Federal Court of Justice finds administrative fee clauses in consumer loan agreements to be invalid
In two landmark decisions passed on 13 May 2014, the German Federal Court of Justice (the BGH) decided that standard clauses in consumer loan agreements which stipulate an administration fee to be paid by the customer are invalid under German law.
In the first case,1 a consumer protection association had filed for an injunction against a bank concerning the use of a standard clause in the General Terms and Conditions of the bank which provided for a non-recurring "administration fee" of 1% of the loan amount of any consumer loan. In the second case,2 several consumers had sued a bank for repayment of the administration fee on the grounds of unjust enrichment.
Rejecting the banks' arguments, the court's senate for banking litigation categorised administration fee clauses as standard terms which are subject to judicial scrutiny, even if the amount of the administration fee may vary and is calculated from case to case, since the underlying clause is intended for recurring use in all consumer loan agreements. Further, contrary to some previous decisions of lower courts, the court has held that administration fee clauses are subject to the strict fairness test pursuant to the German provisions implementing the Directive 93/13/EEC on unfair standard terms in consumer contracts. The banks had argued that the clauses were exempt from judicial scrutiny on the grounds of being "price clauses" which regulate the price to be paid for the bank's services. However, in the court's view, they are considered ancillary clauses stipulating an additional fee, and not the main consideration under the loan agreement, which would be the interest.
Applying the strict fairness test, the court found that non-recurring administration fee clauses unreasonably disadvantage the customer contrary to the requirement of good faith and are, consequently, considered unfair and invalid. According to the court, such clauses deviate from the underlying concept of a loan agreement under German law since they shift the overhead costs for administrative services rendered by the bank to the customer, while the law assumes that these costs should be borne by the bank, having its own interest, or even a contractual or legal obligation, to carry them out.
The decisions put an end to a highly controversial discussion about the validity of administration fee clauses in consumer loans in Germany in previous years. Deviating from earlier precedents, more and more regional courts had considered such clauses invalid.
The practical impact of the court's judgment is expected to be considerable. Banks that have in the past extended loans to consumers – in particular, but not limited to, loans connected to the purchase of consumer goods – are likely to be faced with substantial claims for repayment of administration fees. Thousands of claims have been reported even before the recent judgments. The German press is now expecting a massive wave of consumer claims and calculates the total amount of reclaims to be billions of Euros.
Those claims are, to a certain extent, limited by the statute of limitation – German law generally provides an absolute statute of limitation of ten years from the time the claim arose, as well as a relative statute of limitation of three years which requires knowledge on the claimant's side. The BGH is expected to rule on this question in two separate proceedings currently pending. In any case, the assessment as to whether or not consumer claims for repayment are time-barred depends on a number of factual circumstances and must be decided on a case-by-case basis.
In both decisions, the written reasoning of the judgment has not yet been published. It remains to be seen whether the court has in its written decisions clarified remaining open issues, such as: the amount of interest customers can claim in addition to the repayment of the administration fee; whether they have a claim against the bank to disburse the part of the loan amount that corresponds to the administration fee as a cash loan; or possible effects of the invalidity of fee clauses on the loan agreement and its enforceability in general.
1. File No XI ZR 405/12.
2. File No XI ZR 170/13.