A EU-wide legislation on credit agreements for consumers relating to residential immovable property was adopted in 2014. Member states were required to implement its provisions by March 21.
In an area marked by the specificity of credit agreements and differences in market conditions across the member states, this directive adopts a targeted approach. It contains provisions of the more frequent type, commonly described as minimum harmonisation, which can be exceeded by member states when transposing them into their national legislation.
Minimum harmonisation applies except for two of the requirements under the directive, namely the provision of pre-contractual information and the EU standard for the calculation of the annual percentage rate of charge. These are subject to maximum harmonisation and cannot be exceeded by member states when implementing them.
The harmonised regulatory framework set in place by this directive seeks to ensure a high level of consumer protection in the area of credit agreements based on the notion that consumers and enterprises are not on the same level playing field when negotiating this type of agreements.
The directive approaches this concern by making it obligatory on member states to promote measures aimed at the financial education of consumers. Furthermore, creditors are required to conduct themselves honestly, fairly and transparently when providing credit to consumers and are required to have an appropriate level of knowledge and competence to carry out their duties properly.
In addition, and more specifically, the directive introduces pre-contractual requirements on creditors foremost among which is the obligation to provide a consumer, free of charge, with personalided information. This must be provided through a European Standardised Information Sheet, without undue delay and in good time before the consumer is bound by any credit agreement or offer. This will enable the consumer to compare the credits available on the market easily and make an informed decision. Consumers must be given at least seven days to consider the implications of the credit agreement they are being asked to enter into.
Creditors are required to conduct themselves honestly, fairly and transparently when providing credit to consumers and are required to have an appropriate level of knowledge and competence to carry out their duties properly
After the credit agreement is concluded, consumers have the right to discharge fully or partially their obligation prior to the expiry of the pre-established time frame set in the agreement. Early repayment may be made subject to conditions that may include restrictions or time limitations on the exercise of the right. Creditors are required to provide to the consumer without delay with information quantifying the implications of early repayment.
The directive also introduces changes designed to curtail irresponsible lending practices. Before concluding a credit agreement, creditors are required to carry out a creditworthiness assessment on the consumer. The European Banking Authority has published guidelines on creditworthiness assessments that are intended to ensure consistent implementation across the EU member states. The guidelines specify that in making such assessments, creditors must among others verify the consumer’s income, identify and prevent misrepresented information, make allowances for the consumer’s committed and other expenditures, and for potential future negative scenarios.
The directive contains provisions in relation to the manner in which property valuations are to carried out. In this respect, member states are required to put in place reliable valuation standards to be used by creditors, and internal or external appraisers are required to be sufficiently independent from the credit underwriting process to ensure an impartial and objective valuation.
In the case of consumers falling back on repayments, the directive requires member states to encourage creditors to exercise reasonable forbearance before foreclosure proceedings are initiated.
The guidelines issued by the European Banking Authority require creditors to adopt concessions by way of forbearance measures which may be in the form of total or partial refinancing of a credit agreement or changes to an agreement’s terms and conditions, such as extending the term of the credit, deferred payment, changing of interest rate or offering a payment holiday.
The directive does not seek to harmonise rules on the validity of credit agreements under contract law, property law or land registration, which have been left specifically out of the directive’s remit and in relation to which member states are free to maintain or introduce domestic legislation.
Outside the scope of the directive are credit agreements granted by an employer to his employees free of interest or at a lower than market rate, overdraft facilities, or credit agreements which relate to deferred payment of an existing debt.
The directive covers credit agreements concluded with consumers post-March 21, and applies to credits secured by residential immovable property regardless of the purpose of the credit.
jgrech@demarcoassociates.com
Josette Grech is adviser on EU law at Guido de Marco & Associates.