As part of a broader legislative package reacting to the severe economic consequences of the Covid-19 pandemic, the German Federal parliament has adopted a bill dealing with far-reaching relief measures in contract law. Among other issues, this includes temporary relief for borrowers under consumer loans (“Temporary Rules”). The law entered into force on 28 March 2020.
Scope of the Temporary Rules
The Temporary Rules apply to consumer loan agreements entered into before 15 March 2020 (so not those entered into on or after 15 March 2020). The Rules provide for a three months deferral of loan receivables, i.e. claims for both interest and principal payment, which become due between 1 April 2020 and 30 June 2020, subject to the following conditions:
- the borrower suffers a loss of income;
- the loss of income must be due to the exceptional circumstances caused by the spread of the Covid-19 pandemic;
- the loss of income must make it unreasonable for the borrower to render performance, i.e. to pay his debt as and when due;
- the deferral is not unreasonable for the lender.
Temporary exclusion of the lender’s right to terminate the loan agreement
Where the conditions for deferral are satisfied (“Affected Loans”), the lender‘s right to terminate the loan agreement due to a payment default, or a material deterioration of the borrower's financial situation or the value of collateral provided for the loan, is excluded until the end of the respective deferral period. This means, the lender is prohibited from exercising its termination right, and if it does so anyway, the termination is without effect.
Extension of the Affected Loan term by three months after 30 June 2020
Subject to an amicable agreement between the lender and the borrower entered into before 30 June 2020, the Temporary Rules provide for an extension of the term of Affected Loans by three months. In addition to this, any claim of interest or principal falling due during that three-month period (i.e. until 30 September 2020) will be equally deferred (e.g., an instalment due on 31 July 2020 will only be due on 31 October 2020).
Potential prolongation of the applicability of the Temporary Rules
The Federal Government is authorised to extend, by statutory order, the deferral period of three months to up to six months and the extension of the loan agreement term to a maximum of twelve months.
Impact on lenders
The impact of the Temporary Rules on lenders, particularly those focusing on consumer lending, is potentially significant. Against this background, the EBA calls for flexibility and pragmatism in the application of the prudential framework and clarifies that, in the case of debt moratoria, there will be no automatic classification of default, forborne or IFRS9 status. Such classification would trigger adverse regulatory consequences: for example, a requirement that lenders hold additional regulatory capital against such non-performing loans. In accordance with EBA’s view, BaFin has asked banks with respect to COVID-19 related payment defaults to adopt a “through the cycle” approach, taking into account public support measures to mitigate the crisis.
© 2020 Hengeler Mueller