The European Court Resolves Debate on Consumer Rights in Germany but Questions Remain

In this commentary, “The European Court Resolves Debate on Consumer Rights in Germany but Questions Remain”, we summarise and analyse the impact of the European Court of Justice ruling against the German Supreme Court (the Ruling), which introduces revocation risk allowing consumer borrowers to withdraw at any time. The actual impact on structured finance transactions remains uncertain and will only become clear over time with the establishment of practices that apply the principles of the Ruling.

Summary highlights include:
-- On 9 September 2021, the ECJ reinstated and strengthened consumer rights regarding revocation of loan contracts, de facto introducing additional risks in German structured finance transactions.
-- The Ruling suggests that the borrower is required to pay for the benefits received and the use of an asset that may be purchased in connection with the loan and that the lender should not suffer a loss due to the exercise of the cancellation.
-- Most questions cannot be answered at this stage, but the general principles of the Ruling seems to suggest that borrowers would not perceive any real advantage from exercising the option.

“Initial observations seem to reinforce our current view that the Ruling is unlikely to result in any significant financial liability for the existing securitisations”, said Paolo Conti, Head of European ABS at DBRS Morningstar. “We will continue to closely monitor the developments in accordance with our methodologies”, he added.