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Banks and their Clients

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Before, banks with hedge funds, and borrowers felt helpless – there was need for the legal regulations to change – hopefully as soon as possible in Germany.

About 800 billion of real estate consumers in Germany are currently in debt. As a result, claims reaching the amount of 23 billion are deemed to be “concerned” thus threatening economy. This was a cause to conduct a study by the Hamburg Institute for Financial Services (IFF), the umbrella organization of consumer centers. Now foreign financial investors, especially the Texas Society Lone are involved in planning as well.

Credit Sales – Here’s how it works

Until quite recent times banks sold loans among themselves or, in the meantime, this was also allowed with non-banks. Many banks liked to make use of these loans, in order to restore their balance sheets. To make the entire package for the collectors attractive, the “bad” as well as “good” credits previously separated were mixed. The investors have no financial interest in purchasing loan packages to administer their finances, but this was very profitable option to exploit. This was confirmed by Frank-Christian Pauli, banking expert at the Consumer Central Federation. “Investment companies are not interested in having a long-term contractual relationship with the customer.” Non-performing loans may be terminated by the bank if the customers are not paying their fees and the bank loan agreement has terminated. Owner of the mortgage can claim “immediate execution” subjected to banks and financial investors immediately, and the need for a judicial review is not necessary.

How it affects investors

Apart from the financial ruin of the borrower, the result of lost tax revenues was millions lost by the State.

And this is how profit is made: The Bank for example has a claim of 100,000 Euros. The collectors get 60,000 Euros and also get the remaining 40,000 as quickly as possible from the debtor. The amount 40,000 Euros is their profit. For the bank it is apparent loss, but it is in the end also having bad loans off. This makes an annual return of 20-30 percent. In 2004/2005 the market leader in Germany Lone Star already bought loan packages with a nominal value of 18.4 billion.

Role of banks

Considerably enhanced by the presence of borrowers with “good credit”, the banks are now concerned about the situation. Either this has never occurred, or, it “is the absolute exception”. Anyway – some can get the protection against credit sales that is now well paid: to guarantee to the Commercial Bank’s borrowers that the loans at the Bank remain safe for the entire period of time. This will cost, depending on credit record, between 01, and 0.2 percent interest rate premium. For consumer the protection is essential. The consumer centers (vzbv) warned five banks, which contain clauses in their loan contracts about bank customers consenting to a lump sum sales. Boss of vzbv Gerd Billen criticizes above mentioned clauses, because that undermined the relationship of trust in the Bank. Each time the customer could be a total stranger for contractors. The customer agrees to disclosure of data and frees the bank from the banking secrecy – regardless of whether the loan is distressed or not. This also enables loans, which are not distressed to be sold at any time.

The legislature is in demand

So far banks and buyers are in a legal gray area. The Civil Code (BGB) provides not much. If there were any court rulings, they were mostly at the expense of borrowers. The example is the Federal Court’s decision (BGH, Az XI ZR 195/05).
Meanwhile, the Federal Ministry of Justice needs to take action. There are planned new protection rules, to protect more customers from the effects of the credit sale. In January, meeting of the Finance Committee of the Bundestag was held.

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