Legal Aspects of Consumer Loans from the Perspective of Consumer Protection

8/11/2019 Legal Aspects of Consumer Loans from the Perspective of Consumer Protection

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Legal Aspects of Consumer Loans from the

Perspective of Consumer Protection

by DraganaŠindić



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“Consumers by definition, include us all”.

They are the largest economic group, affecting andaffected by almost every public and private

economic decision. Yet they are the only important

group whose views are often not heard.”

John F. Kennedy



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Content:

1. Introduction

2. General notion about consumer loan and

consumer protection

3. USA legislation - Serbian legislation

4. EU legislation - Serbian legislation

5. Conclusion



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Problems in Serbian legislation concerning consumer

loan protection :

• not enough laws and regulations

• consumer loans are one of the most used banking product in

the market-it is the only way for many to buy certain things-

autos, house renovation, TV, etc.

• consumers are not properly informed about their rights

On the other hand EU and USA have developed legislation in

this area.

The aim – finding better andmore developed legal solutions

for consumer loan protection

in Serbia



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Recent changes in Serbian legislation:

• New Serbian Consumer Protection Law-2011

• The part concerning consumer loan is absent from this law

• New Financial Service Protection Act will be effective from 2012

• At the moment only Serbian Obligation Law has some articles

concerning consumer loan (it regulates loan is general)

There is no proper act that regulates consumer loan, which makes

consumer’s extremely vulnerable and unprotected.



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Consumer loan-general notion, history

• Loan in general, is a certain amount of money lent by the financial institution (usually

bank) to the borrower, which should be returned on or before fixed date with an

interest.• The basic rights and obligations of parties of loan contract (agreement)-for lender

(bank) -giving certain amount of money to the borrower in terms and conditions

specifies in the contract and for borrower (loan beneficiary) -returning of the borrowed

amount on a date defined by the bank’s repayment plan.

• Consumer loan is money loaned to individuals by a financial institution (bank usually)

for personal, family, or household purposes.

Development of a loan through history:

• Babylon-Hammurabi’s Code

• Greece-Pythius, metics (Pasion)

• Roman Empire- “bancu”

• Renaissance Italy - Florence, Venice, Genoa,Jews, Bardi, Peruzzi, ”banca rotta”, financing

the wars, Banca Monte dei Paschi 1472



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Loan Contract-legal term, contract clauses

• A Loan Agreement is a contract entered into between two parties,

that defines the terms of a loan which is repayable with interest overa fixed term.

• Written form

• None of the clauses are in consumer’s favor, because the lender

(bank) is the party that writes the contract

Clauses characteristic for consumer loan :

• Insurance clause

• Acceleration clause

• Deficiency clause

• Recourse clause



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The differences between consumer loan and consumer credit

• In Serbian language the consumer loan and the consumer credit can be considered

synonyms. However, in Serbian we can draw a line between a loan and a credit froma division based on a loaner. In the case of the credit the loaner can be only financial

institution (usually a bank), but in the case of a loan the loaner can be both financial

institution and an individual.

• In English language consumer loan is part of consumer credit that besides consumer

loan includes: credit cards (classic, gold, platinum), personal loans (short-termedloans), T&E cards (travel and entertainment cards), C&D loans (construction and

development loans), private label card, oil company cards, lines of credit and home

mortgages.



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Risk/Reward Ratio of Banking Products

CREDIT LINES

PRIVATE LABEL CARDS

T&E CARDSC&D LOANS

STANDARD CREDIT CARD

BUSINESS LINES

GOLD CARD

DEBIT CARDS

HOME MORTGAGES

PROFIT

R

I

S

KPREMIUM CREDIT

CARDSAUTO LOANS





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Example of consumer loan

agreement, Vojvodjanska banka

Uniformed, in written form

More powerful side of the

agreement-bank determines the

terms of agreement



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In first line of the contract are named

the parties of the contract, the bank

and loan beneficiary, a person who is

borrowing the money from the bank, as

well as their addresses and date of

signing the agreement, which is the

first and second typical content of

Consumer Loan Agreement.



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• First article explains the nature of this agreement and gives definitions of the subject

of agreement and responsibilities of each party in the contract, and it is the third and

fourth element that every loan contract has to incorporate.

First article explains the nature of this agreement and

gives definitions of the subject of agreement and

responsibilities of each party in the contract, and it is

the third and fourth element that every loan contract

has to incorporate.

In first article is also given breakdown of loan (theamount of money, interest rate, number of

installments, etc.) and repayment period and

provisions, which are content number five and six.







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Article number nine of the agreement covers fourteenth element from the list, the co-

borrowers. The loan beneficiary could not transfer his rights and obligations to anotherperson, without prior consent of the bank. However, bank can assign its rights and

obligations to another bank, or financial institution (offset business-twelve content from the

list).

Article number twelve and fifteen are about

eventual disputes between parties and sources of

law in the case of dispute, which are given in the

list of contents under number eleven-default.



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Consumer protection: definition and history

• Consumer protection is a way to protect consumers by applying certain standards

and laws.

• The consumer protection is the product of a long civilization development of humanrights and economic growth.

• Caveat emptor, contra preferntem

• 1960’s USA-the beginning of modern consumer protection, John F. Kennedy

• 15.3.1962 –Bill of Consumer Rights

8 Consumer Rights incorpo rated in

UN Resolu t ion 39/248:

1. Basic Needs

2. Safety

3. Info rmation

4. Cho ice

5. Represent at ion6. Redres s

7. Consum er Educat ion

8. Healthy Env ironment



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Economic theories on consumer protection

• Adam Smith and the classic liberal economy - "the invisible hand," “Welfare of the

Nations”, laissez-faire convictions, the main duty of the state is to provide an environment

suitable for economic growth, to contribute to progression by failing to influence the

economy, in the center of the theory-consumers who are key force in regulating market-offer and demand by their preferences

• Keynesism- The End of Laissez-Faire, free market and consumers’ possibilities of choice

were restricted by international trusts, the state must intervene

• Economy of welfare states - social security and education must be provided by the state

for each citizen, by the means of the redistribution of goods directed by the state, equal

rights and chance to obtain goods and services• Neoclassic school - Milton Friedman, state intervention only to the extent necessary for a

basic level of security, budget deficit, slowdown in economic growth

The awareness of need for consumer

protection and theories about this subject,

developed through the ages. The

consumer’s protection right is the productof the growth in economy and

improvement of human rights. Every

period had its own economics theory

based on the present development.



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Consumer loan protection in United States of America

• The Fair Credit Reporting Act - regulates the collection, dissemination, and use

of consumer information, including consumer credit information

• Fair Debt Collection Practices Act - regulates debt collection practices

• Equal Credit Opportunity Act - prevents discrimination in the granting of credit

• Electronic Funds Transfer Act & Fair Credit Billing Act - establish

procedures for resolving mistakes on credit billing and electronic fund transfer

account statements

• Fair Credit Practice Rule - define and prevent “unfair or deceptive acts or

practices

• Truth in Lending Act – explains in great detail disclosures, usage and

different situation in all credit business, including consumer loan



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Fair Credit Reporting Act • passed in 1970, enforced by the US Federal Trade Commission,

designed to protect consumer’s privacy

The major rights under the FCRA:

• Consumer must be told if information in his file has been used against him

• Consumer has the right to know what is in his file

• Consumer has the right to ask for a credit score

• Consumer has the right to dispute inaccurate or incomplete information

• Consumer reporting agencies must correct or delete inaccurate, incomplete, or unverifiable

information

• Consumer reporting agencies may not report outdated negative information

• Access to consumer’s file is limited

• Consumer must give his consent for reports to be provided to employers

•Consumer may limit “prescreened” offers of credit

and insurance consumer gets, based on information in his creditreport.

•Consumer may seek damages from violators

FSPL-Article 18-bank has to get written consent from

consumer in order to assess his credit score-bank has to

inform consumer about the reasons of loan denial from

National Credit Bureau



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Fair Debt Collection Practices Act

• purposes are to eliminate abusive practices

in the collection of consumer debts, topromote fair debt collection

FDCPA requires debt collectors to :

• Identify themselves and notify the consumer

• Give the name and address of the original

creditor

• Notify the consumer of their right to dispute

the debt

• Provide verification of the debt

• File a lawsuit in a proper venue

Abusive and deceptive actions that

FDCPA prohibits:

• abusing consumer by the phone

• communicating with consumers at their

place of employment

• contacting consumer known to be

represented by an attorney

• misrepresentation or deceit

• publishing the consumer's name or address

on a "bad debt" list

• seeking unjustified amounts

• communication with third parties

• abusive or profane language

• threatening arrest or legal action

• contact by embarrassing media

• reporting false information on a consumer's

credit report or threatening to do so in theprocess of collection

FDCPA covers final stage of consumer-bank relationship-the unwanted one, where consumer

can’t fulfill his obligations to the creditor (bank). Not present in Serbian legislation. . Developing

of similar legal act will be not only beneficial to consumers, but also in legalizing of financial

institutions that collect debts on behalf of another.



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Credit Practices Rule • The purpose of the Credit Practices Rule is to declare certain acts or practices by banks in

connection with consumer credit transactions to be unlawful

Prohibited provisions are :

• A confession-of-judgment clause

• A waiver of exemption

• An assignment of future wages

• The taking of non-possessory security interests in household goods

• pyramiding late charges • misrepresenting a cosigner’s liability

Only a confession of judgment clause is

present in Serbian Law of Financial

Services Protection. Opportunity for

consumer to be heard - National bank of

Serbia , article 42 of the Law. Consumer’s

right on a law suit is stated under article46 of FSPL.



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Equal Credit Opportunity Act

• unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit

transaction

Under the Equal Credit Opportunity Act:

• Consumers cannot be denied credit based on race, sex, marital status, religion, age, national origin, or receipt

of public assistance.

• Consumers have the right to have reliable public assistance considered in the same manner as other income.

• If consumers are denied credit, they have a legal right to know why

ECOA is a very detailed and developed act and some of its solutions should be included in futureSerbian law-Serbian Antidiscrimination law have general antidiscrimination provisions, but specific

antidiscrimination regulation present in banking practice should be enacted also

Applicants 60+-difference in Serbian and USA law



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Fair Credit Billing Act and Electronic Fund Transfer Act

• establish procedures for resolving mistakes on credit billing and electronic fund transfer

account statements, including :

• charges or electronic fund transfers that consumer have not made;• charges or electronic fund transfers that are incorrectly identified or show the wrong date or

amount;

• math errors;

• failure to post payments, credits, or electronic fund transfers properly;

• failure to send bills to consumer current address – provided the creditor receives consumer’s

change of address, in writing, at least 20 days before the billing period ends;

• charges or electronic fund transfers for which consumer asks for an explanation or writtenproof of purchase along with a claimed error or request for clarification.

FSPL, article 31- bank is obligated to give consumer free credit

statement at least twice a year, and for current accounts at least

once a month.

FSPL does not regulate all the situations stated in U.S.A. FCBA

and EFTA act. These electronic errors are mostly regulated bybank’s good business practice. When consumer notices the

error, he complains to bank, which usually finds a solution.

Nevertheless, it is better and more secure to determine all these

situations in written form and include them in FSPL.

National Bank of Serbia controls electronic fund transfers in

Serbia and there is also the Serbian Electronic Communications

Law.However, neither of these laws has provisions mentioned inEFTA



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Truth in Lending (TILA)

• 1968 , designed to promote the informed use of consumer credit (loan)

• The regulation is divided into subparts (from A to G).

• Subpart A gives general information about the authority, purpose, coverage, organization, enforcement, and

liability of the act, as well as definitions and rules of construction, and exemption of the rules and finance

charge. In general, this regulation applies to each individual or business that offers or extends credit when

four conditions are met:

• The credit is offered or extended to consumers

• The offering or extension of credit is done regularly

• The credit is subject to a finance charge

• The credit is primarily for personal, family, or household purposes

Subpart C

Subpart C relates to closed-end credit. It contains rules on disclosures, treatment of credit balances,

annual percentages rate calculations, rescission requirements, and advertising

It is the most important and detailed part of TILA, that regulates consumer loan.

Rules on disclosures:

•Written form

•The disclosures shall reflect the terms of the legal obligation between the parties.

•information necessary for an accurate disclosure is unknown to the creditor-the disclosure is based on

the best information reasonably available- state clearly that the disclosure is an estimate

•transaction in which a portion of the interest is determined on a per-diem basis and collected at

consummation, any disclosure affected by the per-diem interest shall be considered accurate if the

disclosure is based on the information known to the creditor



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Advertising:

Actually available terms, Advertisement of rate of finance charge, Advertisement of terms that

require additional disclosures-Triggering terms, Catalogs or other multiple-page advertisements;

electronic advertisements, Alternative disclosures--television or radio advertisements, Tax

implications, Misleading comparisons in advertisements, Misrepresentations about government

endorsement, Misleading use of the current lender's name, Misleading foreign-language ad.

• Subpart D - miscellaneous information (oral disclosures, Spanish language disclosure

in Puerto Rico, record retention, effect on state laws, state exemptions and rate limitations.)

FSPL contains many important provisions included in TILA act such as: right to recession,

necessary form of credit (written form), advertising of bank’s products, important elements

of disclosures, etc.

Calculation of interest rate and more detailed information about advertising (in FSPL there

is provision of clear and understandable advertising, prohibition of inaccurate and untrue

advertising and prescribed penalties in case of law violation) as well as subpart D should

be incorporated in future Serbian Law.



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Basic Principles of Consumer Protection in EU:

• Consumer can buy what he wants, where he wants

• If it doesn’t work, send it back

• High safety standards for food and consumer goods

• Awareness of food ingredients

• Contracts should be fair to consumers

• Sometimes consumers can change their mind

• Making the easier to compare prices

• Consumers should not be misled

• Protection while consumers are on holiday

• Effective redress for cross-border disputes

•recognized andapproved by European

Commission



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EU Directive 48/2008:

Directive 48/2008/EEC was enacted by European Parliament and Council of European Union in 2008.

Protects consumers with 4 sets of norms:

• obligation of pre-contractual information

• obligation of fair consumer loan advertising with minimum of information

• prescribing required form and content of consumer loan agreement

• definition of rights and obligations of the consumer

Pre contractual phase-main features: duration of the credit agreement, total amount of credit, the

borrowing rate ,annual percentage rate of charge and the total amount owed by the consumer, theamount, number and frequency of installments, 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, sureties.

•adequate explanations to consumer

•right to withdraw (14 days)

•early repayment

•Serbian FSPL = EU 48/2008



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Financial Service Protection Law • New Serbian Law, effective from 2012

• regulates the rights of consumers of financial services provided by banks, financial leasing

institutions and traders, as well as conditions and ways of applying these rights• Article 5 of FSPL defines 5 principles of consumer protection in financial services:

– right to equal relations with creditor

– antidiscrimination right

– right to information

– right to definition of contractual obligation

– right to protection of interest of consumer

• Article 6 insures clear and understandable way of advertising financial services.

• It prohibits placement of inaccurate information and possibility of misinterpretation about credit

conditions.

• Article 7 prescribes written form of credit contract. Every party should receive a copy of a contract.

The contract can’t contain articles where consumer declines his rights guaranteed by this Law.

In Article 10 it is prescribed that creditor must inform consumer

about his general provisions and gives him the explanation and

instructions about applying of general provisions. Creditor is

obligated to provide consumer with the written form of general

provisions on consumer’s request.





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• Article 19 prescribes provides the basic elements of credit agreement

• article 28 is provided that bank can’t single-sided change the elements of agreement. Bank has to

obtain written consent from consumer.

• In article 30 gives consumer right to free credit statement. Bank has to provide at least twice a

year consumer with a free credit statement.

• Article 32 gives bank the right to charge penalty rate in case of late payments

– article 40 of FSPL states that if the consumer rescinds the contract of sale, seller has an

obligation to inform the bank about recession of the contract. Bank has to return the amount

that consumer already paid, including interest rates.

This article covers the situation when consumer is denied a consumer loan. As a result of this,

previous contract of sale must be rescind.



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Conclusion:

• Confusing situation in Serbian Law concerning consumer loan-without the proper

regulation

• New regulation-FSPL, effective 2012 completely transcribed from EU Directive48/2008

• Absolute need of the law dedicated solely to consumer loan as a special type of

credit transaction (example Croatian Consumer Loan from 2009)

• Improvement in FSPL : currency clause, prohibition of aggressive and abusive bank

marketing, required current account alongside credit account)

• National Bank of Serbia should follow and harmonize its regulations with other notfinancial regulations (example-Financial Service Protection Law and Consumer

Protection Law should have complementary articles)



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ATTENTION!

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Legal Aspects of Consumer Loans from the Perspective of Consumer Protection