Proposal for a new Directive on Consumer Credits
Expanded regulation to require significant adjustment for consumer finance providers
On June 30, 2021, the EU Commission proposed a new Directive on Consumer Credits (COM(2021) 347 final). According to this proposal, the regulations for consumer loans are to become even more comprehensive and will apply to forms of consumer financing that so far were not in scope. For lenders, this will require substantial adjustments; the EU Commission estimates the implementation cost for the banking industry at EUR 1.5 billion!
1. Regulation of Small Loans, Leasing, and Crowdfunding Platforms
According to the draft directive, various forms of consumer finance previously exempt from this regulation will have to meet the strict requirements of the Directive on Consumer Credit (as implemented by the national laws).
This affects all loans that were previously out of scope because of their small amount, low cost, or short term, including the consumer finance offered on internet platforms (“Buy Now Pay Later”). Pursuant to the proposal, the rules for consumer credits will apply to - so far exempt - loans of less than €200 and interest-free/charge-free loans, including short-term financing available through credit cards (charge cards/delayed debit cards). In addition, all forms of leasing will be regulated as consumer credits, including operating leasing which is not in scope unter the current directive.
Lenders will have to adapt their contract terms and processes, from pre-contractual information requirements to credit decision processes and dealing with the withdrawals, to which borrowers will have a right for forms of consumer credit that newly fall under the regulations.
Further, crowdfunding platform operators will have to fulfill the obligations of credit intermediaries and in some respects (creditworthiness check) those of a lender, even if the platforms offer only peer-to-peer lending.
2. Tightening of Current Regulation
Additional requirements are also planned for consumer financing already regulated under the current Consumer Credit Directive. For example, additional pre-contractual information requirements will be introduced. In the future, the lender must provide the consumer, prior to signing, with general information about the financing offered and, in adddition, a one-page standard overview of the material credit terms (Standardised European Consumer Credit Overview). Also, a one-day cooling-off period between the consumer receiving the information and the conclusion of the contract generally must be observed.
The rules for creditworthiness assessments will be more detailed and tightened, with specification of the information to be considered in the decision. Also, a consumer loan may only be granted if it is positively established that the consumer is likely able to fulfill his obligations under the credit agreement.
Conduct of business obligations are imposed on lenders. They must act honestly, fairly, transparently, and professionally, taking into account the rights and interests of the consumers. This may require an adjustment of remuneration structures to avoid conflict with good conduct. In particular, the remuneration of credit decision-makers must not depend on approved credit volumes.
3. Cap on Credit Costs
The proposed directive imposes ceilings on the credit costs for the protection of the consumer. Member states must set for consumer credits mandatory caps on interest rates, the annual percentage rate of charge or/and the total cost of the credit to the consumer. Depending on the level of the caps, lenders will have to consider the offer of which loans can continue. In the interest of consumer protection, the EU Commission accepts that this could result in a drop in the supply of available consumer credit.
4. Effectiveness of the New Rules
Upon effectiveness of the new Directive on Consumer Credit, according to the proposal, the member states would have two years for the implementation into national law. These rules would then have to apply within a further six months. Therefore, the new rules will presumably not apply before the end of 2024. Given the need for adaptation, however, consumer finance providers are well advised to prepare their procedures, processes, and contractual documentation for the new regulations as soon as the directive is adopted. This affects in particular all financings coming newly into the regulations´ scope because the effort required to adapt the contract terms and the processes (pre-contractual information, right of withdrawal, creditworthiness assessment) will be considerable and time-consuming.
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