Separate and apart from the general legal framework for the protection of consumers in Romania set forth in Government Ordinance no. 21/1992 (hereinafter the “GO”), a niche had existed for creditors enabling them to modify the interest and fees that they charged for certain consumer loans by increasing them as much as they wanted -- such as the law regarding mortgages (Law 190/1999) and the law regarding consumption credits (Law 289/2004). As a consequence, consumers often paid more and more to the banks as interest or fees were arbitrarily increased.
This led to many complaints addressed to the Consumer Protection Office and to the courts. Trust in credit institutions was shaken. In reaction to this, the Government enacted Emergency Ordinance no.147 (hereinafter the “EGO”) that was published in the Official Gazette of Romania no. 795, Part 1 on November 27, 2008 and became effective on December 27, 2008. The EGO is designed to put a stop to abusive practices by credit institutions.
The GO protection framework
The EGO introduced three new articles in the GO (i.e., 9¹ - 9³) for the protection of consumers who conclude credit contracts. The general protection provisions state that when asked by the consumer for a credit offer, a financial services provider (i.e., the creditor) must offer, free of charge, in hard copy, a reimbursement format or other document detailing the total costs of the credit to be borne by the consumer and a copy of the draft credit agreement.
Financial services providers will have to abide by the provisions of the GO in regard to each type of credit agreement they offer to customers. Therefore, if the credit applies interest or any other costs for the consumer, the credit institutions must supply the consumer with the following information: the interest rate, whether fixed or variable; the total cost of the credit; the effective annual interest; the duration of the credit contract; and the total amount that a consumer could pay. The information regarding the costs has to be written in an easily visible manner by using fonts of the same size as the rest of the text.
Conditions for the conclusion of credit agreements
According to the amended GO, financial services providers must adhere to certain requirements when suggesting a draft credit agreement to an individual. The first condition is that all clauses have to be written in a visible and easy to read manner by using a font size of at least 10 point. The agreement must be drafted in two originals, each of them going to one party. Another condition is that all interest, commissions, fees, prices and bank expenses or any other costs related to the credit or regarding services related to the credit, which a consumer cannot refuse, must be clearly stated in the agreement. Additionally, the agreement must include clauses regarding the costs for any account operations such as deposits, extractions, or administration expenses.
In order to prevent abuses by financial services providers during the credit period, they are prohibited from increasing commissions, fees, prices and bank expenses or any other costs that are mentioned in the agreement or to introduce new ones that are not mentioned in the agreement.
The EGO provides for certain conditions to be met for credits with variable interest rates such as an independent determiner of the interest (i.e., the increase of the interest does not depend on the financial services provider but on contractual or legal reference indices). Another provision states that the interest may fluctuate according to the financial services provider’s reference interest, as long as it is unique for all the credits granted to natural persons and if it does not breach the limit in the credit agreement. Furthermore, the formula used for the determination of the interest rate has to be set forth in the agreement as well as the periods of time and conditions under which it fluctuates. In this manner, the consumer has more security and can appraise more accurately the sum of money he owes to the financial services provider.
The EGO prevents provisions in the agreement from allowing the financial services provider to modify the clauses if an addendum to the agreement is not concluded with the consumer concerning such an amendment. If the financial services provider seeks to amend the provisions of the agreement, it has to notify the consumer using the means of notification provided by the agreement and wait for an answer. The lack of answer does not amount to an acceptance of the amendment.
The agreement may provide that if the consumer does not pay his installments on time, he will be reported to the Credit Office or to any other similar institution.
The special credit law – the consumption loan - Law 289/2004
While the GO represents the general framework for consumer protection, Law 289/2004 regulates the specific field of consumption loans. The main feature of Law 289/2004 is that it only targets natural persons (referred to as consumers) and not legal entities. The law might thus be considered a special facility granted for natural persons.
According to Article 3 of Law 289/2004, it does not apply to real estate loans. The law applies to leasing agreements which ultimately aim at the transfer of ownership title to the lessee, but does not apply to ordinary rental contracts. Loans which do not apply interest rates or any other expenses represent another exception from the object of the law as well as loans which do not provide for interest payment if the debtor agrees to reimburse the entire credit at once. Moreover, the law does not apply to credits that are granted as payment advances for credit lines supplied by a credit or financial institution if not covered by a payment instrument such as a credit card.
Preliminary obligations for the creditor
The consumer has a wide range of agreements that he can conclude with a creditor, but in order to insure his protection the law provides for certain obligations by the creditor. The original text of article 6(a) of Law 289/2004 provided that before the conclusion of the credit agreement the creditor had to present the types of credits it grants and the sums to be provided by taking into account the consumer’s financial status, the advantages and disadvantages implied by the type of credit and also the purpose for which it had been requested.
The EGO amends the above noted provision stating that a creditor has to offer, free of charge, in hard copy a reimbursement scheme and a copy of the draft credit agreement, when asked by the consumer for a credit offer, according to the general consumer protection framework. As a consequence, the consumer can recognize more easily the advantages and disadvantages of a credit offer and whether he can bear the rates for reimbursement. Also, the new text provides the opportunity to the consumer to discuss the clauses of the draft credit agreement with the creditor.
Formerly, article 6(b) of Law 289/2004 allowed the creditor to supply the precise and complete information that is necessary for the conclusion of the credit agreement. The meaning of the word “necessary” was construed in favor of the creditor; therefore, it could have hidden the “unnecessary” information that might have caused the consumer not to enter into the deal. The EGO amends article 6(b) by erasing the construable “necessary”- the creditor must now provide correct, complete and precise information regarding the envisaged credit agreement. According to article 6(c) of the law and also to the EGO, the creditor must provide the consumer with information regarding the entire documentation that is necessary in order to obtain a credit.
Under the amended EGO, the consumer must supply the creditor with a current accurate presentation of his own financial position, as set forth in the regulations and also demonstrate the means to guarantee the entire payment of the debt, and if necessary an appraisal of the goods representing the guarantee. Article 6(c) of the law had provided for an extra condition – the credit documentation must contain an appraisal of the financial situation covering the entire reimbursement period. The EGO sets aside such a provision due to the unpredictability of the financial environment, and therefore exempts both the consumer and the creditor from such an improbable estimation.
Conditions of the credit agreement
As previously noted, just like the credit offer presented by the creditor when requested, the credit agreement must also be concluded with the consumer in hard copy in at least two originals out of which one remains with the consumer. The law provides that the credit agreement must contain at least the names and the addresses of the parties; the value of the interest; the value of the total costs of the credit supported by the consumer; a list regarding the value, number and frequency of the reimbursement payments or the payment dates; the credit documentation; the possibility of reimbursement for the entire credit added to a proportional reduction of the credit costs; and other clauses as per the annexes of the law.
Mention should be made that the EGO modifies some of the clauses provided by the law. The clause related to interest plays a major role in the fight against creditors’ abuses. More precisely, the EGO restates the amendments that were also added to the general consumers’ protection framework. Therefore, in a consumption loan agreement, the interest has to be well defined as fixed or fluctuating. In case the interest is fluctuating, its variability must be independent of the creditor’s will and it can only fluctuate because of the fluctuation of some verifiable references which are mentioned in the agreement or because of the provisions of the law.
Special attention is given to agreements that refer to credits granted as payment advances for credit lines supplied by a credit or financial institution - credits that are covered by a payment instrument such as a credit card. For these types of credit agreements, the consumer has to be informed by the creditor of the limit of the credit, if any; the annual interest and the applicable costs as well as the amending conditions; and the procedure by which the credit agreement might terminate. The creditor has to inform the consumer in writing of any modification of the annual interest or other costs, if such a modification is ulterior to the execution of the contract.
The amendments regarding the necessary conditions for the conclusion of a consumption loan are also to be observed at the conclusion of a particular type of agreement which implies three parties: a services or goods provider; the creditor and the consumer. This type of agreement implies a pre-existing agreement between the services or goods provider and the creditor. The pre-existing agreement provides that the creditor grants credits only to the clients of the services or goods provider (i.e. the consumer).
The penalty for not observing the amended conditions of the law is that the agreement is null and void.
The discretionary possibility of credit institutions to modify clauses in a credit agreement in their favor without the prior consent of the consumer led to a lack of trust in such credit instruments and to a decrease of investments made on the basis of such credits. The EGO provides more security for consumers and investors who obtain this type of credit.
However, a new problem has lately arisen – the possibility that the limitations and conditions provided by the EGO will eventually lead to a diminished number of credit agreements as credit institutions may introduce harsher conditions to be met by the consumers when applying for credit. This is due to two factors that now influence credit operations: on the one hand the limitations regarding the variability of interest and the credit costs imposed by the EGO, and on the other hand, the credit institutions’ mistrust of the current economic environment combined with the increase of the interest rate at which credit institutions grant credits to each other. As a result, credit institutions may well impose harsher conditions for the credits that are granted to consumers in order to secure their businesses. Hopefully, the entire economic environment, shaken by the world economic crisis, will soon heal and, as a consequence, credit institutions will drop their harsh conditions regarding credits.
The article was published based upon approval of:
Rubin Meyer Doru & Trandafir
SOCIETATE CIVILA DE AVOCATI / LAWYERS PROFESSIONAL CORPORATION
IN ASOCIERE CU / AFFILIATED WITH HERZFELD & RUBIN, P.C.