Amsterdam Court of Appeal orders ABN AMRO to compensate damage on account of excessive lending
In an action brought by the Foundation for Victims of Home Equity Products (GOWP), the Amsterdam Court of Appeal recently ordered ABN AMRO to compensate the damage suffered by victims on account of excessive lending. In this ruling, the Court of Appeal took ABN AMRO to task for the way in which it provided financing to private individuals around the turn of the century. Two of Höcker Advocaten’s lawyers – Koos van den Berg and Marc Wolters – represented GOWP in these proceedings.
GOWP was founded in 2004. It aims to promote the interests of private individuals who have suffered damage because of financial schemes recommended by the financial intermediary Wagner & Partners, which has at this point become insolvent. GOWP maintained that ABN AMRO had provided an irresponsibly high amount of credit to these individuals, in order to facilitate this financial scheme for them.
The financial scheme
An example of how the scheme worked:
Family A had an annual income of EUR 35,000 and a mortgage debt of EUR 60,000 on a house with a forced-sale value of EUR 125,000. ABN ANRO gave this family a new mortgage loan of EUR 155,000 (125% of the forced-sale value). The old mortgage debt of EUR 60,000 was paid off from the amount borrowed. The remaining EUR 95,000, together with an additional EUR 180,000 borrowed from ABN AMRO, was used to buy shares and securities. A family with a mortgage debt of EUR 60,000 (on which the interest was deductible) became a family with a debt of EUR 335,000 (on which the interest was only partially deductible), while the family’s income stayed the same at EUR 35,000.
Special duty of care for a bank
The issue in the case was whether a bank is allowed to provide such financing. Specifically, to avoid excessive lending, a bank has an independent obligation to examine whether a private person can actually make the interest (and other) payments ensuing from a financing arrangement. Further, a bank must explicitly warn the borrower of the potential consequences if the payments cannot be made from the borrower’s regular employment income. After all, the money has to come from somewhere if the interest payments are to be made.
Income and assets test
ABN AMRO had not fulfilled this obligation. GOWP showed that ABN AMRO had merely examined whether the value of the collateral (house and stocks) would provide sufficient security for ABN AMRO itself, if the person could no longer make the payments. ABN AMRO argued that this test was the standard practice at the time. GOWP, however, asserted that ABN AMRO should have examined whether the person could actually make the payments following from the financing scheme.
Amsterdam Court of Appeal
The Court of Appeal agreed with GOWP’s reasoning, finding that ABN AMRO was liable, because it had engaged in excessive lending with respect to the individuals who had joined up with GOWP. ABN AMRO should have advised people not to take out the additional medium-term loan (in the example, the EUR 180,000), because the payments could not be made from their employment income
The Court of Appeal thus put an end to this kind of financing by ABN AMRO. By merely looking at whether the financing was risky for the bank itself, ABN AMRO had interpreted its special duty of care towards its customers in too limited a way. There is definitely a chance that other courts will reach the same conclusion in similar cases.This is the second victory which GOWP and Höcker Advocaten have chalked up in a short period of time. In a previous ruling, the Court of Appeal of Den Bosch, the Netherlands, stated that the bank Van Lanschot could not rely on the intermediary and had to do its own investigation into whether the financing scheme payments could be made by individuals.