Consumer Finance [EU]

Consumer credit

European legislation harmonises the general conditions relating to consumer credit, including the main information consumers ought to be aware of, and their obligations. This information includes the annual percentage rate of charge or, failing that, the total amount that the consumer must pay for credit.

Council Directive 87/102/EEC of 22 December 1986 for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit .

Scope

The Directive aims to bring about a certain degree of approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit.

The Directive does not cover:

• credit agreements for the purpose of acquiring or retaining property rights in land or a building;
• credit agreements for the purpose of renovating or improving a building;
• hiring agreements which do not provide for the title passing to the hirer;
• credit free of interest or any other charge;
• interest-free credit agreements where the consumer repays the credit in a single payment;
• credit in the form of advances on a current account granted by a credit institution or financial institution, with the exception of credit card accounts;
• credit agreements involving amounts less than EUR 200 or more than EUR 20 000;
• credit agreements whereby the consumer undertakes to repay the credit either within three months or by a maximum of four payments within a 12-month period.

Member States may also exclude from the scope of the Directive certain types of credit which are granted at rates of charge below those prevailing in the market and which are not offered to the public generally.

Any credit-related advertising that indicates some aspect of the cost of the credit must also include a statement of the annual percentage rate of charge.

Requirements

Credit agreements are to be made in writing. Besides the essential terms of the contract, an agreement must state the annual percentage rate of charge and the conditions under which it may be amended.

Where credit is granted in the form of an advance on a current account, the consumer is to be informed in writing, at or before the time the agreement is concluded:

• of the credit limit, if any,
• of the annual rate of interest and the charges applicable,
• of the procedure for terminating the agreement.

Any change in the annual rate of interest or in the relevant charges, during the period of the agreement, must be notified to the consumer at the time it occurs.

In the case of credit granted for the acquisition of goods, Member States must lay down the conditions under which the goods may be repossessed and are to ensure that neither of the parties gains any unjustified enrichment.

Rights

The consumer may discharge his or her obligations under a credit agreement before the time fixed by the agreement. In this event, the consumer is entitled to an equitable reduction in the cost of the credit.

Where the creditor’s rights are assigned to a third person, the consumer’s rights remain unaffected and action to enforce any claim may be taken against that third person.

The Member States must ensure:

• that consumers using bills of exchange are suitably protected, when such practices are allowed;
• that the existence of a credit agreement does not affect the rights of the consumer vis-à-vis the supplier of goods or services purchased by means of such an agreement in cases where the goods or services are not supplied or are not in conformity with the contract.

The consumer may seek redress against the grantor of credit when the following conditions are fulfilled:

• the consumer has entered into a credit agreement with a person other than the supplier of the goods or services purchased;
• the grantor of the credit and the supplier of the goods or services have a pre-existing agreement under which credit is made available exclusively by the former;
• the consumer obtains his or her credit pursuant to that pre-existing agreement;
• the goods or services covered by the credit agreement are not supplied or are not in conformity with the contract;
• the consumer has sought redress against the supplier but has failed to obtain satisfaction.

Regulation

The Member States are to:

• ensure that persons offering credit obtain official authorisation to do so;
• ensure that the persons in question are subject to inspection by an official body;
• promote the establishment of appropriate bodies for providing information and advice to consumers in respect of credit agreements and for receiving associated complaints.

The Council is required to revise the amounts laid down in the Directive, for the first time in 1995, and every five years thereafter.

The Member States must ensure that the rules set out in the Directive:

• are complied with in credit agreements;
• are not circumvented as a result of the way in which agreements are formulated, e.g. by the device of distributing the amount of credit over several agreements.

The Member States may introduce more stringent rules than those laid down in the Directive.

Directive 90/88/EEC sets out a single mathematical formula for calculating the annual percentage rate of charge throughout the Community and for determining credit cost items to be used in the calculation.

Directive 98/7/EC focuses on the calculation of the annual percentage rate of credit charge.

Consumer credit agreements

The increased availability of credit in Europe must be accompanied by a strengthening of consumer rights. Harmonisation of national provisions must also encourage cross-border credit availability.

Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers and repealing Council Directive 87/102/EEC.

Scope

This Directive aims to harmonise the laws, regulations and administrative provisions of the Member States covering credit for consumers, in order to facilitate cross-border services. It shall increase the transparency of contractual conditions and improve the level of consumer protection.

However the Directive is not applicable to credit agreements that are:

• secured by a mortgage;
• concluded for the purchase of land or immovable property;
• whose total amount is less than 200 euros or more than 75 000 euros;
• relating to lease or hire where there is no obligation to purchase;
• granted free of interest, without other charges or in the form of an overdraft facility;
• concluded with an investment company;
• the result of a judicial ruling;
• linked to the payment or to the surety of a debt;
• linked to loans granted to a limited group of the public.

Member States may also apply a less restrictive regime to organisations with social aims and activities that only profit their members, where they offer an annual percentage rate of charge which is lower than the current market rate.

Disclosure

During the pre-contractual phase,the creditor or their intermediaries must supply clear information on the main features of the credit offered in due course. In particular, this concerns:

• the duration of the credit agreement;
• the total amount of credit;
• the borrowing rate and rates relating thereto;
• the annual percentage rate of charge * and the total amount owed by the consumer *;
• the amount, number and frequency of instalments;
• the cash price for goods or services supplied against specific payment terms or a linked credit agreement;
• costs linked to or resulting from the agreement;
• contractual obligations;
• consumer rights;
• the consequences of late payments and defaults;

Consumer Rights

Consumers shall receive this information in a standard form as stipulated in Annexe II of the Directive.

Apart from an obligation to supply comprehensive pre-contractual information, creditors must supply consumers with adequate explanations so that the latter may choose a contract which corresponds to their needs and to their financial situation. In addition creditors must evaluate the solvency of their clients before concluding an agreement, whilst also respecting the right of consumers to be informed when their request for credit is rejected.

The contract must restate the main information relating to the credit offer chosen. If the borrowing rate is modified *, the consumer must be informed of the new amount, the number and frequency of instalments.

Consumers may exercise their right to withdraw by notifying the creditor of their intention, without having to justify their decision. This must take place within fourteen days from the conclusion of the agreement.

Consumers also have the right to make early repayment of their debt. They can exercise this right at any time, as long as the creditor receives fair compensation which is objectively justified.

Member States shall ensure that creditors and credit intermediaries fulfil their obligations. They shall ensure that audits are carried out by an independent authority.

Context

This Directive repeals Directive 87/102/EEC in order to strengthen consumer protection. It must be implemented in Member States before 2 May 2010.