Can a foreign mortgage lender operate in Germany? Checking BaFin licensing under § 1 KWG and the "Merkblatt zur Erlaubnispflicht"

What § 1 KWG says — the legal trigger for licensing

Section 1 of the German Banking Act (Kreditwesengesetz, KWG) defines which activities count as "banking business" or financial services in Germany. The statutory definitions determine whether a provider carries out credit business (for example granting loans) or other regulated financial services that bring the provider within the KWG regime. If an activity falls within those definitions, the provider is in principle subject to the German licensing rules. (See the official text of § 1 KWG.)

Can an overseas mortgage lender operate in Germany?

Short answer: sometimes. A foreign credit institution may lend to German borrowers by one of three basic routes: (A) operate under its home‑state authorisation and provide services cross‑border, (B) establish a branch (Zweigniederlassung) in Germany, or (C) set up a locally authorised entity. Which route is permitted depends on where the lender is authorised and on the exact services offered. BaFin's guidance on cross‑border business explains the assessment criteria and the limits on service provision from abroad. The BaFin Merkblatt emphasises that European Commission criteria and prior supervisory practice are relevant when deciding whether cross‑border services are allowable without a German written licence.

When a German licence is required

If the activity is carried out from within Germany (a branch) or otherwise meets the KWG definitions of banking business performed in the German market, a written authorisation by BaFin (or an in‑Germany licence) will be required. BaFin's market‑entry information highlights that an authorisation under the KWG (for banking business) is the standard requirement and that certain statutory exemptions are narrow. The BaFin Merkblatt also warns that even where a foreign provider claims cross‑border status, certain German rules — for example anti‑money‑laundering duties — may still apply to its business with German customers.

Practical steps to check authorisation before you take a loan

1) Ask the lender for its authorisation details. For an EU/EEA bank ask for the home‑state licence number and the home supervisor's name. For a non‑EEA lender ask for its full legal name, home licence and the entity that supervises it.

2) Ask whether the lender operates by passporting its services into Germany, by a registered branch, or through a local German entity. Passporting or cross‑border provision is a different legal situation from having a German branch.

3) Check BaFin guidance and ask BaFin or the Deutsche Bundesbank directly if you need confirmation. BaFin's publications include the "Merkblatt zur Erlaubnispflicht von grenzüberschreitend betriebenen Geschäften" and market‑entry pages describing which services need a KWG permit.

4) Verify AML and customer‑identification procedures. The BaFin Merkblatt reminds borrowers that even when an institution relies on cross‑border rules, German anti‑money‑laundering standards can apply to dealings with German customers.

5) If in doubt, require evidence in writing (a copy of the licence, a regulator's confirmation, or a branch registration) and obtain independent legal advice. This is especially important for large loans or where the lender is based outside the EU/EEA.

When to get a lawyer or adviser

If the lender cannot prove a clear supervisory basis for lending to German borrowers (home licence plus passporting statement, or registration as a German branch), treat the arrangement as higher risk. Ask a German banking lawyer to review the documents, the loan contract, and any security (mortgage registration, Grundbuch entries). Do not rely on assurances alone; regulators and courts look to documentary proof of authorisation and compliance.