These include, above all, savings banks or Volksbank Raiffeisen banks. In any case, they have a social mission and expand their portfolio for the promotion of society as a whole by taking on trust loans.
The funds for the loans receive banks from the state or from state-owned banks such as the Kreditanstalt für Wiederaufbau. Also possible are insurance companies as lenders for trust loans.
For the function as a trustee, the banks are paid by the lenders. As a result, banks do not earn as much as when it comes to lending their own loans, but the fees still pay for their own administrative expenses.
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Many banks offer trust loans along with other loans to broaden their customer base. At the same time, for example, future property owners may combine a trust loan with a real estate loan. In this way, the bank additionally earns on the conventional loan provision and has gained a new customer by offering a trust loan.
The legal basis for trust loans
Paragraph 6 of the Financial Reporting Ordinance on credit institutions and financial services institutions specifies exactly how banks are permitted to show trust credits in their books. Accordingly, trust loans must be listed in the balance sheet.
Administration of trust loans
There are various ways in which trustee loans are paid out. While some loans immediately pay the full loan amount, there are other loans where only partial payments are paid out.
A typical example of partially disbursed trust loans is student loans that are granted on a fiduciary basis. Also possible is the pro rata disbursed loan amount for business start-up loans.
Roles and functions in the trust loan
Unlike a traditional lending business, the trust loan consists of three players:
- Trustor: The trustor is usually the state, a state bank or an insurance company that provides the capital for the loan.
- Trustee: The trustee is responsible for the proper processing and proper use of the trust loan. He collects the interest and installments due, which he forwards to the trustor. For the administration of the loan, the trustee receives a fee from the trustor.
- Borrower: Borrower can be a private client, such as a company, who applies for and receives the money as if it were a traditional loan. The repayment takes place via the bank.
Frequent trust loans from KfW in Germany
In Germany, trust loans are often granted through the Kreditanstalt für Wiederaufbau (KfW). This state-owned bank offers both consumers and businesses various options for loans.
- Business start-up founders: There are certain loans for start-up founders via KfW which are intended specifically to promote business. The special feature of lending is that the business plan has a greater weight than the creditworthiness of the applicants. Appropriate loans for founders can be applied for through banks such as Sparkasse or Volksbanken.
- Homeowners: Anyone who owns a home can use a KfW loan for energy-efficient renovation or the purchase of alternative energy sources. For example, KfW is promoting the installation of a heat pump.
Funding opportunity via the BafA
Incidentally, funding opportunities for alternative heating can also be obtained from the Federal Office for Export Control (BafA).
- Students: Students can apply for a student loan through the KfW. In this way, a trust loan contributes to social promotion. Trainees can also apply for a BAföG bank loan.
In addition to supporting private individuals, KfW also offers trust loans for companies as well as municipalities and social insurance providers.
In 2012, KfW granted trust loans totaling 437 billion euros.
Advantages of the trust loan
A trust loan is usually associated with many benefits for borrowers:
- Borrower benefits from conditions: The terms of trust loans are usually much better than comparable loans in the private sector. Finally, these benefits are deliberately created as the state sets certain goals for lending through trustees.
Banks can also benefit from the granting of trust loans:
- Bank does not have to bear credit risk: the risk of default is not borne by the trustee, but always by the trustor. This puts the banks in a very comfortable position. You just have to manage the loans.
- Bank does not need to provide financial resources: as the trustor provides the capital, lending does not burden the bank’s own resources.
Finally, the trustor also benefits from a continuous loan:
- T reugeber does not need its own administrative machinery: if the state provides funds for trust loans, it does not need to use its own administrative resources to do so. The trustee is solely responsible for the administration. There are fees for this. However, they are well below the cost of own credit management.
Trust Loan: Liability Risk
A special feature of the trust loan is that the trustee carries no liability risk for the loan. As a trustee, a bank is solely responsible for ensuring that the loan is properly managed and organized. Liability for the loan is borne by the trustor.
However, there are regulations in practice according to which the trustee is also partially involved in the credit risk. In this way, the trustor ensures that the trustee carefully selects the borrowers.
Amortization loss on trust loans
Since escrow loans are usually government-sponsored loans, there are often more accommodative solutions to repayment problems. For example, KfW may apply for deferment of student loan repayments. It is important that the accrued installments are due at the end of the deferral.
Trust loans for the promotion of society
The granting of trust loans is usually mainly public money passed on by the trustee. For this reason, states use trust loans to promote social development. The aim of fiduciary financing, for example, is targeted for regional economic promotion or support for investments in social infrastructure.
The motives of the state can be, for example:
- Family Support: By providing cheap trust loans, the state can help families.
- Housing Development: Trust loans are often used for social housing. This creates a living space that can be obtained from socially disadvantaged families. It is also possible to use these loans for the construction of social facilities such as kindergartens or retirement homes.
- Promotion of environmental protection measures: The state promotes the implementation of energy-saving measures with continuous loans. For example, real estate owners can receive discounted loans for thermal insulation or the energetic renovation of buildings.
- Monument protection: Government-sponsored trust loans can be provided for construction measures that serve to preserve culturally important buildings.
- Entrepreneurship: Through fiduciary loans, the state has the opportunity to promote entrepreneurs or SMEs. The loans facilitate investments in new machines or products and help to set up companies.
These requirements must be met by trustees
In order for government funds to be provided for funding, trustees must assure that they will manage the loans according to their purpose. This includes the obligation to return interest or repayment installments to the trustor, who in this case is the state, a state or another body.