The European Parliament wants to cap bank interest rates for consumer loans

The state capping of bank interest could become a reality if the European Commission's proposal for a directive on consumer loans passes the European Parliament as the text was adopted in first reading in the meeting of September 12, 2023.

The proposal for a directive mentions in Article 31 - Measures to limit loan rates, annual percentage rates or total costs of credit for the consumer - the following:

"(1) Member States shall introduce measures to effectively prevent abuse and to ensure that consumers cannot be charged excessively high interest rates, annual percentage rates or total costs of credit to the consumer, such as ceilings.

(2) Member States may adopt prohibitions or limitations regarding specific fees or charges applied by creditors in their territory".

The cited document refers in Article 35 to the fate of arrears and the introduction of tolerance measures. The provisions of this article introduce the notion of reasonable forbearance before the initiation of the procedure for forced execution of debtors:

"Member States require creditors to exercise, as appropriate, a reasonable forbearance before the initiation of enforcement proceedings. Such tolerance measures must take into account, among other things, the individual circumstances of the consumer. Creditors are not obliged to offer consumers reiterative forbearance measures, except in justified cases".

Forbearance measures refer, among other things, to the creditor offering the possibility of total or partial refinancing of the credit agreement, extending the duration of the credit agreement, postponing the full or partial repayment of installments for a period, reducing the loan rate, offering a pay leave, partial repayments, currency conversions, partial debt forgiveness and debt consolidation.

However, in paragraph 2 of art. 35 the proposed directive provides that the list of tolerance measures "does not affect national law and does not require member states to provide for all these measures in domestic law".

Paragraph 3 of the same article limits the amount of fees imposed on consumers (debtors) in case of non-fulfillment of an obligation, to the amount necessary to compensate the creditor for the costs incurred as a result of the non-fulfillment of obligations.

Through paragraph 4, the proposed directive introduces the capping by the Member States of the additional fees that the consumer should pay in case of non-payment.

The European parliamentarians, in their proposal for amendments to the directive text initiated by the European Commission, introduce a new obligation for creditors, regarding the debtors' state of difficulty.

Thus, art. 36 of the proposed directive states that Member States shall ensure that independent debt advice services are made available to consumers who are experiencing or may experience difficulties in meeting their financial commitments, with limited fees payable for such services. The same article provides that in order to fulfill the obligation to advise, creditors shall establish processes and policies for the early detection of consumers experiencing financial difficulties, and Member States shall ensure that creditors refer consumers experiencing difficulties in meeting their financial commitments to services debt advice easily accessible to the consumer.

• Assessing consumers' creditworthiness and informing them - mandatory conditions for financial institutions

Apart from this obligation, at the conclusion of the credit agreement, financial institutions must evaluate the creditworthiness of the consumer according to the provisions of art. 18 of the proposed directive, which provides that "that assessment is carried out in the interest of the consumer, in order to prevent irresponsible credit practices and over-indebtedness and takes due account of the relevant factors for verifying the prospect of fulfilling its obligations under the credit agreement ".

The cited document also states that "the creditworthiness assessment is carried out on the basis of relevant and accurate information regarding the consumer's income and expenses and other financial and economic circumstances that are necessary and proportionate to the nature, duration, value and risks of the credit for the consumer; this information may include evidence of income or other sources of repayment, information on financial assets and liabilities or information on other financial commitments".

At the same time, if the credit application is submitted jointly by several consumers, the creditor evaluates the creditworthiness based on the joint repayment capacity of the consumers.

For the assessment of creditworthiness, the future directive provides for the obligation of creditors to establish procedures in this regard and to document and keep information on the creditworthiness of debtors.

If, following the assessment, the creditor rejects the consumer/client's request, he/she must receive easily accessible debt counseling services, according to his/her financial situation.

Important provisions are also included in the draft directive regarding informing consumers before signing a bank credit agreement. Thus, according to art. 11, the consumer must receive clear, equally visible and comprehensible pre-contractual information. That information must be provided in one page or a maximum of two and must include: the identity of the creditor and, where appropriate, of the credit intermediary involved; the total amount of the loan; duration of the credit agreement; the acquisition rate or all interest rates, if different interest rates apply in different circumstances;

the annual percentage rate of the tax and the total amount payable by the consumer; in the case of a credit in the form of deferred payment for certain goods or services and in the case of related credit agreements, the specific goods or services and their cash price; the costs in the case of late payments, namely the interest rate applicable in the case of late payments and the ways of adjustment thereof and, where applicable, any fees payable for non-payment; the amount, number and frequency of payments to be made by the consumer and, where applicable, the order in which the payments will be allocated to different outstanding balances charged at different loan rates for repayment purposes; warning about the consequences of missing or late payments; the existence or absence of a right of withdrawal; the existence of a right to early repayment and, as the case may be, information regarding the creditor's right to compensation; a repayment schedule containing all payments and repayments over the term of the credit agreement, including payments and repayments for any ancillary services related to the credit agreement that are sold simultaneously, whereby payments and repayments, where different loan rates apply in different circumstances, it is based on reasonable upward changes in the loan rate; the geographical address, telephone number and e-mail address of the creditor, as well as, where applicable, the geographical address, telephone number and e-mail address of the credit intermediary involved.

• Prohibition of advertising for some credit products

The draft directive, as amended by the European Parliament, also introduces strict rules regarding the advertising of credit products.

Thus, according to Article 7 of the cited document, member states require that any advertising and marketing communications relating to credit agreements be correct, clear and not misleading.

"It is prohibited to formulate, in such advertisements and marketing communications, information that may create false expectations for a consumer regarding the availability or cost of the credit or the total amount payable by the consumer," states the respective article.

The cited document also contains the standard information that must be included in the advertising of credit contracts. Thus, according to art.8,

Member States will require that advertising on credit agreements include a clear and visible warning to make consumers aware that the loan costs money, using the wording 'Caution! Borrowing money costs money' or equivalent wording.

Member States shall also require financial institutions that advertising on credit agreements indicating an interest rate or any figures relating to any cost of credit to the consumer include standard information that is easily legible or clearly audible, comprising all of the following elements: the rate the loan, fixed or variable or both, together with details of any fees included in the total cost of credit to the consumer; the total amount of the loan; the annual percentage rate of the tax; duration of the credit agreement; in the case of deferred payment credit for certain goods or services, the cash price and the amount of any advance payment; the total amount payable by the consumer and the amount of installments.

The draft directive requires, through the same article, member states to prohibit advertising for credit products that: encourage them to seek credit, suggesting that credit would improve the financial situation of those consumers; states that outstanding credit contracts or credits registered in databases have little or no influence on the evaluation of a credit application; falsely suggests that credit leads to an increase in financial resources, is a substitute for savings or can raise the consumer's standard of living.

At the same time, EU member states could prohibit, according to the cited document, advertising for credit products that: highlight the ease or speed with which credit can be obtained; states that a discount is conditional on taking over the loan; offer "grace periods" of more than three months for repaying loan installments.

• Gheorghe Piperea: "Interests on loans must be capped at a level close to the reference interest rate of the central bank"

University professor Dr. Gheorghe Piperea welcomes the approach of the European Commission and the European Parliament, welcomes them to the club of those accused of spreading conspiracy theories and claims that loan interest rates must be capped at a level close to the reference interest rate of the central bank.

In a point of view sent to the newspaper BURSA, lawyer Gheorghe Piperea states:

"Five years ago we issued, in the form of three draft laws, a set of three "conspiracy theories", submitted to parliament, which can be summarized as follows:

- interest on loans must be capped at a level close to the reference interest rate of the central bank;

- if the debt burden becomes excessive, the debtor must be allowed a conventional or judicial review of the credit agreement that entails deferrals, partial debt relief or reductions in the volume of payments in lei for foreign currency loans;

- excessive foreclosures must be seriously and thoroughly controlled in foreclosure approval procedures and, if necessary, quickly frozen, by presidential decree, without the payment of bail, evictions from the family home must be reduced to completely exceptional cases and postponed for at least 6 months to allow the debtor to find suitable housing, and credit contracts can no longer be considered enforceable titles in themselves.

A fourth conspiracy theory is present in a book of mine from 2018, entitled "Consumer Protection in Commercial Contracts": credit is like medicine, it should only be taken with a "medical" prescription, with a warning about the risk of pay infinitely more money than those borrowed with naivety and overconfidence in the bank, the future and themselves.

(...) As ridiculous/absurd as it may seem, many, many debtors (now bankrupt, due to excessive/usurious interest rates) also rose up against me, on the grounds that I would have tried to rob them of their sacred right to go into debt and make captives at the banks. In the wake of this crossfire with cluster bombs, after Parliament passed the interest cap law twice, the CCR accepted that it was some "conspiracy theories" and elegantly slammed the law. Twice even.

I feel sorry for the poor exponents of the European Commission and the European Parliament who, behold, have fallen into the great capital sin of these 4 "conspiracy theories", manufacturing this draft directive against honest banks".

• Mircea Coşea: "The interest cap directive is a political attempt to calm the business environment and public opinion"

The interest cap directive, initiated by the European Commission and approved in first reading by the European Parliament, is actually a political attempt to calm the business environment and public opinion, university professor Dr. Mircea Coşea, economic analyst, told BURSA newspaper.

Mr. Mircea Coşea told us: "I followed the reactions that were in the international press after the debate in the European Parliament. The measure comes after there was a lot of discussion about the huge profits of the banks during the pandemic crisis, profits that had no justification in terms of the activity submitted. However, I believe that the said directive will be difficult to put into practice, especially through the lens of the similar situation with the European level taxation of multinational companies, taxation which has failed or has not given many positive results so far. In the area of capping bank interest, things seem to me to be more declarative than actually put into practice. And in this sense we have the example of Italy, which failed to implement a ceiling in the banking system. In Romania, it will be more difficult to implement such a directive, because the state is the banks' biggest client. However, capping interest and commissions would decrease the appetite of the banking system for lending to the state. I think that the directive initiated by the European Commission is a political attempt to calm the business environment and public opinion in the sense of showing that at the level of the European Union they are working towards a certain normalization of the relationship between banks, the business environment and customers, but I think that we are still far from implementing such a decision".

We mention that we also tried to find out the opinion of the National Bank of Romania and the banking system regarding this directive proposed by the European Commission, but by the time the edition was closed, neither the representatives of the central bank nor those of the banking system had answered our questions.