Ensuring a Responsible Credit Market

Principles 4 and 5

P4:    Adaptation should be preferred to credit cancellation and destruction.

If debtors experience adverse circumstances, changes in credit relations by adjustments and adaptation should be preferred to acceleration, cancellation and destruction of the credit relationship.

1. There is a need for effective protection against unfair credit cancellation.
   

   Credit relations are as important as labour and housing rent contracts in relation to individual lives. The principles of protection against unjustified or premature cancellations in these relations should be extended to credit.

2. Default charges should be adequate to cover losses only.
   

   Default charges should be regulated in a way that prevents lenders from recovering more than the true cost of the default and lenders should aim to ensure the speedy restoration of the original contract terms.

   Default interest rates should not exceed the refinancing cost of the lender plus additional administrative costs

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P5:    Protective legislation has to be effective.

It must cover any form of credit that is linked directly to the lives of borrowers and especially to credit provided for consumption, education, housing and the start-up of a small business. Exemptions on the basis of size of loan or type of loan only serve to confuse consumers and have adverse impacts on market behaviour.

1. Credit regulation has to cover all non-commercial users.
   

   It should include consumers, homeowners and individuals starting up small businesses (all hereafter called “consumers”).

2. Credit regulation has to cover all commercial forms of credit provision.
   

   Definition: Credit comprises all activities which bring people into debt through the commercial offer of purchasing power, irrespective whether this is done in the form of loans, deferred payments, leasing, rent or any other legal form and irrespective whether payments are called interest or fees.

3. Credit regulation has to cover the whole process of credit extension as experienced by its users.
   

   The economic development of suppliers has tended to divide the process of providing and servicing credit contracts into ever more distinct pieces, each undertaken by different types of firm. The impact of credit on consumer households, however, has become ever more integrated and unified. Credit was historically extended as part of one contractual relation in which a consumer bought goods and services through installment purchases. A singe institution was creditor, broker and debt collector and that institution was accessible for consumers’ concerns. This relation was later split into two separate types of contract, one for purchases/service agreements and one for loans. This has led to the creation of lenders who operate without any regard for the consumption purposes of the loan.

   Cost efficiency, as expressed in the “value chain” approach, drives suppliers into horizontal co-operation and into the development of a whole bundle of separate contracts. The provision of money, the acquisition of clients, the securing of debts and the servicing of credit contracts (and adapting them to the changing living conditions of the borrowers) and, finally, debt recovery have been put into different hands. Each player is solely focused on its own profit, freed from direct concern about consumers’ employment problems and consumption needs. In addition, modern global competition among the most profitable multinational financial conglomerates has led to the increased exploitation of the dependency inherent in the creditor-debtor relations. Such institutions engage in the cross-selling of linked insurance, investment and financial products at above market rates. For consumers, there is only one process —getting money for present expenditures and paying it back from future income. Nonetheless, suppliers pretend to deliver hundreds of valuable services. It is an important task of our political culture to ensure a unified vision of the demand side as a leading perspective in law and to guarantee a market whose final goal should remain the satisfaction of the needs of the people.

4. Credit regulation has to encourage efficient social and economic effects of credit extension.
   

   Protective regulation has to adopt an economic and social language and should not use only legal language that is open to the manipulation by those who provide financial services. Providing legitimacy to usury through the device of “borrowers’ consent”, for example, would ignore 1,000 years of experience in which credit contracts voluntarily undertaken by needy persons have led to their exploitation and dependency. Indeed we consider that usury, by definition, is undertaken with the borrowers’ consent as it is precisely the desperation of the borrowers’ financial circumstances that drives them to seek out usurious loans. However, the extension of credit at usurious prices is not a solution to the problem of poverty and should not be entertained as such by credit regulation.