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Consumer credits: new regulation from 1 April 2011

EcovisTill 1 April 2011 provision of consumer credits and consumer credits agreements are regulated only by the provisions of Civil Code of the Republic of Lithuania (hereinafter - Civil Code) and those provisions are even not applied to all consumer credits. As it‘s stated in Art. 6.886 the provisions of Civil Code regulating consumer credits shall not apply when under the credit agreement: 1) the credit is granted by mortgaging an immovable property; 2) the consumer does not pay any interest or other fees; 3) the consumer undertakes to repay the credit within a period not exceeding three months or when the amount of the credit does not exceed one thousand Litas; 4) for a certain provided service the consumer pays installments during provision of the service. The exception indicated under point 3 excludes from the regulation of Civil Code so called “fast credits” which had become very popular during economic crisis and raised a lot of contradictory discussions.

On 23 December 2010 Lithuanian Parliament adopted the law on the Consumer Credits (hereinafter - Law) which will come into force from 1 April 2011. By this Law the provisions of Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers and repealing Council Directive 87/102/EEC (hereinafter - Directive) are implemented into Lithuanian national law.

The purpose of the Law as it is stated in its Art. 1 point 1 is to determine conditions of the granting of consumer credits and providing the information about these conditions, duties and responsibility of the creditors and credit intermediaries while providing consumer credits and while assessing the ability to pay of the credit receiver, credit receiver‘s right to repay the credit early than determined term and creditor‘s right to ask for a compensation in the case of early repayment. New provisions of Civil Code are also coming into force on 1 April 2011. The concept of the consumer credit agreement determined in art. 6.886 of the Civil Code is amended and articles 6.887-6.891 are repealed.

Art. 3 of the Law determines the scope of its application but contrarily to actual regulation the minimal limit of the credit to which the Law wouldn’t be applied is not determined which means that the provisions of the Law shall also be applicable for the “fast credits”.

Point 26 of the Preamble of the Directive states that Member States should take appropriate measures to promote responsible practices during all phases of the credit relationship, taking into account the specific features of their credit market. Those measures may include, for instance, the provision of information to, and the education of, consumers, including warnings about the risks attaching to default on payment and to over-indebtedness.

Lithuanian national law didn’t have such a regulation especially related to “fast credits”. The new Law implements all provisions of the Directive and covers all phases of the credit relationship.

First phase would be information preliminary to the conclusion of the credit agreement. Actual Civil Code has only one provision for this phase of the credit relationship and it states that in all cases, notwithstanding the proposed to the consumer way of execution of the credit agreement (including the advertisement), the annual credit repayment norm shall be specified (art. 6.887 point 8 of the Civil Code). Meanwhile the new Law regulates not only requirements regarding advertising but also an obligation for the providing of information while concluding the credit agreement (Chapter II of the Law).

Very important provisions are in the Chapter III of the Law „Assessment of the ability to pay of the credit receiver“. These provisions were included for two reasons. First of all it was necessary to implement provisions of the Directive. Point 26 of its Preamble indicates that in the expanding credit market, in particular, it is important that creditors should not engage in irresponsible lending or give out credit without prior assessment of creditworthiness, and the Member States should carry out the necessary supervision to avoid such behavior and should determine the necessary means to sanction creditors in the event of their doing so. Art. 8 of the Directive obliges Member States to ensure that, before the conclusion of the credit agreement, the creditor assesses the consumer's creditworthiness on the basis of sufficient information, where appropriate obtained from the consumer and, where necessary, on the basis of a consultation of the relevant database and  that, if the parties agree to change the total amount of credit after the conclusion of the credit agreement, the creditor updates the financial information at his disposal concerning the consumer and assesses the consumer's creditworthiness before any significant increase in the total amount of credit.

But also these provisions on the assessment of the ability to pay of the credit receiver were necessary considering the recent practice when persons could easily get credits without any preliminary assessment from different creditors and later they were not able to repay them.

Art. 8 of the Law determines that before the conclusion of the consumer credit agreement the creditor by following the principle of responsible lending has to assess the ability to pay of the credit receiver on the basis of the information received from the credit receiver and if needed for this assessment he can also consult relevant database. If after the conclusion of the agreement parties agree to change the amount of the credit, before any important change the creditors have to renew the possessed financial information on the credit receiver and to assess newly his ability to pay.

Neither the Law, nor the Directive does not provide the concept of the principle of responsible lending. On 30 November 2009 European Commission published a Summary of responses to the public consultation on responsible lending and borrowing in the European Union (http://ec.europa.eu/internal_market/finservices-retail/docs/credit/resp_lending/feedback_summary_en.pdf). This document includes ideas and responses how the principle of responsible lending could be explained. For example, financial services industry federations generally expressed the view that credit receivers should be expected to take responsibility for their part in the credit transaction, including reading information provided to them, and providing honest, accurate and complete information on their own situation to the creditor or intermediary. Consumer advocates, consumer and user representatives generally argued that the creditor is in a position of strength, contrary to the credit receiver, and should use this power to make an adequate assessment of the credit receiver and the credit products before agreeing to lend.

But still European Union law does not provide a clear definition of the principle of responsible lending. It is presumable that in the future this principle should be described in the case-law. 

A lot of discussions arose because of art. 10 of the Law which regulates the conclusion of the consumer credit agreement by using a means of distance communication. The initial draft of the Law didn‘t have this provision. While reading the Law at the Parliament there were suggestions to forbid these forms of the agreement or to determine that if a concrete credit receiver earlier was not client of the creditor then the agreement cannot be concluded by using a means of distance communication. In this way the identity of the credit receiver would be ascertained and also it would be known for sure that this credit receiver is familiar with the conditions of the agreement. 

The adopted Law determines that a consumer credit agreement can be concluded by using a means of distance communication with a credit receiver only if a creditor is ascertained that this is the will of the credit receiver and such an agreement with a new client can be concluded only after his identity is confirmed.
Actually the main way to confirm the identity and the will of the credit receiver is his registration by SMS message or on internet site and then payment of the registration charge (which is usually very nominal 0.01 LTL) from the bank account indicated while registration. If the information coincides credit receiver gets an SMS with a password for signing.

The Law also regulates in details form and content of the agreement of consumer credit. Moreover it provides a new possibility – a right of the credit receiver to withdraw from the credit agreement during 14 calendar days after its conclusion.

The Directive obliges member states to ensure the regulation and supervision of the creditors. Lithuania implemented this provision by art. 22 of the Law which states that a person has a right to perform the activity of lending consumer credits only after State Consumer Rights Protection Authority includes this person in the public list of the creditors. It should be noted that only legal persons are allowed to perform this activity in Lithuania.

The Law also regulates out-of-court dispute resolution procedures. The credit receiver has a right to apply to the State Consumer Rights Protection Authority which settles disputes out-of-court or to apply directly to the court (art. 26 of the Law).

For the conclusion it could be said that at least from legal point the Law protects rights of the credit receivers, but any assessment whether the Law accomplishes its purpose could be made only when it will come into force and will be applied in practice.

Giedre Uleviciute
ECOVIS Miškinis, Kvainauskas ir partneriai advokatų kontora
E-mail: giedre.uleviciute@ecovis.lt - Internet: www.ecovis.lt