What will banks have to comply with by 2014?

A series of amendments to the Consumer Credit Act will establish adequate consumer protection, including measures related to defining and limiting interest rates, margins, and fees, as well as limiting the amount of permitted overdraft on current accounts to the level of one regular monthly income, which banks and citizens will have to comply with by the end of 2014.

This is anticipated in the working version of the proposed amendments to the Consumer Credit Act, on which the Ministry of Finance opened a public discussion today that will last until the end of May.

The amendments to the Act introduce a series of measures to improve the position of citizens/consumers, who, as the ‘weaker’ contracting party, face numerous problems in credit relations with creditors, and the burden of blame for this situation, they say in the Ministry of Finance, certainly falls on the banks as well.

Therefore, a series of amendments is anticipated, whereby fees related to approved loans must be tied to the actual cost of granting the loan, and the introduction of new fees after the signing of the loan agreement is prohibited. The Minister of Finance will define the fees in more detail by regulation.

An obligation is introduced whereby the creditor must inform the consumer in writing about the risks associated with exchange rate changes, changes in interest rates, and the loss of the consumer’s income.

Parameters that can be used for changing the agreed variable interest rate are precisely defined, and the margin must remain fixed throughout the loan repayment period.

An obligation is introduced to define parameters and fixed margins for loan agreements concluded before the entry into force of this law, whereby for loan agreements where the exchange rate of a foreign currency against the domestic currency has increased by more than 20 percent during the repayment period, the interest rate and fixed margin must not exceed the initial ones.

Furthermore, a special article is introduced that determines the maximum allowed interest rate on housing loans, which must not exceed the average interest rate on approved housing loans by currency in the Republic of Croatia, increased by one percentage point.

A limitation on the amount of permitted overdraft on current accounts is proposed, which must not exceed the average monthly inflow to that account over the last six months. Citizens and banks must reduce overdrafts greater than one regular monthly inflow to permissible limits by December 31, 2014. In this regard, banks must offer citizens a loan to close excessive overdrafts for a period of no less than 24 months.

The effective interest rate (EIR) is also anticipated and limited in such a way that it amounts to a maximum of one percentage point less than the statutory default interest rate.

The amendments to the Consumer Credit Act, the Ministry of Finance notes on its website, are prompted by the difficult position of citizens in credit relations with creditors, as evidenced by more than 300,000 blocked accounts of citizens and an increasing percentage of loans that citizens cannot repay. The share of non-performing loans in total housing loans is 12.5 percent, and in some categories of loans, for example, housing loans in Swiss francs, it is much higher.

The burden of blame for this situation, they say in the Ministry of Finance, certainly falls on the banks, which, through their irresponsible behavior and excessive credit expansion, often granted loans without a quality in-depth analysis of the client and determining their creditworthiness as well as assessing all risks associated with the credit business.

Likewise, banks have entered into tens of thousands of housing loan agreements with variable interest rates with consumers, without having agreed on the parameters based on which the interest rate will change. Such loan agreements allow banks to act arbitrarily in changing interest rates and are null and void under the Obligations Act. Such loan agreements are also contrary to the fundamental principles proclaimed by the Constitution of the Republic of Croatia.

The arbitrariness of banks, they emphasize, is also evident in the granting, and especially in the cancellation of overdrafts on citizens’ current accounts (so-called negatives) because decisions to reduce overdrafts are made unilaterally by banks.

The Ministry of Finance believes that such behavior of banks does not differ from the behavior of legally prohibited ‘credit agencies’ that operated without a license, and numerous lawsuits against banks confirm the described poor practices of banks.

They also emphasize that the intention of this law is to apply its provisions to all consumer credit agreements, regardless of when they were created, including loan agreements created before the adoption of the first Consumer Credit Act in the Republic of Croatia in 2009.