that do not hold a relevant banking license. According to the court, it did not need to address the issue of whether the assignee required a credit lending license in case of an assignment of a loan receivable, because even if the assignee would be required to hold a credit lending license and did not do so, the assignment would nevertheless be valid under German civil law. The court indicated that the licensing requirement was established in order to protect the public, rather than to protect individual borrowers; the assignment would be valid because the borrower does not have the right, under German civil law, to maintain the original counterparty. Furthermore, the court indicated that an assignment does not require the approval of the borrower as long as the terms of the loan remain the same.
According to the court, it did not need to address the issue of whether an assignment would be void if the assignee were a non-German entity. The plaintiffs had argued that in contrast to a German entity, a non- German entity is not subject to the supervision by the BaFin in case of a violation of the German Banking Act, and therefore such an assignment should be void. However, in the case of a non-German entity that is organised within the European Union, such adverse treatment could qualify as a violation of the non-discrimination rules under European law. A further argument that the court stated as a reason for the validity of the assignment is that only one of the two parties to the assignment would have violated the German Banking Act in the issue at hand, and the rules pursuant to which the assignment could be void in general require a violation of the relevant law by both parties. Hence an assignment of a loan to a non-German entity should be valid under German civil law.
The court also stated that neither the German banking secrecy rules (Bankgeheimnis) nor the German data protection laws (Bundesdatenschutzgesetz) would require that such an assignment be invalidated. Notwithstanding this positive decision by the German Federal Court of Justice, buyers of German loans (or loan receivables) need to take into account any restrictions imposed by such rules and laws, since the breach thereof could lead to damage claims and/or penalty payments.
1 A draft of the directive and regulation that set the minimum capital requirement standards for banks organized in the European Union was published on 20 July 2011.
2 Section 32 paragraph 1 and Section 1 paragraph 1 sentence 2 No. 2 of the German Banking Act.
3 See BGH – XI ZR 256/10.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.