Fitch:ABS Set-Off Risk From German Handling Fee Ruling Mitigated

Wed May 14, 2014 11:56am EDT

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(The following statement was released by the rating agency) LONDON, May 14 (Fitch) Fitch:ABS Set-Off Risk from German Handling Fee Ruling Mitigated The ruling by Germany's Federal Court of Justice that credit handling fees for consumer loans are invalid may increase set-off risk in German consumer ABS transactions, Fitch Ratings says. We do not expect any ratings impact however. This is because of mitigants in Fitch-rated transactions as well as actions taken by originators to reduce exposure. The ruling removes legal uncertainty about the validity of handling fees by confirming several Higher Regional Court rulings that such fees were invalid. It was widely expected by the market. Our ratings already take into account the risk created by these earlier rulings that borrowers will try to recover their money by deducting the paid handling fees from loan repayments. Mitigants in recent transactions include set-off reserves that are equal to handling fee exposure at closing and then regularly recalculated as loans are paid off, or structuring deals with sufficient credit enhancement to cover potential set-off losses, as incorporated into our cash flow models. We have also assessed more qualitative factors, such as whether originators are obliged to repurchase receivables whenever set-off risk arises, and whether this provision applies to set-off risk from handling fees. Originators have also taken the earlier rulings into account in their dealings with borrowers. Most originators of Fitch-rated German consumer ABS transactions no longer charge handling fees, and several have returned fees on consumer demand, without legal proceedings, reducing potential set-off exposure in some transactions. Strong transaction performance and quick portfolio amortisation have increased credit enhancement in older transactions to levels where additional potential set-off risks are covered. Nevertheless, exposure remains significant in some portfolios, and can increase over time as a proportion of the outstanding portfolio amount as the handling fees do not amortise. We expect an increase in claims by borrowers seeking to recover handling fees, due to the widespread media coverage of the judgement, and the willingness of consumer protection associations to support individual claims that require legal proceedings. As many originators reimburse fees to customers upon request, increased media coverage may well lead to a reduction of the exposure in outstanding transactions. The Federal Court judgement is broad, ruling that handling fees are invalid both as part of a lender's general terms and conditions and its general business practice. But it is unclear for how long customers would have a right to bring claims. Contact: Christian Ganthaler Associate Director Structured Finance +49 69 76 8076 260 Fitch Ratings Deutschland GmbH Taunusanlage 17 D-60325 Frankfurt am Main Traycho Nikolov Director Structured Finance +49 69 768076 150 Mark Brown Senior Director Fitch Wire +44 20 3530 1588 Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: christian.giesen@fitchratings.com; Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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