"The Wealth of Nations" – Session A1: Country Report Germany
by Manfred Westphal, Lars Gatschke and Helga Springeneer, Verbraucherzentrale
Bundesverband (vzbv), Federation of German Consumer Organisations |
I. Country presentation (Q.1)
· Level of indebtedness (as of 31 Dec 2005):
o Total outstanding consumer credit („Other loans to domestic employees
and other individuals”): 234 Billion €,
o Total outstanding mortgage credit (“Housing loans to domestic employees
and other individuals”): 779 Billion €
All in all the level of indebtedness has increased continuously over the past
years.
· Estimated percentage of people in default
There is no extensive analysis. Some credit agencies and other organisations
provide single values such as:
o Arrears of rent (as of 31 Dec 2005): 2,2 Billion € (plus 10 % compared with
2004); source: “Haus und Grund” – Association of Real Estate Owners.
o Affirmations in lieu of oath / Affidavits (as of 31 Dec 2005): 1,6 Million new
affirmations in 2005 (minus 2,6 % compared with 2004; but differentiated
by East and West-Germany: minus 3,6 % in West-Germany and plus 0,6 %
in East-Germany; source: Bürgel).
The level of outstanding debt is still very high.
· Estimated percentage of overindebted consumers
The latest reliable data refer to the calendar year 2002 – the corresponding
empirical study, which is part of the poverty and wealth report submitted by the
Federal Government, was made in 2004. According to this study, 3.13 million
private households – or 8,1 % of all private households – were overindebted
meaning that they had no attachable/available income and assets to fulfil their
financial obligations. Compared with the previous study in 1999, this is an
increase of 15 %. There are no signs of relief (due to unemployment rate,
duration of unemployment, divorce rate).
II. Protective rules on overindebtedness
· Question 3.1.
Concerning overindebtedness there is an increased public awareness as a social
problem raising in particular from the increasing number of filings for bankruptcy.
At Federal level the political responsibility is divided. At present, several Federal
Ministries share competences such as:
- Federal Ministry of Justice: in charge of bankruptcy reform, enforcement law;
- Federal Ministry of Health: in charge of report on poverty and wealth;
- Federal Ministry of Finance: in charge of report on access to basic financial
services (bank account);
- Federal Ministry of Labour and Social Affairs: in charge of social welfare;
- Federal Ministry of Economy: in charge of micro/ small entrepreneurs and their
financial conditions.
There is no certainty that these Ministries will maintain their responsibilities. At present, the Federal Ministry for Family Affairs, once an important policital supporter, turns away from the topic “overindebtedness as family problem”.
On the part of the Federal States, in particular the Ministries of Social Affairs are
responsible for financing debt counselling and the formal acknowledgement of
insolvency counselling.
Valuation: A subdivided responsibility at Federal level need not per se be negative in
case that responsibilities are clear and in case of concerted action – but this is not
the case. In contrast, the federal structure is awkward – it hinders a co-ordinated and
coherent legislature.
· Questions 3.2. and 3.3
Rules to guarantee adequate advice
In order to file for bankruptcy overindebted consumers have to provide the
certification of an acknowledged (authorized) insolvency agency or a lawyer that the
– required – extra-judicial debt settlement failed. At first sight, this might only be a
formal requirement, but the certification means that the consumer has to enter a
consultation process.
National provisions concerning consumer credits
The basic structures of the consumer credit business were only rudimentarily
regulated by German law until Directive 87/102/EEC was implemented into national
law by the Consumer Credit Code. Before that the jurisdiction clarified substantial questions by case-law. Due to the Act to Modernise the Law of Obligations (Schuldrechtsmodernisierungsgesetz) this special Code was integrated in the Civil
Code (Bürgerliches Gesetzbuch) in 2002. Independently jurisdiction developed
additional principles in its case-law. Finally, there are some other rules protecting
consumer interests beside Civil Code articles.
In line with the enactment of the former Consumer Credit Code, the German
legislator adopted more stringent provisions to protect consumers, in particular regarding the scope of application, the formal requirements including legal consequences in case of infringement, linked contracts, the treatment of default
interest and the partial performance.
Scope of application
The provisions concerning consumer credits apply not only to consumers, but also to founders of a new business unless the net loan amount or the cash price exceeds 20 000 Euro. Furthermore, the maximum net loan amount limit according to Art. 2 (1) lit.f) Regulation 87/102/EEC wasn’t transferred in German law. All consumer credits
are generally covered by the provisions unless they are secured by a mortgage loan.
Formal requirements and legal consequences in case of infringement
According to § 492 (1) Civil Code the contract declaration has to be signed by the borrower. The written form is met if the offer and the acceptance are each declared separately in writing.
The legal consequences of formal defects and missing mandatory information are
regulated in a very differentiated framework. According to § 494 (1) Civil Code the
contract is void if the requirement for signing in written form isn’t complied with as
such or if any of the important contract information (laid down in § 492 (1), sentence
5, Nos 1 to 6) isn’t provided. Irrespective of any defect, the contract becomes valid if
the borrower receives the loan or has recourse to it. The contract then is modified
according to the requirements of § 492 (2) Civil Code:
- The rate of interest applicable to the loan contract (§ 492 (1), sentence 5, No
4) is reduced to the statutory interest rate if that rate of charge or the annual
percentage rate of charge or the initial annual percentage rate of charge (§
492 (1), sentence 5, No 5) or the total amount (§ 492 (1), sentence 5, No 2)
hasn’t been indicated.
- The borrower doesn’t owe any charges not indicated.
- If there hasn’t been an indication of conditions under which the price
determining factors may be altered, they may not be altered to the detriment of
the borrower.
- If there hasn’t been an indication regarding securities, they may not be
demanded, unless the net loan amount exceeds 50 000 Euro.
If the annual percentage rate of charge or the initial annual percentage rate of charge has been indicated at a rate lower than the actually applied rate (§ 492 (1), sentence 5 No 4), the interest rate applicable to the contract is – according to § 494 (3) – reduced by the percentage amount by which the indicated annual percentage rate of charge or the initial annual percentage rate of charge is lower than the actually applied rate.
Treatment of default interest and credit for partial performance
If the borrower is in default making payments, the rate of the interest is – according to § 497 (1) – reduced to the amount owed in accordance with § 288 (1). Here the rate of default interest is five percentage points above the basic interest rate (actually 1,37% plus 5% p.a. = 6,37% p.a.). In individual cases the lender may prove that his
loss was greater or the borrower may prove that the lender’s loss was less.
According to § 497 (2) interest that accrues after default is to be entered in a separate account and may not be included in an account with the amount owed. The lender is allowed to demand compensation only up to the amount of the statutory interest rate (4 % p.a.).
According to § 497 (3) the lender may not refuse partial payments. Payments by the borrower which are insufficient to repay the entire due debt must be credited first against legal costs, then against the remainder of the amount owed and finally against interest.
Further provisions in the Civil Code
In addition to the special provisions concerning consumer credits, the Civil Code contains other provisions which affect directly or indirectly the legal framework of loan contracts.
So-called linked contracts
Although the provisions concerning linked contracts were originally placed in the context of consumer credit provisions, they were recently integrated in the general part of the law of obligation. The main focus lies on the provisions concerning the
rights of revocation and the legal consequences of revocation (§ 358 Civil Code) as well as the so called “Einwendungsdurchgriff” (The consumer can refuse to payback the loan if he may cancel the linked contract concluded with the businessperson).
Regarding the consumer’s right of revocation according to § 358 (1) the consumer ceases to be bound by his declaration to conclude a consumer credit contract if he has validly revoked his declaration to conclude the linked contract for the delivery of
goods or for other performance by a businessperson. According to § 358 (4), no claims for payment of interest and costs arising out of the winding up of the consumer loan contract may be brought against the consumer. The giver of the loan assumes the rights and obligations of the businessperson under the linked contract in relation to the consumer with regard to the legal consequences of revocation or return, if the businessperson has already received the loan when the revocation or recall got valid.
Vice versa, according to § 358 (2), the consumer also ceases to be bound by his
declaration to conclude a contract linked with the loan contract for the delivery of goods or the supply of other performance, if he has validly revoked his declaration of intention to conclude that loan contract.
The necessary instruction notice concerning the right of revocation or return must draw attention to the legal consequences.
One more characteristic of linked contracts is the so called “Einwendungsdurchgriff”. According to § 359 Civil Code the consumer may refuse to pay back the loan if he may proceed against the linked contract concluded with the businessperson. The purpose of this provision is to protect the consumer in case of a purchase using a
loan just like he is protected in the case of a contract concluded with the businessperson allowing him to pay by instalments. The consumer shall not bear the risk that such an instalment purchase is split into two parts – a sales contract and a loan contract. Furthermore the consumer shall not be obliged to pay back the credit rates
although there is a defect in the sales contract. In fact, the lender must bear this risk of division, because he making profit of the services of the businessperson with the conclusion of the consumer loan contract. Therefore the German legislator adopted more stringent provisions. The consumer is not obliged to first pursue his remedies
against the supplier of goods or services.
Ban on compound interest
§ 249 Civil Code forbids agreeing on compound interest. Purpose: Prevention of the consumer illiquidity in case of accumulated interest. Nevertheless, such an agreement is permitted after the due date. § 289 Civil Code protects the consumer against accumulation of interest: default interest isn’t payable on interest. The provision doesn’t affect the creditor’s right of compensation in case of delay, but he
may demand compensation only up to 4%. Compound interest in the case of
overdrafts is more problematic.
Provision concerning usury
Under § 138 (2) Civil code any legal transaction is void if a person who rigorously makes use of and profit from another person’s exigency, inexperience, lack of discernment or considerably weak will and hereby gets the promise or receives financial advantages for granting a credit if these financial advantages are disproportionate to his effort/service. Furthermore there is § 242 Civil Code: “The obligor must perform in a manner consistent with good faith taking into account accepted practice.”
Consequently, the jurisdiction has established concrete guidelines for usury interest.
There is usury if the interest rate is 200% of the market rate interest or 12% higher than the market rate interest.
Provisions apart from the Civil Code
Prohibition of usury under the Criminal
Code
According to § 291 of the Criminal Code any person who exploits another person’s
exigency, inexperience, lack of discernment or considerably weak will and hereby gets the promise or receives financial advantages for granting a credit if these financial advantages are disproportionate to his effort/service, is liable. The sentence provides an imprisonment of up to three years.
Prohibition of door-to-door sale
According to § 56 (1) No 6 of the Trade, Commerce and Industry Regulation Act
(Gewerbeordnung) the procurement against payment isn’t allowed in the itinerant
trade. A person runs an itinerant trade in the sense of § 55 of the Trade Regulation if he professionally sells outside his business premises goods or services without being ordered in advance. So, this definition corresponds to the term of a door-to-door sale
in the Civil Code conception.
§ 56 (1) No 6 is not any more considered as a protective law in the sense of § 134 Civil Code. By consequence, loan contracts aren’t per se void because the consumer is nowadays protected by the regulations concerning door-to-door sales, in particular by the consumer’s right of revocation. However, loan contracts which are concluded through agency in the itinerant trade are void in the sense of § 134 Civil Code.
III. Effective accessible institutions to help people in debt (Q. 4)
Social Welfare Institutions, Consumer organisations and the majority of municipalities offer independent debt counselling – mostly free of charge.
There are waiting periods for consumers at these institutions – therefore more and more debtors fall for commercial “money adviser”. At present, the Legal Advice Act prohibits debt counselling without official permission. Due to liberalisation of legal advice and open competition the Legal Advice Act is “under construction” – the bill intends to legalize commercial debt counselling. |
| ID: |
37327 |
| Author(s): |
iff |
| Publication date: |
26/04/06 |
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Created: 26/04/06. Last changed: 26/04/06.
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