For companies and private households alike, Covid-19 has thrown financial planning into chaos. Declining revenue, reduced working hours, and other circumstances, can be the cause for financial difficulties. An existing loan that must be serviced can make it even harder. Banks are often not supportive in such situations, in fact, on the contrary. In a specific case, the bank terminated the loan of a client without notice and made it due, even though the loan instalments were paid properly.

The bank justified the termination of the loan agreement without notice with the reason that the borrower’s debt service capacity was no longer guaranteed due to lack of evidence thereof.

Debt service capacity is understood to mean the ability of a borrower to service a loan sustainably at the time and in the future to be able to provide all necessary interest and repayment payments. In this specific case, the bank no longer considered this capacity as apparent. The borrower did not show that the borrower had sufficient income to properly service the existing loan. Therefore, the bank proceeded with the termination of the real estate loan without notice and made the outstanding loan amount of around € 230.000 due. The borrower was notified to repay the amount within four weeks.

If the amount is not repaid on time, a credit bureau entry and foreclosure are the potential consequences. With a credit bureau entry, a restructuring of the loan will be difficult and hardly possible, increasing the threat of foreclosure of the property. Borrowers should therefore ask for a check whether the termination of a loan agreement by the bank is actually lawful. In many cases, is does not stand up to judicial review.

Banks are obliged to check a potential borrower’s debt service ability in the context of lending. According to § 18 KWG (German Banking Act), a loan may only be granted after disclosure of the economic circumstances. To protect against money laundering, banks must also check from which sources borrowers derive their income. However, often banks’ detailed audits seem arbitrary. Therefore, borrowers have good prospects of defending themselves against a loan termination without notice due to lack of debt service capacity.

The content of this article is valid as at the date of its first publication. It is intended to provide a general guide to the subject matter and does not constitute legal advice. We recommend that you seek professional advice on your specific matter before acting on any information provided. For further information or advice, please contact Benjamin Hasan, Partner at the Frankfurt office, via telephone at +49 69 247 428 444 or by email at benjamin.hasan@kyprianou.com