Loan Approval

Loan commitment ( English credit commitment ) is banking a legally binding commitment by the lender bank , loans under certain pre-established credit terms to borrowers to provide.

General

A credit approval is preceded by a positive credit decision by a credit institution to grant the bank customer a bank credit under certain conditions. Since the loan approval is a consensual agreement, it comes about through mutual declarations of intent by the lender and the borrower. In the offer addressed to the bank customer, the bank ’s declaration of intent is to be seen in the acceptance of the offer, the corresponding declaration of intent by the bank customer. The loan agreement is concluded through the offer and acceptance . In terms of contract law , the loan approval is a loan agreement with a deferred payment claim; The payment is only made when the borrower requests it.

species

There are irrevocable and revocable loan commitments under civil law . All loan commitments that cannot be canceled or revoked by the bank without reservation and without notice are to be regarded as irrevocable . The loan commitments that can be canceled without reservation and without notice are revocable.

• An irrevocable loan commitment ( English irrevocable credit commitment ) is when the bank to the borrower specifically on his right of withdrawal under § 109 para. 1 BGB or Section. 19 No. 3 AGB has waived. Loan commitments for which the borrower still has to meet certain disbursement requirements, the fulfillment of which is exclusively within his sphere of influence, are also to be regarded as irrevocable . This includes, for example, the provision of loan security such as the registration of a mortgage or the provision of a certificate of rank if the borrower is also the security provider. The lender can no longer avoid the credit risk by his own decision. All express commitments that the borrower has not yet bindingly accepted are also considered irrevocable because the bank has no power to prevent acceptance.
• To revocable credit lines ( English revocable credit commitments ) is, if the bank has a unilateral right of withdrawal or she can cancel at any time without notice and without reservation. A unilateral revocation is only possible as long as the loan has not yet been paid out (valued); after it has been paid out , only termination is possible. The revocable loan commitments include commitments with a committee reservation, according to which a legally binding credit commitment can only become effective after approval by the bank's internal bodies ( management board , supervisory board ). Since this is a condition precedent , the commitment will not be made if the approval is refused. Forward loans , in which the prospective borrower has the option of not drawing on the loan in exchange for payment of compensation, are also treated as revocable loan commitments. The wording “until further notice” gives the bank an unconditional and immediate termination option and is therefore considered a revocable loan commitment. Purely internal lines of credit do not even meet the criterion of a loan approval.

Banking regulatory law

General

A loan approval is equated with the credit agreement for regulatory purposes. While the term credit agreement has generally prevailed under civil law, the banking supervisory law now speaks of the credit approval when it comes to the crediting of unused credit agreements with the liable equity of the approving bank. The banking supervisory authority therefore restricts the loan agreement for its own purposes to loans that have not yet been paid out in whole or in part. In Principle II , which was valid until December 2006, according to the interpretative decisions of the Federal Financial Supervisory Authority (BaFin), irrevocable loan commitments were “formally made and legally binding commitments, provided that the requirements for using the promised credit funds are met and the credit funds can be called up immediately “(§ 3 No. 4 GS II). Loan commitments for which the disbursement requirements do not currently exist, but for which they will be met within the next twelve months, were previously not taken into account for the capital adequacy requirement , as were loan commitments for which the disbursement of the loan amount was linked to conditions on the reporting date were not fulfilled. Between January 2007 and December 2014, a regulation in Section 50 (1) SolvV a. F., which for the first time provided for partial capital adequacy.

The capital adequacy regulation (CRR), which has been in force in all EU member states since January 2014 , contains a modified regulation. According to this, credit lines that an institution can terminate unconditionally and without notice at any time, or which automatically result in termination if the borrower's creditworthiness deteriorates , are considered revocable and are credited with 0% (Art. 166 No. 8a CRR). Unused commitments are regarded as unconditionally cancellable if the contractual conditions allow the institution to make full use of the cancellation options under consumer protection law and the related legal provisions (Art. 154 No. 4b CRR). Loan commitments - with the exception of liquidity facilities for securitisations - with an initial term of up to one year will be backed with a credit conversion factor of 20% and loan commitments with an initial term of more than one year with 50% of the credit line. Loan commitments that can be canceled at any time without reservation and without prior notice by the bank or that effectively automatically expire in the event of a significant deterioration in the borrower's financial situation receive a loan conversion factor of 0%, regardless of the term. The backing with own funds is the reason for the usual bank calculation of commitment interest on the unused part of the loan.

Conversion factors

According to Art. 166 Para. 8a CRR, unused loan commitments do not need to be backed with own funds ("conversion factor 0%"; English Credit Conversion Factor ; CCF) if an institution can terminate unconditionally at any time without notice or if the creditworthiness of the Borrower automatically leads to a loan termination. The Capital Adequacy Ordinance is imprecise in this regard, because a substantial deterioration ( English material adverse change ) - and not just a deterioration - is required under banking law . Loan commitments must contain in their loan conditions a right of withdrawal that can be enforced without restriction and without notice at any time or a covenant in which a deterioration in creditworthiness of the borrower automatically leads to termination.

According to Art. 4 Para. 1 No. 56 CRR, the conversion factor is the “ratio between the currently unused amount of a commitment that could be drawn and would therefore be outstanding if it defaulted, and the currently unused amount of this commitment ". This legal definition is poorly worded because it contains the phrase "currently undrawn amount" twice. Rather, the formula for the conversion factor is : ${\displaystyle CCF}$

${\displaystyle {CCF}={\frac {K_{L}}{K_{A}}}}$.

The entire credit line is the unused credit line and the used credit line
${\displaystyle K_{G}}$
${\displaystyle K_{L}}$
${\displaystyle K_{A}}$

Treatment of undrawn loan commitments

Original maturity	Credit conversion factor (CCF) with right of termination	Credit conversion factor (CCF) with no right of termination
${\displaystyle \leq }$ 1 year	0%	20%
${\displaystyle >}$ 1 year	0%	50%

The amount of the CCF therefore depends on both the loan term and the right of termination. Partly drawn down loan commitments with a term of more than one year ( ) that do not have the right to terminate are taken into account to determine the default loan amount ( ) as follows: ${\displaystyle K_{A}}$ ${\displaystyle EaD}$

${\displaystyle EaD=K_{A}\cdot 100\,\%+K_{L}\cdot 50\,\%}$.

The utilized part of the credit line is therefore taken into account at 100% and the unused part at 50% in the EaD. If there are termination rights, the CCF is 0% regardless of the term. While the conversion factor for balance sheet assets is always 100%, it can be between 0% and 100% for off-balance sheet transactions.

Millions and large loans

For the purposes of loans in the millions , section 19 (1) sentence 3 no. 13 KWG counts the not yet drawn loan commitments as notifiable loans. Unused loan commitments can only be offset against large loans at 50% of the loan amount ( Section 1 No. 6b GroMiKV ).

Loan approvals in banking practice

The typical case of a loan commitment is the undrawn credit line , such as individuals , a overdraft facility . Here, the bank provides the customer with a loan that the customer can call up immediately or at a later date as he or she chooses. In the case of real estate financing , the borrower receives a written credit approval (approval, credit notice) with the credit agreement , the acknowledgment of debt and the general terms and conditions from the credit institution after its creditworthiness and the lendability of the pledged property has been checked on the basis of the credit documents . The loan agreement contains a detailed description of the loan terms . Since the bank bears an interest rate risk here , it usually declares that it only feels bound to its offer for a certain period of time (14 days are usual). If the customer does not accept the offer within this period, the credit approval expires. This letter is an irrevocable loan approval because the bank customer can accept within the offer period. In the corporate customer sector , it is common for the company to agree a maximum amount of the loans to be drawn with the bank. This credit approval can be used in various forms of credit (e.g. as a current account credit , stand-by credit or letter of credit ).

During the subprime crisis that began in May 2007, many American special-purpose vehicles had to take advantage of the stand-by loans available to them in order to be able to continue servicing securitization papers in circulation such as collateralized debt obligations or collateralized bond obligations , or to be able to pay third-party creditors stay. This drove some of the originator banks to the verge of bankruptcy . Such loan commitments with guarantee rank ( IAS 37.23) only had to be shown as provisions in the bank balance sheet if a predominant probability (> 50%) of utilization was to be expected. However, since the stand-by lines of the originator were mostly not used by the special purpose vehicle until the start of the subprime crisis, no provisions had to be set up; the lines were only in the notes or the management report . That is still the law today.

Accounting

The balance sheet in the bank balance sheet includes all irrevocable loan commitments that have not yet been drawn on, regardless of their term, including those with an original term of one year or less. Irrevocable loan commitments involve a potential counterparty risk . Under accounting law, these are all commitments that oblige credit institutions to pay out loans, provide guarantee credits or acquire securities , such as placement and takeover obligations . According to § § 251 , § 267 Abs. 4 HGB they are to be noted "below the balance line" on the liabilities side of the balance sheet . The balance sheet item U2c “irrevocable loan commitments” includes all irrevocable obligations that represent the beginning of a credit risk. According to Section 27, Paragraph 2, Clause 1 of the Financial Institutions Accounting Ordinance (RechKredV), all irrevocable obligations that may give rise to a credit risk must be noted. In § 36 sentence 2 no. 2 RechKredV is regulated in the Annex to acquiring list of irrevocable commitments. Irrevocable loan commitments (liquidity commitments) are excluded from the scope of IAS 39 in accordance with IAS 39.2h, but must be checked in accordance with IAS 37 for the formation of a provision or contingent liability . Since the irrevocable loan commitments belong to the contingent liabilities, they are taken into account in the business volume of the credit institutions.

Independent law

The borrower's fulfillment of the disbursement requirements of an irrevocable loan commitment triggers a disbursement claim by the borrower, so that the bank is obliged to pay out. Corresponding to the lender's payment obligation, the borrower has a claim to payment that can be assigned , pledged or pledged independently ( Section 398 ff. BGB). This temporary claim is about in interim financing used, in which between financing banks can assign the claim for payment against the Endfinanzierer. The seizure covers the payment claim as such and not just the claim to the temporary use of the capital. The borrower has the right to disbursement as long as he does not use the approved loan in whole or in part.

See also

• Loan application
• Consumer Credit Act

Individual evidence

1. ↑ Kai-Oliver Knops, Handbook on German and European Banking Law , 2009, p. 701
2. ↑ Paul Scharpf / Armin Sohler, Guide to the Annual Financial Statements according to the Bank Accounting Guidelines Act , 1992, p. 193
3. ↑ Hartmut Bieg, bank accounting according to HGB and IFRS , 2011, p. 302
4. ^ Federal Association of German Banks V., Bank Accounting Directive Law: Working materials for the application of the Bank Accounting Directive Law and Accounting Ordinance , 1993, p. 67 f.
5. ↑ BaFin, Explanatory Notes on the Announcement on the Amendment and Supplement to the Principles on Own Funds and Liquidity of Institutions of November 25, 1998
6. ↑ Knut Henkel, Accounting for Treasury Instruments according to IAS / IFRS and HGB , 2010, p. 102
7. ↑ BGHZ 147, 193 , 196