1.

Under Article 25 of Directive 2014/17/EU, ( 2 ) consumers have the right to discharge fully or partially their obligations under a credit agreement relating to residential immovable property before that agreement expires.

2.

To date, the Court of Justice has ruled on the extent of the reduction (in favour of the consumer) in the total cost of the credit, associated with the early discharge of the consumer’s obligations. ( 3 )

3.

This reference for a preliminary ruling affords the Court the opportunity to address for the first time (unless I am mistaken) the other side of the equation: the creditor’s right to receive ‘fair and objective compensation, where justified’ for possible costs directly linked to early repayment of the credit.

4.

Recital 66 reads as follows:

‘A consumer’s ability to repay the credit prior to the expiry of the credit agreement may play an important role in promoting competition in the internal market and the free movement of Union citizens as well as helping to provide the flexibility during the lifetime of the credit agreement needed to promote financial stability in line with the recommendations of the Financial Stability Board. … Member States should therefore ensure, whether through law or other means such as contractual clauses, that consumers have a right to early repayment. … The conditions set by Member States may provide that the creditor is entitled to fair and objectively justified compensation for potential costs directly linked to early repayment of the credit. In the event where Member States provide that the creditor is entitled to compensation such compensation should be a fair and objectively justified compensation for potential costs directly linked to early repayment of the credit in accordance with the national rules on compensation. The compensation should not exceed the financial loss of the creditor.’

5.

Under Article 25:

‘1.   Member States shall ensure that the consumer has a right to discharge fully or partially his obligations under a credit agreement prior to the expiry of that agreement. In such cases, the consumer shall be entitled to a reduction in the total cost of the credit to the consumer, such reduction consisting of the interest and the costs for the remaining duration of the contract.

2.   Member States may provide that the exercise of the right referred to in paragraph 1 is subject to certain conditions. Such conditions may include time limitations on the exercise of the right, a different treatment depending on the type of the borrowing rate or on the moment the consumer exercises the right, or restrictions with regard to the circumstances under which the right may be exercised.

3.   Member States may provide that the creditor is entitled to fair and objective compensation, where justified, for possible costs directly linked to the early repayment but shall not impose a sanction on the consumer. In that regard, the compensation shall not exceed the financial loss of the creditor. Subject to those conditions Member States may provide that the compensation may not exceed a certain level or be allowed only for a certain period of time.

4.   Where a consumer seeks to discharge his obligations under a credit agreement prior to the expiry of the agreement, the creditor shall provide the consumer without delay after receipt of the request, on paper or on another durable medium, with the information necessary to consider that option. That information shall at least quantify the implications for the consumer of discharging his obligations prior to the expiry of the credit agreement and clearly set out any assumptions used. Any assumptions used shall be reasonable and justifiable.

5.   Where the early repayment falls within a period for which the borrowing rate is fixed Member States may provide that the exercise of the right referred to in paragraph 1 is subject to the existence of a legitimate interest on the part of the consumer.’

6.

Several provisions of the Bürgerliches Gesetzbuch (German Civil Code; ‘the BGB’) are relevant to the present case, in particular, Paragraph 252 (‘Loss of profit’); subparagraph 2 of Paragraph 490 (‘Extraordinary right to terminate the agreement’); subparagraph 2 of Paragraph 500 (‘Borrower’s right to termination; early repayment’); Paragraph 502 (‘Compensation for early repayment’); and Paragraph 812 (‘Right to restitution’).

7.

On 11 January 2019, MW and CY concluded a mortgage loan agreement with VR Bank Ravensburg-Weingarten eG (‘VR Bank’) for the outright purchase of residential property. They agreed on a fixed loan rate until 30 January 2029.

8.

Under the agreement, the borrower could only discharge his or her obligations early during the term of the fixed rate if he or she could demonstrate a legitimate interest.

9.

The agreement included the following clauses:

10.

On 19 May 2020, MW and CY sold the property (which they had acquired the year before) ( 5 ) and terminated the loan agreement with effect from 30 June 2020.

11.

On 9 June 2020, VR Bank claimed compensation from MW and CY in respect of loss resulting from early repayment of the loan, which they paid.

12.

On 19 April 2021, MW and CY called on VR Bank to return the compensation for early repayment. They have made the same claim in the action pending before the referring court.

13.

In the applicants’ view, VR Bank was not entitled to compensation because the loan agreement did not provide sufficient information on how compensation was to be calculated. They also submit that, under Directive 2014/17, compensation can only cover costs actually incurred, not loss of interest or loss of profit sustained by the creditor. Furthermore, they maintain that a hypothetical calculation based on formulae deriving from financial mathematics is not permissible.

14.

VR Bank contested the action and put forward the following arguments:

15.

In those circumstances, the Landgericht Ravensburg (Regional Court, Ravensburg, Germany) has referred the following questions to the Court of Justice for a preliminary ruling:

16.

The request for a preliminary ruling was received at the Court on 10 August 2022.

17.

Written observations were submitted by VR Bank, the German Government and the European Commission. It was not considered necessary to hold a hearing.

18.

Directive 2014/17 lays down ‘a common framework for certain aspects of the laws, regulations and administrative provisions of the Member States concerning agreements covering credit for consumers secured by a mortgage or otherwise relating to residential immovable property’. ( 6 )

19.

With a few exceptions, the harmonisation carried out by Directive 2014/17 is minimal. As regards its material scope:

20.

Under the heading ‘Early repayment’, Article 25 of Directive 2014/17 ensures that consumers have the right to discharge their contractual obligations before the end of the stipulated period. However, that right is neither unconditional nor without its drawbacks: those include the possibility of having to compensate the creditor for potential costs directly incurred as a result of early repayment of the credit.

21.

Member States are required to establish the consumer’s entitlement to the early repayment of credit relating to residential immovable property, with the attendant reduction (in the consumer’s favour) in the total cost of the credit. Directive 2014/17 lists the items to which that reduction applies.

22.

By contrast, Directive 2014/17 does not, in itself, ensure that creditors have the right to compensation for loss sustained as a result of early repayment. The directive merely allows each national legislature to introduce and regulate that right, laying down the conditions governing it. ( 8 ) However, if compensation is permitted under national law, it must satisfy certain minimum requirements set by Directive 2014/17.

23.

The referring court enquires whether fair and objective compensation for possible costs directly linked to early repayment also covers the creditor’s loss of profit. ( 9 ) It includes within that concept, in particular, interest which the creditor expected to be paid in the future but which it will no longer receive. ( 10 )

24.

In my view, since Directive 2014/17 does not preclude that interest being taken into account when calculating the compensation payable, the first question referred for a preliminary ruling must be answered in the affirmative. In the considerations set out below, I will, to that end, interpret Article 25(3) of that directive in accordance with the usual criteria.

25.

At first sight, Article 25(3) ( 11 ) might give rise to some doubts:

26.

However, I do not think that a literal interpretation of Article 25(3) of Directive 2014/17 militates against my proposed approach.

27.

The concept of ‘costs’ used in that directive ( 13 ) is not a precise one and its content is not unambiguous. ( 14 ) On its face, it treats interest as ‘costs’, for example in Article 14 on pre-contractual information. ( 15 )

28.

Furthermore, since ‘costs’ are part of the ‘total cost of the credit’ to the consumer in Article 25(1) of Directive 2014/17 and, therefore, the ‘costs’ to be borne by him or her, ( 16 )‘interest’ also constitutes ‘costs’ within the meaning of ‘total cost of the credit’. ( 17 )

29.

Article 25(3) of Directive 2014/17 further states that compensation ‘shall not exceed the financial loss of the creditor’. ( 18 ) It thus suggests that the loss of future interest should be viewed as a cost which falls (or could fall, as the case may be) on the creditor as a result of repayment being brought forward, and is compensatable if the national legislature so decides.

30.

The use of the words ‘possible costs’ also does not prevent loss of profit from being regarded as part of the compensation payable to the creditor. The creditor no longer receives the agreed interest (that is to say, interest which, under the agreement, would have accrued over the entire contractual period) as a result of early repayment of the credit. That is precisely why loss of interest may be classified as a financial consequence directly linked to repayment.

31.

From that point of view, the assertion that interest is inevitably, not just possibly, lost is, in general terms, correct. However, the situation may arise whereby a variable-rate loan ceases to accrue interest before and independently of repayment (in certain market conditions). ( 19 )

32.

It may also transpire that, in practice, early repayment of the capital does not result in loss to the creditor in respect of interest it will not receive, if the creditor reinvests the amount in question and the interest rate applicable after reinvestment is to its benefit. In those circumstances, it is not certain ex ante whether or not the loss will materialise.

33.

Other references in Article 25 of Directive 2014/17 confirm that it is correct to classify interest which will no longer be received as an integral part of the compensation payable to creditors, since such compensation is not limited to mere management costs:

34.

Lastly, Section 9 (‘Early repayment’) of Part B in Annexe II to the European Standardised Information Sheet (ESIS) contained in Directive 2014/17, concerning the information to be contained in that sheet, states that ‘When the amount of compensation would depend on different factors, such as … the prevailing interest rate at the moment of the early repayment’. It thus underscores that interest which will no longer be received is one of the elements that may be taken into account when calculating compensation.

35.

In the course of examining the preparatory documents relating to Directive 2014/17, I did not find any references to compensation for early repayment aimed at harmonising its calculation or the eligible heads of compensation. There are, however, indications that consideration was given to the possibility of including the creditor’s loss of profit in that compensation.

36.

In its report on the Commission’s proposal, the European Parliament suggested that, when setting the amount of compensation, account should be taken not only of the creditor’s costs, but also of any savings made by the creditor as a result of repayment. ( 21 ) In the enacting terms, it also limited the maximum amount of compensation to the economic loss incurred by the creditor. ( 22 )

37.

In some documents of the Council of the European Union, compensation is envisaged as separate from ‘other additional costs’, such as administrative costs or the costs of closing the file. ( 23 )

38.

Furthermore, in addition to the possibility for Member States to lay down rules governing early repayment with compensation to the creditor for the associated costs, the Council made provision for reimbursement without charge (‘free of charge for the consumer’), citing variable-rate loans as an example. ( 24 ) That provision seems to me to be indicative of the fact that, for the Council, compensation could cover the interest which would no longer be received following early repayment.

39.

As I have indicated, Directive 2014/17 does not, in itself, confer on creditors a right to receive compensation for early repayment of the credit. The decision whether or not to establish that right is a matter for each national legislature, which must, however, respect the purpose of Article 25 of that directive.

40.

A national system which takes account of the creditor’s loss of profit when calculating compensation for early repayment may, in my view, be consistent with that purpose.

41.

In its judgment in UniCredit Bank Austria, the Court, after linking the right to early repayment to Article 1 of Directive 2014/17, read together with recital 15 thereof, recalled that that directive seeks to ensure that agreements covering credit for consumers secured by a mortgage or other credit relating to immovable property for residential use ‘enjoy a high level of protection’. ( 25 )

42.

It has been argued that excluding the creditor’s loss of profit from the compensable costs would be the approach that best protects the consumer (since it removes obstacles to the exercise of his or her right to early repayment). ( 26 ) From that point of view, the reduction in interest and costs entailed by the right to reimbursement under Article 25(1) of Directive 2014/17 would prevent compensation from covering future interest which will no longer be received. ( 27 )

43.

In line with that approach, assimilating the creditor’s loss of profit to the return it would have received if the agreement had remained in force would remove part of the appeal of the right to early repayment, namely to make savings, and would undermine the purpose of that right. Without specific justification or some kind of limitation, such assimilation would not be compatible with Directive 2014/17.

44.

However, I do not think that that is the position which results from Directive 2014/17. At the same time as imposing the right to early repayment (which, as such, is non-derogable), it allowed each Member State to incorporate that right into its legal system in a way which preserved the particularities of that system and took account of the specific features of its credit market relating to immoveable property. ( 28 )

45.

Where, in availing itself of that possibility, a Member State confers on creditors the right to compensation, it is required to comply with certain minimum conditions, ( 29 ) but nothing prevents it from taking into account the creditor’s loss of profit for the purposes of calculating the compensation payable.

46.

Directive 2014/17 does not define what is meant by ‘fair’ compensation, ( 30 ) which must be given a uniform interpretation and denotes the ‘why and wherefore’ of the compensation as well as its ‘quantum’. As in other areas of EU law, ( 31 ) the term ‘fair’, applied to compensation for early repayment of the credit, refers both to reparation of the damage sustained by a party and to the balance between the opposing interests of the consumer and the creditor:

47.

In that context, including loss of profit as one of the heads of compensation may further the objectives of Directive 2014/17, which are not limited only to ensuring a high level of consumer protection. Another of its stated objectives is to create an efficient and competitive internal market in credit agreements relating to residential immovable property, ( 33 ) against the backdrop of financial stability concerns. ( 34 ) According to recital 66 of that directive, the right to early repayment is an instrument which furthers those objectives. ( 35 )

48.

Where the right to compensation has been recognised in a Member State, as explained above, Directive 2014/17 leaves that Member State ample leeway to regulate its exercise. It thus allows the Member State to take account of the specific features of its credit market, without clashing with the objectives of that directive.

49.

Whether or not to provide for compensation in favour of the creditor in the event of early repayment and, if so, to what extent, is a decision which may, depending on the circumstances, have significant consequences. In the field of credit agreements relating to immoveable property, primarily of a domestic nature, those consequences would first of all be visited on the local market and the local economy, but their capacity for contagion at higher levels cannot be ruled out.

50.

A scheme which does not allow creditors to be compensated for the loss of interest they expected to receive may impel them to implement strategies with a potentially undesirable impact on the objectives of Directive 2014/17, ( 36 ) for instance, limiting the range of credit products on offer or charging higher interest to consumers across the board. ( 37 )

51.

Where Article 25(3) of Directive 2014/17 entrusts Member States with the decision whether or not to introduce compensation, it does not limit that compensation at the outset to repayment processing costs or to other associated administrative costs. The national legislature thus enjoys a broad discretion, with the result that it is free to ensure that compensation covers the creditor’s loss of profit if it considers it necessary to do so in order ultimately to further the objectives of Directive 2014/17 in its own residential property market.

52.

In the recitals, Directive 2014/17 recalls the need for interpretations that are consistent with and complementary to other EU acts, in particular Directive 2008/48. ( 38 ) Although it also points to the limits on the criterion of systematic interpretation, none of them concerns the right to early repayment. ( 39 )

53.

Directive 2008/48 acknowledges (recital 39) the difference between consumer credit and ‘other products which are financed by long-term funding mechanisms, such as fixed-rate mortgage loans’. It is precisely because the latter long-term financing model is not commonplace in consumer credit that the maximum compensation due to the creditor in the event of early repayment of that credit must, as a rule, be set on a flat-rate basis.

54.

In Directive 2008/48, the exception to that rule confirms that interest which will no longer be received following early repayment is (or may be) compensable:

55.

If that is the case under Directive 2008/48, it may a fortiori also be the case as regards credit relating to immoveable property (secured by a mortgage or equivalent security) for the purpose of interpreting Article 25 of Directive 2014/17. ( 41 ) This therefore confirms that financial loss in the form of interest may be included in the potential costs linked to early repayment of the credit, in accordance with the national rules on compensation.

56.

In short, my view is that there is nothing to prevent the legislation of a Member State from providing that compensation under Article 25(3) of Directive 2014/17 should take into account damage linked to the loss of interest which, as a result of early repayment, will no longer accrue.

57.

If (as I suggest) the first question is answered in the affirmative, the referring court enquires whether Article 25(3) of Directive 2014/17 contains ‘guidelines for the calculation of the income which the creditor receives from its reinvestment of a consumer loan relating to immovable property which has been repaid early – income to be taken into account in the context of loss of profit’.

58.

Directive 2014/17 does not refer to a specific way of calculating the compensation payable to the creditor. ( 42 ) The method of calculation (like other aspects of compensation, subject to only a few conditions to which I have already referred and which I will repeat here) is left to the discretion of the Member States.

59.

That is confirmed by recital 66 of Directive 2014/17, which states that compensation must be set ‘in accordance with the national rules’.

60.

For the purposes of establishing the compensation, Directive 2014/17 neither requires account to be taken of the way in which the creditor actually uses the amount repaid early ( 43 ) or of any other similar method, nor prohibits such account from being taken, which are matters for each Member State.

61.

The constraints imposed by Directive 2014/17 as regards compensation are limited to ensuring that it does not penalise the consumer or exceed the creditor’s financial loss, and that it is ‘fair’ ( 44 ) and ‘objective’.

62.

The requirement that compensation be ‘objective’ refers to an abstract and predetermined method of calculation, the parameters of which cannot be defined as one of the parties sees fit. That method must, moreover, serve to identify cases in which compensation is not warranted. ( 45 ) However, provided that those features are respected, calculating the compensation payable using a method incorporating a hypothetical element may, in my view, be an option which is consistent with Directive 2014/17.

63.

According to the description set out in the order for reference, which refers to national case-law, ( 46 ) in the asset/liability method the financial loss sustained by the creditor is the difference between two amounts:

64.

For the purposes of that calculation, it is not necessary for the reinvestment as such to have been made. The benchmark is set by assessing the return on an investment with the same maturity. ( 47 )

65.

The amount of the difference must also be reduced by the risk costs and administrative costs which were avoided as of the date of payment of the compensation for early repayment. It is also updated having regard to that date of payment.

66.

Under that method:

67.

Like all the parties which participated in the preliminary ruling proceedings, and subject to the referring court’s final assessment on that point, I consider that the ‘asset/liability’ method meets the minimum conditions for compensation required by Directive 2014/17.

68.

What is more, that method is similar to the method used by Directive 2008/48, in Article 16(4) in fine, to calculate the creditor’s actual financial loss, where Member States have made exceptional provision to derogate from the flat-rate maximum rule (Article 16(2)).

69.

Like the ‘asset/liability’ method, the calculation of compensation payable to the creditor under Directive 2008/48 on consumer credit incorporates an element of hypothetical (and not necessarily actual) reinvestment of the amount repaid. ( 48 ) The fact that such an element is permitted in the field of consumer credit also enables it to be used in relation to credit secured by a mortgage or equivalent security.

70.

The referring court enquires whether Article 25 of Directive 2014/17 applies in circumstances such as those of the present case, in which the consumer, before repaying the credit, terminates the agreement on the basis of a right of termination conferred on him or her by national law.

71.

The question arises in relation to German law, which envisages two scenarios of early repayment of credit in connection with fixed-interest loans:

72.

The consequences of applying one rule or the other differ as regards the compensation payable to the creditor:

73.

The existence of divergent academic opinions leads the referring court to express doubts as to whether Article 25 of Directive 2014/17 also applies to repayment of the loan following a contractual termination governed by Paragraph 490(2) of the BGB.

74.

The referring court takes the view that ‘there is good reason to assume that Article 25 of Directive 2014/17 is also applicable where the consumer terminates the … agreement … in accordance with Paragraph 490(2) of the BGB before repaying the loan early’.

75.

Otherwise, ‘many consumers would not benefit from their right to early repayment … If the compensation for early repayment in the case where the right of early termination under Paragraph 490(2) of the BGB is exercised were calculated differently than in the context of … Paragraphs 500 and 502 of the BGB, the result would be that a consumer who terminates his or her loan early might be worse off than a consumer who exercises his or her right of early repayment without terminating the loan’.

76.

The referring court summarises the situation thus: ‘due to the objective of consumer protection pursued by that right, it would therefore appear necessary for Article 25 of Directive 2014/17 also to apply in the case where termination is declared before the loan is repaid’.

77.

I share the referring court’s view on the applicability of Article 25 of Directive 2014/17. However, I have reservations about some of the reasoning on which it is based.

78.

In the abstract, the question is whether each Member State may configure the lender’s right to compensation differently, ( 52 ) depending on whether or not it links compensation to the exercise of an extraordinary right enjoyed by the consumer to terminate the contract.

79.

In my view, an affirmative answer to that specific question cannot be ruled out. In other words, arguments to the effect that a consumer might end up ‘worse off’ ( 53 ) than another for having chosen one of the options open to him or her under national law over another do not seem to me to be sufficient to curtail the regulatory freedom enjoyed by Member States.

80.

What is required, in all cases, is that each option available under national law complies with Article 25 of Directive 2014/17, in addition to the general provision set out in Article 2 thereof.

81.

It follows from the foregoing that the question whether or not the principles governing compensation in the context of Paragraph 490(2) of the BGB (which allow the creditor’s loss of profit to be included) are required to comply with Article 25(3) of Directive 2014/17 must be answered in the affirmative. ( 54 )

82.

Article 25 of Directive 2014/17 grants consumers the right to discharge their obligations, in whole or in part, without having to wait until they fall due. That provision is silent as to the detailed rules for the exercise of that right: it may be exercised as a purely material act of repayment or pursuant to a power to terminate the loan agreement.

83.

The protection which Directive 2014/17 affords to consumers must always exist, irrespective of which of the abovementioned two options they choose in order to exercise the right to discharge their obligations early. Regardless of the rules which a Member State may lay down in making use of the freedom conferred on it by Directive 2014/17, its discretion is subject to the conditions laid down in Article 25(3) of that directive. Those conditions therefore apply whether or not early repayment follows termination of the agreement.

84.

In my view, the reference in Article 25(1) and (4) of Directive 2014/17 to the right to repayment ‘prior to the expiry’ of the agreement does not lend support to the argument put forward by VR Bank. ( 55 ) Article 25 of Directive 2014/17 does not seek to impose temporal restrictions on the exercise of the consumer’s right to discharge his or her obligations early. Rather, it serves to underline that that right trumps the usual rules governing private contracts, under which both parties are required to perform their obligations and to do so on the agreed terms (including temporal terms).

85.

In the light of the foregoing, I propose that the Court of Justice give the following answer to the Landgericht Ravensburg (Regional Court, Ravensburg, Germany):

Article 25(3) of Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010

must be interpreted as meaning that:

– it does not preclude national legislation which, in order to determine the compensation payable to the creditor, takes into account damage linked to the loss of interest which, as a result of early repayment of the credit by the consumer, will no longer accrue;

– it does not preclude a method of calculating the compensation payable to the creditor for early repayment of the credit which is based on the notional reinvestment of the amount repaid in safe capital market securities with maturities corresponding to the term of the loan;

– it applies where the consumer exercises his or her right to discharge his or her obligations early after terminating the consumer credit agreement relating to immoveable property.