German legislator decides on borrower protection in times of coronavirus

In the context of its activities to mitigate the consequences of the corona pandemic on 27 March 2020 the German legislator has enacted a law for statutory deferment and protection against dismissal for a transitional period.

The restrictions on public life and economic activity to combat the corona pandemic also affect borrowers, because they usually service the loans from their current income or earned revenues.

Crisis-related losses unforeseeable at the time the loan agreement was concluded may result in borrowers being unable to repay their loans or the regular interest and redemption payments, or only in part. Borrowers run the risk that the loan may be terminated due to default and that the collateral provided may be enforced.

The German Act to Mitigate the COVID-19-Pandemia in Private Law, Insolvency Lawn and Criminal Proceedings stipulates in Art. 240 Section 3 Introductory Law to the German Civil Code that the contracting parties shall be prevented from immediate termination of loan agreements, even in crisis situations. The aim is to give them time in which to look for solutions to enable them to continue the loan relationship once the crisis has subsided.

Statutory deferment of claims for three months (paragraph 1)

As a central instrument, claims by lenders against consumers for repayment, amortisation and interest due between 1 April and 30 June 2020 will be deferred by law. The maturity of the claims will be postponed by three months. A claim due on 2 April 2020 would thus be deferred until 1 July 2020; its due date would be postponed to 2 July 2020.

The deferral has the effect of postponing the specified due date of the claim. During the period of deferment, consumers cannot be in default with these claims. The regulation is only applicable to loan agreements concluded before 15 March 2020. This is to take account of the fact that the crisis was no longer unforeseeable at that time. The regulation is also intended to avoid that contracts that were and will be concluded from 15 March 2020 onwards to support consumers in order to remain liquid during the crisis are deferred by law.

Firstly, the deferral is conditional on the borrower's loss of income due to the exceptional circumstances caused by the appearance of coronavirus. The borrower bears the burden of proof for this precondition. In addition, the loss of income must result in in a situation qualified as unreasonable for the borrower to perform his or her obligations. The law mentions as a rule example for such unreasonableness that the borrower would endanger his or her reasonable livelihood or the livelihood of their dependents. The threshold of the relevant reduction in income is therefore not fixed as a lump sum but depends on the inpidual case. Also, in this respect the borrower has to furnish evidence. As a rule, this will result in consumers informing their bank that they are invoking the statutory deferral.

However, the parties to the contract may also expressly agree to deviate from the statutory deferral regulation, in particular with regard to possible partial payments, interest and repayment adjustments or debt rescheduling (paragraph 2). However, this agreement, which reinstates the payment dates applicable in the loan agreement before the deferral takes effect, does not constitute an early performance that would trigger an early repayment penalty pursuant to Section 502 of the German Civil Code (BGB).

Exclusion of the right of termination for payment default (paragraph 3)

In addition to the deferral, the lender's right of termination due to late payment, significant deterioration in the consumer's financial circumstances or the value of collateral provided for the loan is excluded.

The deferral postpones the maturity of the claims in question so that the borrower does not default on these claims. Statutory default interest is excluded as the payment is not due (Section 286 BGB). In addition to that, the exclusion of the right of termination is intended to make it clear that a notice of default up to the expiry of the deferral is logically out of the question. During this period of time, a termination by the lender according to Section 490 (1) BGB (actual or impending deterioration of the lender's financial situation or the value of a security provided for the loan) is also not permissible. Finally, the protection against termination cannot be waived at the expense of consumers. The list of excluded events of default triggering a termination right in the statute appears to be enumerative. In practice decisions need to be taken on the subsistence of other events or default justifying termination.

Interview on a consensual settlement (paragraph 4) and extension of the contract period if the consensual settlement fails (paragraph 5)

Lenders should offer consumers who have suffered a loss of income due to the crisis and whose loan obligations have been deferred the possibility of a personal interview. According to the explanatory memorandum, the subject of the conversation may be possible assistance or bridging measures on the part of the lender. The memorandum further comments that the lender only has to refer to offers from third parties if they are known to him (e.g. promotional loans from the Kreditanstalt für Wiederaufbau). On the other hand, the discussion should refer to the continuation of the loan relationship after expiry of the deferral period. For this purpose, for example, interest and repayment adjustments, the extension of the contract period or debt rescheduling agreements can be agreed. This rule will cause substantial problems of capacity for banks. Also, the question may arise whether these interviews may trigger any liability for misrepresentation by the lender.

At the end of the deferral period, the claims that were due until 30 June 2020, but legally deferred, and the claims that become due again regularly after this date would have to be settled in parallel. For a transitional period, consumers would therefore be burdened twice. This circumstance could result in an even more considerable overload. If the parties have not found a negotiated solution regarding the continuation of the loan relationship after 30 June 2020, the contract shall be continued as originally agreed, only the due dates of all obligations will be postponed by three months. This effect, which has already occurred for the deferred payments, will now be transferred to the entire contract. Therefore, the contract term will be extended by three months in total. Interest on arrears, charges or claims for damages at the expense of the consumer cannot arise because there is a statutory adjustment of the contract. A further logistical problem for lenders is created by paragraph 5 sentence 3 obliging the lender to document the contractual or statutory adjustment of the contract.

Exclusion in case of unreasonableness for the lender (paragraph 6)

The above provisions for the protection of consumers do not apply if the lender cannot reasonably be expected to grant a deferral or to exclude termination, taking into account all circumstances of the inpidual case, including changes in general living conditions caused by the coronavirus.

The draft law assumes that, due to the great need for protection of consumers, their interest in deferring payment will generally prevail. Nevertheless, there may be exceptional circumstances which make it unreasonable for the lender to continue the contractual relationship even during the deferment period in inpidual cases.

According to the explanatory memorandum to the law, serious or protracted culpable breaches of duty on the part of the consumer (e.g. fraudulent statements or sales of securities in breach of contract before or during the pandemic-related exceptional situation, which considerably impair the creditor's interest in security) are considered.

Regulations are initially applicable only to consumer loan agreements

The original draft of this law provided that the rules were to apply to all types of money loan agreements. The reason given for this was that businesses, especially small and medium-sized enterprises, were severely affected by the coronavirus and their economic existence was often threatened. Commercial borrowers therefore also needed a protection period in order to exhaust all possibilities to compensate for their loss of income and to be able to service the loan again.

This language was deleted during the legislative procedure. Consequently, the proposed regulations initially only apply to consumer loan agreements within the meaning of Section 491 BGB. Therefore, the borrower must always be a consumer, so that deposits of the consumer (e.g. savings contracts) and interbank business are excluded. Furthermore, neither loans in kind nor financial assistance or instalment payment transactions within the meaning of Section 506 BGB are covered by the scope of the standard. The moratorium in the form of the right to refuse performance pursuant to Art. 240 Section 1 EGBGB, should provide sufficient protection for these.

Regulation authorisation may extend the scope of application for other borrowers (paragraph 8)

Companies and entrepreneurs also see their economic existence threatened despite public aid offers. However, instead of immediately extending the regulation to loans to companies and entrepreneurs, the legislator has opted for an authorization by decree. For the time being, entrepreneurs are to be referred to the other aid packages.

However, the Federal Government with the consent of the Federal Parliament (Bundestag) but without consent of the Federal Council (Bundesrat) may extend the scope of application to other borrower groups, in particular to micro, small and medium-sized enterprises.

Temporarily limited until 30 June with the option to extend

The deferral shall apply to claims due in the period between 1 April and 30 June 2020. However, the duration and effects of the Corona pandemic cannot be reliably predicted at present.

Therefore, Article 240 Section 4 of the Introductory Act to the German Civil Code (EGBGB) authorizes the Federal Government to extend the deferral period until 30 September and the extension of the contract period to up to 12 months by means of a statutory instrument without the consent of the Bundesrat. This is to apply if it is to be expected that social life, the economic activity of a large number of companies or the employment of a large number of people will continue to be significantly affected by the COVID-19-Pandemia.

By statutory order with the consent of the Federal Parliament but without the consent of the Federal Council, the period may also be extended beyond 30 September 2020 if the impairments continue to exist after the statutory order has come into force.