German states pressing for repeal of restrictive credit directives

We have reported extensively in these pages over the past few months on the so-called Wohnimmobilien-Kreditrichtlinie, or the credit-lending directives issued ultimately by the EU in Brussels, but translated into a particularly harsh form in Germany. The directives came into effect in March of this year.

In effect, the directive has led to a dramatic shrinking of the amount of lending for residential property investment by German banks, for whom the onus of verifying customers' ability to repay has been increased to what many believe are ridiculous levels. The Sparkassen (savings banks) have been outspoken in their resistance to the measure, claiming their lending has plunged as a result.

The Bundesbank has now for the first time confirmed the noticeable effect the measure has been having on lending, at least from the smaller banks,with particularly young families and elderly people being disproportionately affected. In Baden-Württemberg the amount of mortgage lending by the state's Sparkassen has shrunk by 11% since April, and the national association of Sparkassen DSGV says its 408 members claim their lending is down 8.9% over the first six months. The refusal rate for credit applications has risen by up to 25% it claims.

Now Baden-Württemberg, together with Hesse and neighbouring Bavaria, is pressing for a repeal, or at least reform of the new measures. They have posted a bill to urgently debate the situation in the Bundesrat, the Upper House, and may shortly be joined by other Länder interests.

In a nutshell, the new European directives on consumer mortgage lending place a far greater onus on the lending institution to verify the ability of their borrowers to pay over the lifetime of the mortgage – in effect, subjecting them to 'stress tests' way beyond their current life circumstances. More weight is to be given to the degree of advice given to the potential borrower and that borrower's credit risk, rather than to the underlying value of the property to be financed.

Factors such as the borrowers' age and current earning power are to now take greater precedence over the property to be financed than in the past. The accompanying scrutiny of a candidate's credentials now requires far more administration and background verification than previously – along with the threat of draconian penalties for bank advisers for cases which could be construed as "mis-selling" or providing inappropriate advice.

Young couples planning children are obviously falling foul of such scrutiny, as are elderly people for whom there can be no guarantee that they will be around for the full duration of the loan. The three states at the forefront of attempts to roll back the harsher aspects of the directives want to at the very least, amend the proviso for lending to include that the loan applicant will 'probably' be in a position to repay the loan. Extension loan financing should also not be subject to the same scrutiny, they insist, as this can cause great disruption particularly for elderly people investing in the upgrading of the quality of their homes.