By Johannes Fiala* Property owners, landlords, entrepreneurs and investors have been complaining for years about falling surpluses or profits due to excessively high bank interest rates. But this does not have to be: Because the more than 3% interest rate reduction of the ECB since 2000, the credit institution must often pass on to the credit customer ! The investment: It all started quite simply for investor Heinrich Müller (name changed): His banker granted him credit and arranged an interesting project as an investment years ago. But then the payment flows got out of control. Revenues fell, while interest on loans remained equally burdensome. What surprised Investor Müller, however, was that the European Central Bank lowered the base rate from 4.26% in 2000 to 1.22% today. However, Müller did not feel much of the impact of the interest rate cut on the capital markets. This bank behaviour annoyed a university professor and economic advisor to the World Bank from Bavaria so much in July 2003 that he reported the bank’s board of directors to the public prosecutor’s office and called in the cartel office. Disinformation of the bank: The bank rejected inquiries only, there would be no requirement on it. During the discussion of the annual financial statements, the topic comes up again, because in view of the lower revenues, the investment no longer pays off. The advisor calculates: “You have invested 15 million with 8% return, that makes 120,000.– You pay 6% effective as interest, that makes 90,000.– At that time the banker calculated this for you: 30,000.– profit it was at that time”. There is no sign of that today, as revenues have fallen by about 2%, but borrowing rates have not. Investor Müller is outraged “If the bank had passed on the interest rate cuts to me in the last few years, I would have fully absorbed the drop in income on average – the bank has effectively taken away my profit, today I’m just exchanging money”. Economic damage: Many investors and entrepreneurs feel the same way as Müller: The economic damage is enormous, the high unemployment figures and the insolvencies that have been rising for years speak volumes. If the banking industry does not properly pass on the interest rate cuts, the recovery may not happen. The legal claim to interest rate reductions: The bank customer often has a claim to the passing on of interest rate reductions in accordance with the development on the capital market: This corresponds to numerous, also higher court judgements, which have been issued on a legal basis over the last 15 years. (cf. judgements OLG Celle of 24.10.1990, 3 U 240/89, BGH of 06.03.1986, III ZR 195/84). Interest rate reservation: Both decisions deal with the interest rate of loans with variable interest rates, for example with the bank clause in the loan agreement “The bank is entitled to change the interest rate if it deems this necessary (…)”.
The lawyer calls this a “reservation of interest”, i.e. a discretionary power of the bank as the sole authority to determine the amount of consideration for the loan of money or capital. However, this right is not without limits: For § 315 BGB forces the credit institution to adhere to certain rules of the game – in particular to pass on the cheaper refinancing options to the customer under certain circumstances (cf. BGH WM 1986, 580 f.). Timing and reason for passing on an interest rate reduction: The case law here requires a pass-through of interest rate adjustments within one or a few months since a change in the refinancing options. The case-law cites a change in capital market rates in the relevant market segment of 0,2 % as the reason for the obligation to pass on a reduction or increase in refinancing rates. Situation with a loan with a fixed term and a shorter fixed interest rate: Often loan agreements have a longer term (e.g. 5, 10, 15 years), but only a fixed interest rate (commitment to a fixed interest rate) for a shorter period. The customer of the credit institution is then surprisingly confronted with much higher interest rates (compared to the market conditions) by the bank when the fixed-interest period expires. In such a case, the borrower can change the bank if there is no agreement on the amount of interest. Case law therefore grants the customer the right to change banks when the fixed-interest period expires (BGH ruling 6.4.1989). A clause according to which the customer has only two weeks for a debt rescheduling to another bank or savings bank (since notification of the bank’s offer with the new conditions) would also be invalid: Hardly any customer would then put into practice the preparation and settlement in such a case at such short notice (BGH ruling 06.04.1989). A statutory notice period of three months is customary here, so that the borrower has sufficient time to look for another credit institution. Transparency requirement: Investor Müller has become suspicious: He now has his loan documents and the bank’s statements of account expertly looked through (cf. e.g. the list of experts at www.fiala.de): And lo and behold, the bank has used a “special interest calculation clause” for him, which gives it even higher interest rates, without this being expressed in the indication of the so-called “initial effective annual interest rate”. The credit institution uses ‘for the calculation of the interest, the capital status at the beginning of the redemption year’. Such clauses are also invalid because the effect of the increase in interest is not sufficiently clear to the average customer (cf. BGH judgment of 30.04.1991). Investor Müller rejoices, because this would make his loan even cheaper – indignantly, he asks his bank to recalculate the loan. The customer of the credit institution is not obliged to file an action for composition (e.g. for recalculation of the credit account) first: Rather, he can immediately sue for repayment of the unjust enrichment (§ 812 I 1 BGB) (cf. AG Bonn judgment of 10.07.1997). Basel II: Occasionally, the credit industry argues that the creditworthiness of the customer has changed and that it is therefore justified to increase interest rates at the expense of the borrower.
However, this appears to be legally erroneous, because an adjustment of the interest in the case of variable interest in accordance with an interest reservation (fixed loan period with variable interest) is only permitted for the credit institution if the cause is a “change in the refinancing conditions for the bank due to capital market conditions” (cf. BGH judgement of 06.03.1986). However, the Bank may terminate the loan in the event of a significant deterioration in creditworthiness. Cost increase via hidden charges Any further “compensation” in favour of the bank, e.g. via increased “credit charges” would be invalid (cf. LG Cologne judgment of 5.3.1986) Burden of proof: The credit institution bears the burden of proof that the interest rates used as a basis for the settlement with the customer are fair (cf. LG Traunstein judgment of 10.11.1994, BGH judgment of 6.3.1986, BGHZ 97, 212). Disclosure of internal bank calculation: In many cases, credit institutions argue that they are not obliged to disclose the bank’s internal calculation when (possibly premature) redeeming a loan: The credit institutions thus deliberately evade judicial control and leave it to the judge to arrive at an appropriate result by way of an estimate (§ 287 ZPO), often with the involvement of an expert: However, the position of the borrower has been considerably improved in this respect by a decision of the Federal Constitutional Court (1 BvR 2203/98 of 28.12.1999), which states that a company in the financial services sector cannot evade judicial review by citing a business secret and refusing to allow the judge to inspect internal calculation documents. Prosperity boost for the investor: Heinrich Müller plans to reinvest the money as soon as he gets it back from his bank. In due course he wants to change his bank account, because he feels he is being led around by the nose by his bank adviser. The trust in honesty is gone: He does not let his bank take away several annual profits of his investment “so that the bank restructures itself at his expense”.
*The author is a lawyer in Munich (www.fiala.de), MBA (Financial Services, Univ. Wales), banker (H.Aufhäuser), certified financial and investment advisor (A.F.A., in the Lloyds Bank, plc. London group).
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PhD, MBA, MM
Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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