Consumer credit refers to credit that is advanced to consumers when purchasing goods or services, the most common form of which is a credit card.
Consumer credit is specifically regulated at EU level by the Consumer Credit Directive. EU rules on consumer credit are designed to ensure a high level of protection by laying down binding rules on the manner in which consumers are to be treated when credit is given.
Among others, the Directive requires consumers to be provided with comprehensible information before the consumer credit agreement is concluded. This pre-contractual information is to be made available to the consumer in standardised format to make it easy for consumers to compare offers on the market and to better understand the information provided.
Furthermore, the consumer is entitled to know the annual percentage of charge that indicates the total cost of the credit.
In addition, consumers retain the right to withdraw from a credit agreement without giving any reason within a period of 14 days after the conclusion of the agreement. In such cases, the consumer is required to refund the money borrowed together with interest and any non-refundable charges already paid by the credit provider.
Consumers also retain the right to repay the loan or credit at any time although, in the latter case, the creditor is permitted to ask for a fair and objectively justified compensation which may represent the income the creditor has forfeited. This compensatory payment may not exceed the total amount of interest calculated on the loan.
These rules do not apply to consumer loans in excess of €75,000 or loans concluded for the purchase of property, lease, when secured by mortgage or granted free of interest.
The consequences that a credit provider may face upon failure to abide by these rules were examined in a recent ruling delivered by the Court of Justice of the European Union (CJEU). The main point at issue in this case revolved around the stipulation in the Consumer Credit Directive that requires credit agreements to be drawn up on paper or other durable medium.
The case was brought forward by a consumer that had taken an unsecured loan from the Home Credit Slovakia for the amount of €700 with a repayment date three years later. After the first two repayments, the borrower defaulted and the lender called in the loan and proceeded to enforce the loan and default penalties by court action.
The borrower defended itself by raising technical objections to the manner in which the credit was advanced. Although the creditor had provided information regarding the loan, the credit agreement failed to specify certain requisite information, such as the total cost of the credit. Furthermore, the agreement provided that the lender’s general terms and conditions also formed an integral part of the agreement, even though the borrower had not signed a copy of them.
The Slovak court seized of the dispute referred the matter to the CJEU by raising questions on the validity of the credit agreement and on the information that consumers are entitled to have.
On the requirement of durable medium, the CJEU concluded that the consumer must be able to store the information provided by the lender to ensure that such information is not altered at a later stage by the credit provider and it remains accessible to the borrower.
This does not mean the credit agreement is to be drawn up in a single document. But, where there is a reference to another document forming an integral part thereof, the latter must be provided on a durable medium. It is not therefore sufficient to be applicable by reference without a copy being provided on durable medium.
More interestingly, the CJEU held that the credit provider may be penalised if it fails to include in the credit agreement certain essential information such as the total cost of the credit, the number of frequency of payments, notarial fees and sureties or compulsory insurance required by the lender. Such information is considered to be essential, the lack of which may effectively compromise the ability of consumers to assess the extent of their liability.
The penalty imposed on the credit provider may be in the form of forfeiture of entitlement to interest and charges on the loan. Member states are not precluded from imposing penalties against defaulting credit providers, provided that such penalty is proportionate.
Josette Grech is adviser on EU law at Guido de Marco & Associates.
jgrech@demarcoassociates.com