EU directive for residential real estate loan contracts urgently requires improvement

by Finanzplatz München Initiative

Munich Financial Center Initiative (known by its German acronym of "fpmi") still sees a considerable need to alter the directive submitted by the EU Commission on real estate loan contracts. This is because the current draft does not meet its objective of improving consumer protection, because it contains non-practicable stipulations, and because it would damage Germany's financial community.

It is for this and other reasons that fpmi is calling for precluding contradictions between and ambiguities in the draft directive and the EU's directive on consumer credit. These currently arise - by way of examples - in the areas of client consulting, pre-contractual time of consideration and effective annual interest. The close relationships between the topics mandate the directive on mortgage credit's modeling itself, to the extent possible, upon the rules found in the EU's directive on consumer credit. This would facilitate the avoidance of these problems.

Regardless of that, the fpmi believes that the EU should incorporate special rules into the directive, should such be required by the existence of special features in the real estate financing available in the member states. This especially applies to the issue of the ahead-of-schedule repayment of real estate loans. Should the stipulation contained in the current draft of the directive be promulgated, it would substantially damage the instrument of providing loans at fixed rates of interest. Also suffering would be mortgage bonds. Both fixed rates of interest and mortgage bonds have proven their mettle in Germany over the past decades, during which Germany's mortgage bond has become and remained an instrument of international investment. The result of the above change could be an impairing of the stability of Germany's financial community.

The Initiative is aware of the fact that the current version of the draft directive already contains alterations that are designed in fact to take the criticisms of the cancellation of Germany's form of long-term financing into account. To be noted is, however, that the current formulation does not suffice to bring about legal security of operation. Desirable would be a stipulation according to which the member states, while adhering to the principle of maintaining the compulsory nature of agreed-upon terms of fixed interest rates, could guarantee - either by enacting legal regulations or by configuring contractual formulations - that consumers have a right to an ahead-of-schedule repayment of a real estate loan. When doing such, the member states should establish the conditions for the exercising of this right. The lender should have a claim for a fair and objective indemnification for any costs directly ensuing from the ahead-of-schedule of the loan.

Ahead-of-schedule right of repayment only in cases of warranted interest

The draft directive foresees the customer's being granted a right of repayment in cases in which this is required by his or her "special interests". The problem arises from the question of whether this "special interest" is identical with Germany's "legitimate interest", or whether the wish to get a lower borrowing rate during the term of its being fixed is to unleash an ahead-of-schedule commitment to repay. An alteration of the legal situation in this way would increase the costs borne by customers and would give rise to long-term problems. These would involve the refinancing of mortgage bonds. This would increase the risks faced by banks and would impair the stability of financial markets.

Consulting only on proprietary products

In addition, consulting services provided to customers can only encompass those products supplied by the lender and by its partners of cooperation. It is for that reason that fpmi rejects the EU Commission's consideration of the idea of committing lenders to incorporating products from third party ones in this provision.

The draft directive also stipulates that the lender also has to make sure that the loan contracts can only be concluded upon the customers' having had time adequate to compare the offers available for such on the market and to evaluate their ramifications. Germany's legal code does not have such a time of consideration. This is also not practicable. For this reason, fpmi is calling for the according of customers with a legally-mandated right of revocation in the area of residential real estate loan contracts. This right has proven its value in many areas of German life. The right also forms part of a majority of Europe's consumer rights directives.

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