1. EU-Commission on Responsible Lending and Responsible Borrowing
EUROPEAN COMMISSION Internal Market and Services DG FINANCIAL INSTITUTIONS Retail issues, consumer policy and payment systems Brussels, 15 June 2009
PUBLIC CONSULTATION ON RESPONSIBLE LENDING AND BORROWING IN THE EU (see link at the bottom)
"Responsible lending" means that credit products are appropriate for consumers’ needs and are tailored to their ability to repay. This may be obtained through having an appropriate framework in place to ensure that all lenders and intermediaries act in a fair, honest and professional manner, before, during and after the lending transaction. Responsible borrowing implies that – in order to obtain a credit – consumers should provide relevant, complete and accurate information on their financial conditions, and are encouraged to make informed and sustainable borrowing decisions."
To illustrate the problem in the Commission’s approach we have amalgamated the following citations from 14 of the 15 questions (all literal citations from the formulation of the questions are set in italics).
a) Lack of Risk Assessment
Consumers act irresponsibly when borrowing. They take up too much credit which they cannot afford. Lenders should exclude more risky borrowers and deny access to credit especially for poor people.
Suppliers should develop more risk guidelines (Q2); Mortgage lenders and credit intermediaries should always perform creditworthiness and/or suitability assessments before granting consumer and mortgage loans using loan-to-income ratios or loan-to-value ratios (Q4); The lender or credit intermediary should demonstrate or document the adequacy of the creditworthiness and suitability assessment (Q5); [Such due diligence behaviour are] advice standards appropriate in an EU context (Q6).
b) Wrong Consumer Decisions
In the present crisis consumers made wrong decisions. We should therefore educate them better, protect them from advertising and exclude those who are not able to decide properly from access to credit.
Evidence of misleading or unfair advertising or marketing can be blamed for the crisis. (Q1); There should be a focus on financial education, [and] any measures that could be taken to encourage responsible borrowing (Q7).
c) Misleading Credit intermediaries
[There are many] examples of cases of misconduct, mis-selling or any other instances of consumer detriment linked to credit intermediaries (Q10); The regulatory patchwork for credit intermediaries presents a problem (Q11); [The reason for misconduct of intermediaries lies in a] potential conflicts of interest, particularly with regard to fee/ bonus/ commission structures (Qu12); [They should be subject to] registration and supervision (Q13); [and taking the criteria of the MIFID Directive, obliged to meet] prudential and professional requirements for credit intermediaries (such as minimum capital, professional indemnity insurance, educational or professional qualifications) (Q14); [and] brought within existing complaints and out-of-court redress mechanisms (Q15).
2. ECRC Letter to the Commission
July 14, 2009
Consultation on Responsible Lending and Responsible Borrowing in the EU – Preliminary Statement
Dear Ms. Lynch,
Thank you for your kind invitation to participate in the consultation process of the EU on credit issues entitled Responsible Lending and Responsible Borrowing in the EU. I would like to attend and speak at the public hearing on September 3, 2009. We would also appreciate if another place could be granted to us at the hearing so that we can also engage another of our partners with whom we have built the Global Coalition for Responsible Credit/ Global Fair Finance. That said, we have some difficulty in responding adequately to your request because the way that it is structured forces the respondents (to a large extent) to subscribe to predefined structures, assumptions, and solutions in order to be able to answer these questions adequately.
- ECRC is a Coalition of not-for-profit institutions and organisations focussed on one single public interest issue: responsible credit (which extends to a campaign for responsible behaviour in the provision of financial services more generally) We therefore cannot register as required on your special interest site, but most of the agencies forming our Coalition are registered in their own right. Our goal is mainly to organise NGO communication, to develop and promote our seven principles of responsible credit that we have developed to help organise conferences and spread information on our five websites.
- ECRC is an international coalition without fees, finance and formal structure. Our activity is paid for by those who want to use or benefit from this structure. We therefore would kindly ask you to carry the cost of travel and accommodation for two persons irrespective of their nationality.
- ECRC-partners subscribe to “responsible credit” as a product and service whose design and distribution is the responsibility of its suppliers. We therefore do not think it should be confused with issues concerning the consumers’ own decision to use credit productively. The reduction of a credit relation to due diligence “lending” at the time the credit is granted seems to be a problematic reduction in the light of our principles.
- The consultation paper makes implicit assumptions on credit, the malfunctioning of the financial market and the tools to be used to cope with the financial crisis. We would like to discuss these assumptions instead of contributing only solutions based on these assumptions. We especially miss most of those concerns and insights brought forward and published in our conferences and public declarations. In the light of our principles for responsible credit only the first half of principle 3 letter a (Credit and its servicing must be productive for the borrower) seems to be taken into account.
On this basis ECRC will try to organise the discussion amongst its partners with the aim of submitting a statement by end of August; even though due to the holiday season this deadline will not be easy to meet.
With kind regards
Udo Reifner, Chair ECRC (Germany)
Damon Gibbons (Chair DOOD, UK)
Bob Schmitz (Member of the ECCG ( European Consumer Consultative Group) sub-group on financial services, Luxembourg)
Benoit Granger (MicFin, France)
Annexes to the e-mail (all available also in other languages at www.responsible-credit.net; www.credit-responsable.net; www.verantwortliche-kreditvergabe.net; www.credito-responsabile.net; www.globalfairfinance.net)
ECRC Principles of Responsible Credit (see short version in this letter)
ECRC/NCRC Subprime Declaration
ECRC/NCRC London Declaration
ECRC G20 Declaration
Principles for Responsible Credit
P1: Responsible and affordable credit must be provided for all.
a. Credit is an essential for full participation in society
b. Banks should not discriminate and should provide real access.
c. Credit to Consumers and Small Businesses must be supervised.
P2: Credit relations have to be transparent and understandable.
a. Competitive transparency requires a standardized mathematically correct form of “one-price” disclosure (the Annual Percentage Rate of Charge or APRC).
b. Social transparency requires a standardized pre-contractual payment plan.
c. Consumers should be provided with adequate time for reflection and with access to independent advice.
d. Consumers should have access to independent financial, credit and debt advice.
e. Both parties in the credit markets have to take part in a mutually productive process of financial education
P3: Lending has at all times to be cautious, responsible and fair.
a. Credit and its servicing must be productive for the borrower
b. Responsible lending requires the provision of all necessary information and advice to consumers and liability for missing and incorrect information.
c. No lender should be allowed to exploit the weakness, need or naivety of borrowers.
d. Early repayment, without penalty, must be possible.
e. The conditions under which consumers can refinance or reschedule their debt should be regulated.
P4: Adaptation should be preferred to credit cancellation and destruction.
a. There is a need for effective protection against unfair credit cancellation.
b. Default charges should be adequate to cover losses only.
P5: Protective legislation has to be effective.
a. Credit regulation has to cover all non-commercial users.
b. Credit regulation has to cover all commercial forms of credit provision.
c. Credit regulation has to cover the whole process of credit extension as experienced by its users.
d. Credit regulation has to encourage efficient social and economic effects of credit extension.
P6: Overindebtedness should be a public concern.
a. Profit-driven systems cannot cope with over-indebtedness.
b. Consumers should have a right to discharge.
c. Bankruptcy procedures should lead to rehabilitation and not to retorsion.
P7: Borrowers must have adequate means to defend their rights and be free to voice their concerns.
a. There should be adequate individual as well as collective legal procedures toenforce borrowers’ rights.
b. Critical public awareness is crucial for the development of a fair and responsible distribution of credit.
3. Altroconsum: Excerpt from its Statement to Questions 10: Could you give examples of cases of misconduct, mis-selling or anyother instances of consumer detriment linked to credit intermediaries in your country?
In 2005, of the 116 businesses tested, only 55 have declared an APR (TAEG) that later turned out to be the real one according to our calculations. In 27 stores did not have any information on the APR (TAEG) and the APR (TAEG) in 34 said it was lower than actual. This means that a consumer was then 61 % chance of having information incorrect or not complete the financing that was about to sign. The situation worsened in 2007, of the 185 visited 41 years have not said no and 93 APR Taeg one other than the actual (calculated taking into account the rate of expenditure, the advance of time and capital funded). So it appears that the consumer seeking a loan has today finalized the 72 % probability of having an incorrect or not comprehensive. In the 2008’s investigation in 86 cases on 285 deals, so in just over 30% of the proposals we have submitted the Taeg true of the loan. In 70% of cases, the consumer information is fake or not you own. Unfortunately, over time the situation has not changed in most cases the offer is done in a hasty, giving brief details and often not truthful on Taeg, the synthetic indicator of the cost which is the information to be kept in mind in order to identify the true cost of funding. At the investigation in 59 cases, thus almost 21% of tenders, the APR has not been declared in most of cases declaring shamelessly "I do not know" In 140 cases, thus almost 50 % of tenders, we were declared the APR that does not correspond to those calculated using rate, term of installments and expenses reported by addeti in stores. So one of the two: either Taeg said it was true or not true the rate or duration or expenditure declared.
What is most worrying is that the store advertising flyers replace precontractual and information leaflets. And as shown by the images photographed by us, more and more the loan becomes a lever of marketing and then accompanies the price of the product. Another problem that signed the mortgage in real estate companies. Estate agents in recent years have widened the scope of their offering to clients and more are on the market as operators across the board from which to buy the house but also the mortgage loan. We have looked for you the mortgage loan deals between the three largest:
Tecnocasa, Toscano and Professione casa. When these loans offer, the agencies are using credit brokers who are accredited to the appropriate operators of UIC members (today UIF of Banca d’Italia) and selling products of banks to customers. For their activity of calling for a commission, often also due if the loan is not granted by the bank. Their work in fact is limited to bringing together the private customer with the bank which then assesses the financial reliability of the score in the normal credit evaluation rules and decide whether or not to grant funding. The commission requested by the mediator credit note that is, by law, in the ISC of the loan. Altroconsumo advised to take out a mortgage agency directly. Indeed, these are contracts
in which the normal cost of the mortgage bank will also add the cost of mediation (up to 5% of the amount required in the loan), for most of the products are marketed by banks and thus with the same characteristics economic, interest spread and the products marketed in the banking agencies. The ISC (which must by law also include the payment of the credit broker) is therefore often much higher than the similar products distributed in the bank. |
