On 19 August 2008, after a protracted legislative procedure the Risk Limitation Act came into force. Its purpose is to hinder investor activities deemed objectionable. The Risk Limitation Act comprises two different legal regimes: the first dealing with voting rights disclosure and takeover control thresholds; the second regulating the sale of loan receivables (Borrower Protection Act). The following paragraphs outline the main issues of the Borrower Protection Act (the ‘Act’), the primary purpose of which is to introduce certain consumer protection provisions.
The Act has to be assessed in the light of media coverage of allegedly unjustified foreclosure measures taken by opportunity funds. An additional background factor is the quote of former Vice-Chancellor Franz Muentefering, comparing foreign financial investors to a swarm of locusts. Even now, this quote is often referred to, especially in the context of capital markets regulation. There had been serious concerns that the Risk Limitation Act might hinder loan portfolio transfers in Germany, since the draft bills included provisions obliging lenders to off er non-transferable loans and enabling borrowers to give early notice of termination in the event of a transfer of loan receivables. However, the provisions as finally enacted cannot be regarded as a significant impairment of the general framework for loan portfolio transfers. Nevertheless, some precautions should be observed when structuring loan portfolio transactions in Germany from now on.
As of 19 August 2008, purchasers of loan portfolios are obliged to inform borrowers who are consumers (i.e. natural persons entering into contracts for purposes outside their business), at least three months prior to the end of any applicable interest rate linkage, whether or not they intend to prolong the loan after that date. If the loan receivables are assigned and the assignor remains responsible for servicing the loan, this obligation does not apply. In case of an assignment of loan receivables or a transfer of a loan portfolio by way of universal succession (such as a hivedown), borrowers have to be informed of the transfer. Again, this information requirement only applies if the servicing does not remain with the assignor in case of an assignment and if the borrower is a consumer.
Acceleration of real estate loans
The requirements to be observed with respect to the termination of loan agreements between banks and consumers collateralised by mortgages or land charges (Real Estate Loans) will be tightened. Lenders as well as purchasers of loan portfolios will only be entitled to give notice of termination if the borrower is in default in whole or in part in respect of at least two consecutive instalments (of capital or interest), and by at least 2.5 per cent of the initial nominal amount of the loan. This protection mechanism, in particular the minimum arrears, usually allows lenders to accelerate the loan following approximately six months of default in the case of a loan term of a longer period (which is often agreed in the case of Real Estate Loans). The e relevant provision will only apply to Real Estate Loans which have been transferred after the coming into force of the Risk Limitation Act.
Defences and claims for damages of borrowers
In the case of a transfer of receivables deriving from a Real Estate Loan, borrowers who grant land charges as collateral will be entitled to raise all defences based on the legal relationship existing between them and the originator against the transferee (e.g. complete or partial extinction of the obligations under the loan agreement), irrespective of whether or not the transferee knew of those defences when acquiring the loan. New s 799a of the Code of Civil Procedure provides for a claim for damages in favour of debtors against purchasers of loan receivables in the event of unjustified foreclosure measures. Pursuant to this provision, creditors may have to pay damages irrespective of fault (i.e. knowledge or gross negligent lack of knowledge of the inadmissibility of the foreclosure measures), if the foreclosure measures are declared unlawful by a court. The protection of debtors is further extended by this recently enacted provision due to debtors now being entitled to claim for damages resulting from unjustified foreclosure measures, whether such measures are based on court decisions or on notarial deeds in which the borrower consents to execution against his property and all of his other assets. In Germany, it is common practice for borrowers of Real Estate Loans to sign such a notarial deed before the loan is granted, and lenders institute foreclosure proceedings based on that notarial deed rather than a court decision. However, we understand these recently enacted provisions are of a rather theoretical nature given the current practice of purchasers of loan portfolios to covenant to comply with any security agreement entered into by the originator and the borrower.
Assignability of corporate loans
Since the coming into force of the Risk Limitation Act, parties to corporate loan agreements may exclude the assignability of loan receivables, with the consequence that any assignment which conflicts with such exclusion is invalid.