The subject of information on the right of withdrawal or instructions regarding the right of withdrawal (hereinafter referred to as “withdrawal instructions”) with respect to loan agreements is keeping a large number of investor lawyers as well as bank lawyers rather busy. Both sides unanimously report that the large wave of lawsuits seen in previous years has significantly decreased. To a large extent, this is due to the legal deadline of 21 June 2016 which was imposed on all cases which arose before 10 June 2010 and the corresponding limitation period which took effect on 31 December 2019.
CJEU decision regarding withdrawal instructions
And now the next wave of lawsuits regarding withdrawal instructions are approaching. And it is a large wave.
Current newspaper articles refer to an affected loan volume of 1.5 trillion euros, including building loans and car financings.
This is due to an CJEU ruling of 26 March 2020 (Case C-66/19).
In this ruling, the CJEU decided that the withdrawal instructions which were contained in a consumer loan agreement and which were phrased in a way that is market-standard, were not “clear” and “concise” enough with respect to when the time period for the right of withdrawal would start. This resulted in the withdrawal time period not being triggered, with the effect that the consumer can still withdrawal their loan agreement today.
Unfortunately, this ruling was in respect of the template wording which was considered to be generally valid for all real estate consumer loan agreements between 13 June 2014 and 20 March 2016 (see below).
From Saarlouis via Saarbrücken to Luxembourg (a short summary of the case)
In 2012, the local savings bank of Saarlouis concluded a mortgage-backed real estate loan agreement with a consumer for 100,000 EUR with a fixed interest rate of 3.61% p.a. until 30 November 2021. The local savings bank of Saarlouis informed its customer of his right of withdrawal in accordance with its standard withdrawal instructions.
On 30 January 2016, the customer then withdrew the loan agreement.
After the withdrawal, the customer went before the District Court of Saarbrücken and claimed, simply put, that the local savings bank of Saarlouis was not entitled to the payment of any interest nor any principal payments since the withdrawal.
The District Court of Saarbrücken was unsure as to how the rules on the instructions provided on the right of withdrawal had to be interpreted under European law and decided on a stay of proceedings and put numerous questions regarding the case before the CJEU on 17 January 2019. By doing so, the District Court of Saarbrücken went against the current case law of the German Federal Court of Justice.
Contentious issue: cascading references
The contentious issue is whether so-called cascading references are in line with European requirements.
What are cascading references?
Background information: The local savings bank of Saarlouis provided withdrawal instructions to its customers using the following wording:
“The borrower may withdraw the agreement in writing (e.g. by letter, facsimile, e-mail) within 14 days without providing any reasons. The time period starts after the conclusion of the agreement but only after the borrower has received all mandatory information in accordance with Section 492 para. 2 of the German Civil Code (e.g. information on the type of the loan, the net loan amount, information on the contractual period).”
With respect to the start of the withdrawal time period, these withdrawal instructions refer to the mandatory information which needs to be provided in accordance with Section 492 para. 2 of the German Civil Code, which states:
“The agreement must contain the information required for consumer credit agreement as stipulated under Article 247 Sections 6 to 13 of the Introductory Act to the Civil Code”.
You can see that the instructions first refer to a legal Act (German Civil Code “BGB”), which then refers to another legal Act (Introductory Act to the Civil Code “EGBGB”) – this is a so-called cascading reference.
Article 247 Sections 6 to 13 of the Introductory Act to the Civil Code contains a lot of mandatory information, such as the name and address of the lender, the type of the loan, the annual percentage rate of the interest etc.. Depending on the type of loan, there are total of around 20 pieces of information which need to be provided.
The German Federal Court of Justice already decided back in 2016 that cascading references were valid for withdrawal instructions.
Cascading references were or are contained in the respective withdrawal instructions template for consumer loan agreements. This is the reason why such a large number of agreements is affected.
What is the withdrawal instructions template?
In order to make withdrawal instructions easier for banks, the German legislator provided a withdrawal instructions template. To the extent that the respective bank uses this withdrawal instructions template, it fulfils the requirements regarding valid withdrawal instructions. This is why numerous banks based their withdrawal instructions on this withdrawal instructions template.
There are two types of withdrawal instructions template:
- Withdrawal instructions template for real estate consumer loan agreements; and
- Withdrawal instructions template for general consumer loan agreements.
The withdrawal instructions template is continuously updated.
The withdrawal instructions template for real estate consumer loan agreements between 30 July 2010 and 20 March 2016 contained a cascading reference. From 21 March 2016 onwards, the cascading reference has been taken out of the template.
The current withdrawal instructions template for general consumer loan agreements also contain a cascading reference.
CJEU objects to cascading references
In accordance with European law, withdrawal instructions must contain clear and concise instructions as to whether there is a right of withdrawal. They must also contain information on the time periode and other modalities regarding the exercise of the right of withdrawal. The key factor is whether the information is clear and concise.
In its decision, the CJEU in particular makes the following two statements:
First: Any withdrawal instructions must provide clear and concise information on the envisaged modalities for calculating the withdrawal time period.
Secondly, cascading references in withdrawal instructions do not fulfil the requirement of clear and concise information regarding the calculation of the withdrawal time period. If consumers want to find out whether the withdrawal deadline has started, they would need to consult numerous legal texts, look at the mandatory information required by law and then check which aspects of the mandatory information have not yet been provided in the agreement in question. The CJEU does not believe this to be clear and concise.
This CJEU ruling has far-reaching consequences for German banks.
In order to understand the extent of the consequences, it is necessary to consider again in detail the consequences of incorrect withdrawal instructions. The result is that the withdrawal time period is not triggered. This means that the withdrawal can be declared even years later.
Customers have to repay the loan immediately once they have withdrawal the agreement. However, in light of the current low interest rates, they can remortgage more cheaply by concluding another agreement with a lower interest rate. The Hamburg Consumer Advice Centre provides the following concrete example: With an annual interest rate of 1.5 % instead of 4.5 % and an outstanding loan amount of 180,000 EUR and a remaining contractual term of around four and a half years, a customer could save around 24,000 EUR.
The decision affects an incalculable number of loan agreements as most of those agreements included the withdrawal instructions template which contained a cascading reference.
What comes next?
This is currently difficult to say. Bank associations are starting to call for a political solution. It also remains to be seen how the appellate courts, in particular the German Federal Court of Justice, will deal with the CJEU ruling.
The only thing we know for sure is that this will result in a wave of lawsuits on “withdrawal instructions”.
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