MIL OSI – Source: German Ministry of Finance – in English –
Headline: Modifications to rules on residential mortgage lending
The new legislation adds precision to existing rules and enhances legal certainty in order to facilitate residential mortgage lending. For example, it specifies that credit scoring procedures can take into account increases in value resulting from construction measures or renovations to residential real estate. In addition, the new legislation will explicitly stipulate that – as is already the case –the rules governing consumer loan contracts will generally not apply to equity release credit agreements (Immobilienverzehrkredite). This will help to eliminate the uncertainties that some credit institutions encounter when interpreting the rules on granting loans to older people, for example.
The federal government’s bill also serves to implement the recommendation – made by the German Financial Stability Committee, the International Monetary Fund and the European Systemic Risk Board – to introduce additional instruments that will enable the Federal Financial Supervisory Authority (BaFin) to set certain requirements for residential mortgage lending.
Michael Meister, Parliamentary State Secretary at the Federal Ministry of Finance, commented on the federal cabinet’s decision:
By adopting this bill today, we are adding specificity to our national legislation implementing the EU Mortgage Credit Directive. In addition, we are creating the legal basis for targeted and customised instruments that will enable BaFin to intervene against speculative excesses on the real estate market, if necessary. This does not mean that the instruments will be deployed immediately. They will only be put into action if the need arises. We cannot rule out the possibility that speculative excesses may also occur on Germany’s real estate markets at some point in the future. We are taking precautions now for such a scenario. If such instruments need to be put into action someday, we will ensure that they are used prudently.
The draft bill provides for the creation of instruments that will allow BaFin, if necessary, to set certain criteria that lenders must comply with when granting new loans. Such criteria could include, for example, an upper limit on the ratio of the loan amount to the real estate value (loan-to-value ratio, LTV). These preventive rules aim to avoid excessively risky lending practices and to mitigate risks to the stability of the financial system. The draft legislation applies only to the construction and purchase of real estate, not to conversion and renovation. Follow-up financing, micro-credits and measures to promote the construction of subsidised housing are also exempt from the new rules.
The bill stipulates that BaFin must conduct an assessment of impending risks to financial stability and to the smooth functioning of the financial system before activating the instruments. BaFin’s decisions must also take relevant analysis and assessments by the Deutsche Bundesbank into account. It will also consult with banking industry representatives and various government ministries and inform the Finance Committee of the German Bundestag. If BaFin puts instruments into action, it will also issue rules on exempt quotas and de minimis thresholds.