Ensuring a Responsible Credit Market
Principles 6 and 7
P6: Overindebtedness should be a public concern.
Dealing with failed credit relations and overindebtedness should be a public responsibility. The goal should be to rehabilitate and reintegrate consumers into the economic life of society.
- Profit-driven systems cannot cope with over-indebtedness.
Refinancing, revolving credit, and predatory lending to economically over-indebted people, are not solutions to poverty. Instead, they can be a way into long-term poverty and dependence.
- Consumers should have a right to discharge.
Consumers should have a right to a public procedure of discharge through which their duties to repay debts are adapted to the remaining productivity of the borrowed funds.
Where credit no longer reflects a productive investment into the economic life of the borrower, a system of discharge and devaluation of debts is necessary. Firms vanish when they fail and their debts are written off in bankruptcy. Individuals, however, do not vanish and therefore their debt burden must be adapted to the value of their labour where this is the only source of income for repayment. Discharge is a fresh start for debtors and their families.
- Bankruptcy procedures should lead to rehabilitation and not to retorsion.
Discharge requires rehabilitation and reintegration into a productive life. It must involve independent advice, shelter from creditors, and help to readapt their income to their expenditures.
P7: Borrowers must have adequate means to defend their rights and be free to voice their concerns.
- There should be adequate individual as well as collective legal procedures to enforce borrowers’ rights.
Creditors address legal matters strategically and calculate risks and cost with respect to the whole of their business. A single consumer, however, takes on an enormous risk when he or she sues a creditor. In practice, creditors dominate the selection of cases which come to the higher courts. It is therefore important to seek remedies for this strategic weakness of consumers in the process of further legal developments. In order to cover the financial risks pro deo procedures are especially important for credit law because the vulnerable poor are least likely to defend their rights in court. In theory, class actions are adequate remedies, if the state can guarantee funding for consumer organizations which effectively care for the rights of the poor. Ombudsman schemes, and other non court based systems, whilst useful for individuals seeking redress should also be able to address broad issues within the credit industry where on the evidence of the number of individual cases being dealt with it appears that these are apparent. This may be, by example, by placing a duty on ombudsman schemes to report to state regulators on the specific concerns arising on a regular basis.
- Critical public awareness is crucial for the development a fair and responsible distribution of credit.
Financial institutions exercise enormous influence within the media through their advertising budgets and through their investments in media firms. They can also use anti-defamation laws quite effectively to suppress critical journalism. In addition, most credit-related research in economics and law is partly financed by the supplier side. If the state does not counterbalance this enormous power, the prospects for critical responses are dim.
The provision of information on lending patterns of private sector lenders is critical to the development of public awareness and ensures that measures can be taken to address the unfair exclusion of lower income social groups from credit. The EU should therefore ensure that there is a standard obligation for lenders in the Member states to disclose information relating to lending patterns by social group and geography and that there is an affirmative obligation placed on lenders to address financial exclusion.
Created: 10/07/07. Last changed: 10/07/07.
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