ECJ: German general consumer loans largely in breach of European law

With the decision of 9.9.2021 (Ref. C-33/20, C-155/20 and C-187/20), the ECJ clarified various issues relating to consumer loans in response to questions referred by the Ravensburg Regional Court against VW Bank and BMW Bank. The decision and its consequences are presented in this article.

From Prof. Dr. Patrick RöslerProfessor of Banking Law at the Allensbach University

Starting point of the ECJ ruling

Consumers had taken legal action against car banks before the Ravensburg Regional Court. They had revoked their loans on the grounds that the loan agreements did not meet the requirements of European law. The Ravensburg Regional Court then referred a number of legal questions to the ECJ for a ruling. The ECJ largely ruled in favor of the consumers.

Linked credit agreement as information in the consumer loan agreement

The ECJ clearly answers this question referred by Ravensburg Regional Court. If it is a linked credit agreement, this information must be clearly stated in the credit agreement itself.

Linked credit agreements are those in which the credit in question serves exclusively to finance a contract for the supply of certain goods or the provision of certain services and these two contracts objectively form an economic unit. An economic unit is to be assumed if, in the case of financing by a third party, the lender makes use of the cooperation of the supplier of goods or the provider of services in the preparation or conclusion of the credit agreement or if the specific goods or the provision of a specific service are expressly stated in the credit agreement.

Such linked contracts generally exist in the case of the sale of consumer goods if the financing is arranged via the seller. This was also the case in this instance of a car purchase with financing.

Default interest and its adjustment: information in the consumer credit agreement

In German law, the default interest rate is regulated in the BGB. According to Section 288 BGB, it is 5% points above the prime rate if a consumer is involved. The prime rate is regulated in Section 247 BGB. It changes on January 1 and July 1 of each year by the percentage points by which the reference value has risen or fallen since the last change in the base interest rate. The current level is announced by the Deutsche Bundesbank.

According to the ECJ ruling, a reference to these provisions and the indication B+5% will no longer be sufficient in future. The consumer must be specifically informed of the interest rate applicable at the time the contract is concluded, e.g. the default interest rate is currently 4.8%. In addition, the change mechanism must be explained clearly. To this end, it may be appropriate to refer the consumer to the Bundesbank's publication for the respective amount and to explain the twice-yearly adjustment in the loan agreement.

This requirement can be easily implemented for future loan agreements.

Calculation of the early repayment penalty: Explanation in the loan agreement

The ECJ requires banks to specify in the loan agreement the method for calculating the compensation due in the event of early repayment of the loan in a way that is concrete and comprehensible to the average consumer. easily comprehensible waymust be specified, so that this can determine the amount of the early repayment penalty on the basis of the information provided in this contract.

The calculation of the early repayment penalty has been specified by the BGH in several decisions over the last 25 years. It is therefore highly complex in terms of financial mathematics in order to determine an amount that is as fair as possible for both contracting parties (for details, see Rösler/Wimmer/Lang: Vorzeitige Beendigung von Darlehensverträgen, Handbuch zur Vorfälligkeitsentschädigung, Munich, 2nd edition 2021).

The BGH had already commented on this issue in its ruling of 5.11.2021 (XI ZR 650/18), and the provisions of Art. 247 § 7 Abs. 1 No. 3 EGBGB is considered to be clear and comprehensible and thus sufficient if the lender provides the parameters essential for the calculation of the early repayment penalty. in broad outline names. This requirement was not easy to implement in practice, but at least it was feasible.

The ECJ goes well beyond this requirement. Consumers must now be given an easily (!) comprehensible explanation in the loan agreement as to how they can determine the amount of the early repayment penalty themselves. This is not feasible in practice.

How will banks deal with this?

The question is how the banks will deal with this. The ECJ ruling initially only applies to general consumer loans, i.e. not to real estate consumer loans. For these, the limits for early repayment penalties are already 0.5 or 1% of the amount to be repaid early (Section 502 BGB). It is not a legally permissible solution in terms and conditions to always calculate the early repayment penalty on the basis of these limits, as it could also be lower and the provision would then be unreasonably disadvantageous to the consumer. However, due to the rather low amount of the compensation, one option would perhaps be to no longer demand any compensation at all, to inform the consumer of this transparently in the loan agreement and to include the costs for this in the interest rate.

Another option would be for consumers to be able to calculate the compensation themselves by means of a simple and comprehensible description in the loan agreement. However, how this is supposed to work if even bank employees, lawyers and consumer advocates cannot calculate the early repayment penalty without the use of specialized software remains completely open. Perhaps one approach would be to give consumers access to calculation software via a link in the loan agreement so that they can carry out the calculation themselves at any time? The only question is: Is this still transparent if the consumer does not know how the software calculates? Is it then necessary to explain how the software calculates plus the possibility of a specific recalculation?

Forfeiture and abusive exercise of a right of withdrawal

Contrary to the previous case law of the BGH, the ECJ ruled that the bank is barred from invoking the defense of forfeiture against the exercise of the right of withdrawal if one of the mandatory disclosures in the loan agreement is missing, irrespective of whether the consumer was aware of his right of withdrawal without being responsible for this lack of knowledge.

Furthermore, if the consumer exercises the right of withdrawal, the bank may not assume an abuse of rights if one of the mandatory disclosures in the loan agreement is missing. This applies regardless of whether the consumer was aware of their right of withdrawal.

This means a new "revocation joker" for such loans. In particular, the issues of specifying the default interest rate and the comprehensibility of the calculation of the early repayment penalty are likely not to be regulated in practically all German consumer loan agreements in the sense of the ECJ, so that the consumer has a right of withdrawal.

Conclusion and outlook

This decision by the ECJ entails a massive need for changes to the current understanding of consumer loan law. It is completely unclear how these requirements can be followed in practice, particularly with regard to early repayment penalties. Existing loans are now subject to the risk of revocation by the consumer for the bank.

To date, these provisions have only applied to general consumer loans and not to real estate consumer loans. The issue of early repayment penalties is much more controversial and economically highly relevant for these loans. If the ECJ extends its case law to this type of loan, banks and ultimately consumers will face real problems. Because if the early repayment penalty also has to be included in the loan interest rate for these loans, real estate financing will become more expensive.

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