Loan security law (Germany)
Credit protection is the protection of a credit risk through property , rights or through the creditworthiness of other companies or persons . The security provided is known as loan security . By securing a loan, the creditor of a claim intends that it becomes insolvency- proof in the event that the debtor himself can no longer pay the repayment and / or interest in whole or in part. Loans without credit protection are known as unsecured loans .
In large parts of the economy, credit protection is generally an instrument of risk reduction . Wherever a creditor does not want to bear a debt or financial risk , he has the opportunity to hedge it. This can be done through retention of title or del credere insurance ( suppliers , creditors ), export credit insurance ( exporters , importers ), credit collateral in the narrower sense ( credit transactions in banking ) or reinsurance in insurance . It is the function of loan collateral to reduce as far as possible the element of uncertainty inherent in the loan business . The agreement on the provision of loan collateral is called a security contract , the contractual partner demanding the collateral is called the collateral taker , the one providing the collateral is called the collateral seller . The protection seller need not also be the borrower , but the protection buyer is always also the lender .
Loan security is regularly required if the creditor does not want to leave his claim unsecured for risk reasons . For this reason, the law defines some legal transactions from the outset as loan security (so-called original loan collateral ), namely finally the retention of title ( (1) BGB), the guarantee ( (1) BGB), the mortgage ( BGB) and the lien ( BGB). In these legal transactions, the law requires the existence of a claim (or liability from the point of view of the collateral provider or debtor) so that this legally stipulated loan collateral can become or remain legally effective. In addition, a large number of loan collateral has been developed through contract drafting ( derivative loan collateral ). In principle, non-attachable items can also serve as loan security .
Loan security is therefore primarily from a legal point of view:
- Liens on rights (e.g. on claims or company shares ), on movable property ( pledging ) and real estate or rights equivalent to real estate ( real estate liens : mortgage, land and pension debt , real burden );
- Assignment of claims ( assignment of security );
- Assumption of debt , joint and several liability and assumption of debt ;
- Guarantee ;
- Security assignment , security assignment of motor vehicles .
A characteristic of loan security is that the creditor is granted further rights by means of a security agreement for the purpose of securing his claim against the debtor . These further rights can either be directed against the debtor himself or against parts of his assets , or the creditor protection can consist in the fact that the creditor can make claims against third parties for the purpose of satisfying his claim against the debtor.
Loan collateral can be required by different types of creditors; Most often, collateral is agreed upon by credit institutions when granting a loan as part of the loan agreement. The institutes then no longer base their granting of credit solely on the repayment claims against the borrower , but justify largely independent claims from this to the proceeds from the realization of loan collateral.
Because of the functional equivalence of the various legal institutions involved in securing loans, an overall view is useful.
Collateral can be divided into personal and property collateral according to the claim. The legal character enables a further delimitation; A distinction is made between accessory and non-accessory (so-called abstract) securities. In addition, a distinction can be made according to whether the law provides for the loan collateral as such (original collateral) or whether the collateral was only developed through the practice of trading (derivative collateral).
- Personal securities are the surety ( BGB ), the guarantee, the assumption of debt ( BGB) and the letter of comfort .
- Among the physical collateral the assignment are under BGB, the transfer of ownership ( BGB), the lien ( , And BGB), the mortgage ( German Civil Code) the land charge ( BGB).
- Original collateral from these are surety, mortgage and liens. Derivatives are, accordingly, guarantee, (security) land charge, (security) assignment and transfer by way of security.
Standard bank loan collateral
There are no legal obligations imposed on credit institutions in Germany to accept loan collateral. Neither the German Banking Act (KWG) nor the Capital Adequacy Ordinance (CRR ) nor the minimum requirements for the lending business determine when and when not to accept collateral. However, in accordance with SolvV , collateral can reduce the risk of counterparty default on the part of the borrower and can therefore be offset against the burden of own funds , which reduces the cost of equity for granted loans and thus the borrower's costs. Credit collateral is not part of the rating ; however, the desire for collateral can be the result of the rating. Collateral may only be taken into account when determining the actually expected default. For this reason, the credit institutions are allowed to decide autonomously as part of their creditworthiness check whether and which loan collateral to accept. In doing so, they concentrate on “standard bank loan collateral”. The indefinite legal term "standard bank loan collateral", not mentioned by law , applies to various types of collateral that have the following features in common:
- small fluctuations in value:
- The collateral may only small fluctuations in value over time, particularly during the loan term , have.
- quick liquidisability:
- The loan security must be instantly convertible into cash without cumbersome procedures or legal obstacles.
- no correlation with the economic situation of the borrower:
- The loan security must not have a positive correlation with the economic situation of the borrower.
- Insolvency resistance:
- The loan security must not be contestable in the insolvency of the collateral provider and must justify a right of separation .
These criteria are generally met by the following loan collateral:
As a registered liens are referred to in a public register registrable liens. As a rule, land charges are used for real estate to secure long-term loans (credit term> 4 years) and entered in the land register for land or land rights . Mortgages, on the other hand, do not play a major role in banking practice, as they can only be used at great expense as ancillary collateral to secure additional loans. As part of the financing of ships which will ship mortgage , which in aircraft since its introduction in 2009 aircraft mortgage used. They are entered in the ship register or in the register for liens on aircraft .
Guarantees are common forms of security in a number of situations to prevent asset shifts to the detriment of the creditor:
- Guarantee of the partner / manager for his borrowing GmbH ( partner guarantee ),
- Spouse's guarantee for debts of the other spouse ( spouse's guarantee )
There are also guarantees from family members if the creditworthiness of the respective borrower is insufficient.
In the corporate customer area, sureties, guarantees and letters of comfort between affiliated companies play an important role. Corporate bonds, guarantees and certain types of letters of comfort are not recognized as formal loan security.
Assignments (assignment of claims)
In the private customer sector, a wage and salary assignment is usually incorporated into the loan agreement (wage assignment clause). Since it is not insolvency-proof and therefore violates the principles of customary banking collateral, it is formally no loan security.
Insurance claims are often assigned:
- Capital-forming life insurance to repay the loan
- Term life insurance to cover the risk of death
- Fire insurance in the financing of real estate
- Comprehensive insurance for the financing of motor vehicles
To secure a loan, residual debt insurance is often agreed (and assigned), which covers the risk of death, illness and possibly unemployment.
When financing freelancers, the self-employed and companies, an assignment of claims is often agreed. So z. For example, a doctor surrenders his claims against the Association of Statutory Health Insurance Physicians to the bank as security for his practice financing.
Pledges and Lombard loans
A distinction is made between pledging rights and movable property. It is common practice to pledge securities (e.g. as part of a securities Lombard loan ). Securities in the narrower sense are pledged like things, i.e. through an agreement and transfer. Pledging of tangible assets is not relevant for bank loans (except for precious metals), but is preferred for pawnbroking . The debtor remains the owner and the lender becomes the owner of the pledge (pledge principle).
Since securities are generally subject to price fluctuations, also known as volatility , the assessment basis is based on various valuation rates:
- Government bonds: 100 percent,
- Bearer bonds: between 90 and 100 percent,
- German stocks: between 60 and 80 percent,
- Foreign small caps: between 20 and 60 percent and
- Fund: between 40 and 80 percent.
However, these are not fixed, predetermined evaluation rates. Each bank can determine the percentage of the credit security to be applied when pledging securities.
Transfer by way of security
The disadvantages of physical handover , as in the case of pledging movable assets, are avoided in the case of collateral assignment. The transfer of ownership of the collateral takes place legally, but according to § 930 BGB, the transfer is replaced by an intermediary relationship (constitution of ownership). Since the creditor gives the borrower the assigned item on loan for immediate possession, the bank is exposed to a greater risk of collateral loss than, for example, with pledging.
In the corporate customer area, the transfer of ownership of goods and machines by way of security is common (e.g. in the form of a space security contract ).
More loan collateral
Further securities in the corporate customer area are the negative declaration , the letter of comfort or the various forms of joint liability outside of the guarantee (such as guarantee , assumption of debt , cumulative assumption of debt or joint and several liability ). Negative letters and certain letters of comfort are not formally considered credit security; credits granted on the other hand are unsecured credits.
The common criteria of “customary bank collateral” are not equally met by all the types of collateral listed. For this reason, a collateral assessment has to be carried out, in the process of which the fulfillment of the criteria as "standard bank security" is examined. The different valuation approaches are then expressed in the lending value and the lending limit (see also overcollateralization ). According to Section 25a KWG, the credit institutions must organize themselves in such a way that the estimated values actually succeed. The mortgage lending value is mostly based on the market value ( residential and commercial property ), also on nominal values ( bank balances , receivables , bonds ), market values ( stocks , bonds, investment certificates ) or surrender values ( life insurances ). The deduction made from the lending value is the maximum lending limit up to which credit institutions may grant credit.
Banks reserve the right in the loan agreements and / or their terms and conditions to increase collateral, i. H. to demand the provision of further valuable collateral if the collateral provided loses value or the customer's financial situation worsens. This individual contractual regulation is supported by (1) BGB. For this purpose, assurances are agreed within the loan agreements ( covenants ). Part of the general covenants are e.g. B. the "significant deterioration in economic conditions" , which on the basis of § 490 para. 1 BGB lists individual examples of when such a deterioration should be considered to have occurred. As part of financial covenants, z. For example, balance sheet ratio clauses are agreed for corporate customers, which are intended to ensure compliance with certain balance sheet ratios ( equity ratio , debt ratio or cash flow ) within a certain range (so-called "headroom"). Deviations from these covenants oblige the borrower to provide further collateral or even trigger an extraordinary right of termination on the part of the creditor.
Since January 2007, loan collateral has initially been referred to as credit risk mitigation techniques in the Solvency Regulation . These regulations in §§ 154 ff. SolvV a. F. were replaced from January 2014 by the Capital Adequacy Ordinance (English abbreviation CRR), which deals with credit risk mitigation in Articles 192 ff. According to the legal definition of Article 4, Paragraph 1, No. 57, credit risk mitigation is a procedure “which an institution uses to reduce the credit risk associated with one or more risk positions in its portfolio ”. A distinction is made between “collateral with security deposit” (Art. 4 (1) No. 58) and “protection without security deposit” (no. 59). In the case of the former, the credit risk is reduced by the fact that a bank has the right to realize certain assets or amounts in the event of default of the borrower or in the event of certain other credit events related to the counterparty , to obtain their transfer or provision or to withhold them, or the exposure amount to the difference between this and the amount of a claim against the institute or to replace it with this difference. This means physical security such as transfer by way of security, assignment or pledging. The "protection without provision of security" comprises the obligations of a third party to make a payment in the event of default of the borrower or certain other credit events (personal security such as surety or guarantee). Financial collateral and gold are under Art. 207 no. 2 CRR particular securities whose issuer credit rating is not significantly positive with the borrower creditworthiness correlate allowed. Art. 202 CRR regulates the requirements for other credit institutions, insurance companies and reinsurance companies as well as export credit insurance companies as providers of collateral. A credit security provided by a counterparty is treated like a claim that exists in the context of a derivative transaction (buy position) against the counterparty and is due on the day the risk position is determined (Art. 279a CRR).
Art. 194 CRR requires credit institutions to ensure that loan collateral is legally effective and enforceable in all relevant jurisdictions . Art. 207 No. 3 CRR stipulates that loan collateral must meet all contractual and legal requirements for the enforceability of your security interest in your legal system through a legal review and this must be repeated if necessary. This is intended to avoid legal risks that are included in operational risks in the event of legally ineffective or unenforceable collateral agreements (Art. 4 Para. 1 No. 52 CRR).
The loan securities have a positive effect on the recovery rate of a loan, because the recycling revenues improve this economic indicator . A study showed that the recovery rate can be significantly positively influenced by the realization of loan collateral. According to the type of collateral, the recovery rate in the observation period between 1984 and 2003 was highest in Germany for public guarantees at 89% of the collateral value, followed by bank balances (88%), mortgages (72%), trade receivables (50%) and security assignments (49%) , on average at 72.9%.
Economic justification for loan collateral
There are economic reasons for loan collateral. A distinction is made below between symmetrically and asymmetrically distributed information between borrower and lender.
For this purpose, symmetrical information is considered as a benchmark . A risk-neutral entrepreneur takes out a loan to finance a project. There is a certain probability that the loan amount including interest will be repaid. In the event of bankruptcy , a specific asset can still be extracted from the company. Assuming a certain capital market interest rate for secure investments, the interest that the investor has to charge in order to receive the same interest rate can be calculated.
Secured and unsecured loans achieve the expected value of the secure capital market interest rate: A security with a liquidation value of the security amount compounded with the risk-free interest rate is repaid with 100 percent probability. The rest of the proceeds remain with the liquidation amount. Even with a certain security, the expected return on the credit exposure corresponds to the secure capital market interest rate . This applies to the entire continuum between fully secured and unsecured. In this world of symmetrical information, loan collateral offers no advantage.
It follows that credit protection is irrelevant in a world of symmetrical information.
With asymmetrical information , credit security leads to a mitigation of the negative effects of quality and behavioral uncertainty. Loan collateral can be used as a tool to determine the quality of borrowers.
Sorting effect: signal for high creditworthiness
- Capital provider offers contracts with interest-collateral combinations: With higher collateral, the loan interest offered is lower. Borrowers who offer high collateral are sending out a good quality signal this way . Collateral may be useful in deterring borrowers from increasing the risk. For this purpose, the assets, the loan security, the liquidation costs as well as the expected profit and loan amount are modeled.
- Good borrowers choose contracts with low interest rates and high collateral: In this way, the lender can differentiate between the types of borrower.
Incentive effect: no harm to the creditor
- Collateral increases the repayment amount R, from which a riskier project is chosen: By determining the critical repayment amount , the lender is able to influence the borrower's project choice .
- Influencing the choice of project with room to increase interest rates without adverse selection behavior
As a result, even a liquidation value of zero would be worthwhile for calling in collateral. In this way, the right incentive effects are achieved.
- Christian Alexander, Joint structures of surety, lien and mortgage , JuS 06/2012 pages 481–490
- Moritz Brinkmann, Loan Securities for Movables and Receivables , 2011, p. 1
- BGH, judgment of November 28, 1960, Az .: VIII ZR 211/59 = WM 1961, 243
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