EU and Consumer Protection in the Credit Market

Consumer protection in the credit market is not a new trend in EU law, as we have seen in the previous post. The main goal to be achieved was to offer a proper protection in this kind of contract to the consumer. This starting point posits different main questions: (1) what do we mean when talking about "consumer" (which is not an easy question, in fact) and (2) how extensively do we use the term "credit market." But I will not focus on these two issues right now. Rather, I will focus on the main innovations in consumer credit regulation in the EU. First, I will outline the present situation. Once again, there is a new quiz available for anybody feeling already bored.

The Directive 87/102/EEC of 22 December 1986 had, in theory, several goals (avoiding distortions of competition between grantors of credit in the common market, deriving different mandatory rules in this field in the Member States, and setting up a common market of consumer credit, among others), but it is obvious that the primary one was to grant an appropriate protection to the consumers in the credit market. The main rules were dedicated to mandatory information in advertising (art. 3), the obligation of contract disclosure and form with minimum content requirements (art. 4), the right for the consumer to discharge his obligations with a reduction on the amount of the credit already pending to be paid (art. 8), and specific rules for the (very common) cases of a financing agreement tied to another contract (mainly, acquisition of goods, art. 11). It could be said that the goals were more or less achieved, but as it often happens with EU Directives, the Member States retained the right to adopt more stringent rules, as the Directive was intended to set only a minimum level of protection. The consequence has been a different protections for consumers in the different countries.

The 1986 Directive, once implemented in several member states, is no longer in force and, as it can be read in the EU page, a new "initiative in the area ha[d] become necessary." First of all, the credit market has developed dramatically (with differences among the member states, of course) and a new legal instrument was a must. And second (and, maybe, most important to the eyes of EU legislators--note the expressive words of the Consumer Commissioner), transnational credit operations are much simpler than they were 20 years ago and a more stringent harmonization was needed. Both are the key ideas of the proposal for a new directive in this area, which latest available version is the amended Proposal for a directive of the European Parliament and of the Council on credit agreements for consumer. Although it dates from 2005, it seems that the EU is pushing for its approval and that is why I thought interesting to post about it.

This latest Proposal follows the path opened by the 1986 Directive in terms of consumer protection, including rules for credit advertising (one issue strictly connected to the Directive on Unfair Commercial Practices (2005/29/CE) and the information to be given before closing the agreement (arts. 4 and 5) and to be written into the contract itself (art. 9). So, as it was in the first Directive, information plays a central role in the protection of consumer and, of course, the information on the cost of credit (see arts. 3,f), 4.2, 5.2,d), 9.2,c), or 10, among others). On the other hand, the Proposal goes undoubtedly further in some point, when giving the consumer the right to withdraw from a contract of credit during the 14 days after it was signed, a period that corresponds to the one given in the Distance Marketing Financial Services Directive (2002/65/EC) (art. 13). The main reason for this withdrawal right is that it will stimulate competition, as the consumer can move to a better offer if known after signing the agreement. In fact, it is a right already present in some EU countries national law (in Germany, for instance, see §495 in connection with §355 BGB –Civil Code-).

It is absolutely impossible to give a deep view of the Proposal, and I have hardly scratched the surface. I wouldn't like to finish this post without pointing to one very interesting issues from Spain: the exclusion of mortgage loan agreements. The reason given is that credit for housing purposes is very distinctive from consumer credit. As it is impossible for the lender to know the purpose of the credit when closing the agreement, all those mortgage loans are out of the scope of the Proposal (art. 2, surety agreements are affected too).

The problem is that here in Spain, what used to be a consumer loans is now being done as a mortgage loan (and the number seems to increase). There are now a lot of companies offering what they call "debt refinancing," i.e., putting all that consumer credit into one only product secured by a mortgage on your home. Consumers find lower interest rates, but they do not take into account the risk they are facing putting all their eggs in the same nest. In fact, this is a matter of concern in Spain, giving the expansion of these companies and the aggressiveness of their advertising practices (just have a look on Google), and there are voices here pushing for a regulation of this market. We could agree that mortgage should not be equivalent to consumer credit, but should we implement a specific regulation for that kind of "debts unification" services?

Next: an example of usury law...

Comments

[John Pottow]

Javier, one of the interesting issues I've found with this proposal is the evisceration of "responsible lending" obligations on the instigators of loans. My understanding is that the Brits were the main ones fighting it. It's still more consumer protection than we have in the States, but it's telling that this was such a touchy area.

[F. Javier Arias Varona]

Yes John, you are right. The question is whether the inclusion of that reponsible lending, that makes the lender or credit intermediary responsible to check if the consumer will be able to pay back, will have the effect of denying the credit to people that now are able to get and, if they were out of the market, would have to ask for it somewere else, with less protection, as it would probably be given by non professional lenders. Actually, I am not sure what the answer would be... On the other hand, number 15 (deleted in this new Ammended Proposal) is now just after new nr. 19 in the "Whereas" (sorry I cannot find the word to define this part of the Directives), saying: "Consumers should also act with prudence and respect their contractual
obligations", which is obvious, but it could be seen as a proof of the change in this question.

[Credit Card Debt]

I have been reading this site for a while and this post made me finally stand up and say... 2 thumbs up keep up the good work.