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Almost Like in the EU. The Borrowers and the banks Will Have a Simpler Life


Oleksandr Vygovskyy, attorney at Ilyashev & Partners Law Firm
Source: Ekonomichna Pravda

On November 15 Verkhovna Rada of Ukraine (the Parliament) passed a long-expected Law “On consumer lending”. Why will it substantially improve the life of borrowers and creditors and what will it result in?

Regardless of the decrease of the volume of consumer loans issued by the banks in the course of the recent two years this segment of the credit market has a substantial potential.

Its advantages are obvious not only for the consumers, who often cannot afford to buy certain consumer products, but also for the banks, who are interested in offering short-term small amount credits because the related credit risks are low.

The idea to reform the sphere of consumer lending through adoption of a separate act of legislation corresponds to practices of the majority of European countries.

Ukraine’s signing of the EU Association Agreement (annex to which requires implementation of the EU legislation on consumer lending within three years following the Agreement execution) also stipulates for adoption of the mentioned Law.

What does the Law stipulate?

The Law is directed at ensuring protection of the rights and lawful interests of consumers, as well as of the creditors in the sphere of consumer lending.

Such an approach is totally justified: although consumers are traditionally considered to be the least protected party of these legal relations, it is the bank who suffers the far larger losses in case of the borrower’s default.

The authors of the law will try to find a balance between the interests of the consumers and those of the financial institutions.

In particular, its drafters refused to include the provisions which would be burdening for the banks. For example, limitation of the right of recovering the cost of the encumbered property.

Also the law establishes the creditor’s necessity to assess the borrower’s credit solvency (considering for the loan period, the sum of the loan, the amount of the consumer’s profits and the loan purpose) on the basis of information received from the consumer.

If the consumer failed to provide documents or information about himself and his financial state according to the requirements of the legislation and of the creditor’s internal documents the bank has every right to deny execution of the consumer lending agreement to such consumer.

The mentioned provision protects, first and foremost, the interests of the banks from the unreasonably high credit risks under such operations.

Important for the creditor may prove to be the possibility to claim withdrawal of the credit in case of violation by the consumer of the consumer lending agreement.

The Law stipulates that in case of delay in settlement of a part of a loan or interest – for at least one month, and in case of the loan secured by the mortgage or a housing loan – for at least three months, the creditor has the right to demand repayment of the consumer credit which has not been due yet.

At the same time the creditor is obliged to inform the consumer in writing about such violation with indication of actions required for its remediation, as well as of the term within which such actions must be carried out.

If the creditor demands premature settlement of the credit under the said grounds the consumer has 30 calendar days (under the mortgage credit – 60 days) from the day of receipt of the claim in the course of which he may either remedy the violation or repay the loan.

The consumer lending may be connected with provision to the consumer of additional or related services, for example property appraisal services, customer’s liability insurance under the credit agreement, opening of a bank account for receiving or processing a loan, notarial and other services.

At the same time according to the Law the creditor has the right to make a list of persons corresponding to his internal criteria and may provide the consumers with such additional or related services.

Termination by the consumer of the agreement on provision of additional or related services which is obligatory for receiving the loan, and failure to enter into a new agreement within 15 days, provides the creditor with the right to demand premature settlement of the credit.

At the same time payments for such services of third persons are not included into the aggregate expenditures under the consumer credit (included are only the services of the creditor himself) and, thus, are not considered in the course of calculation of the real annual interest rate under the credit (and this is totally justified because the bank may not be aware of the cost of corresponding services rendered by the third persons).

This provision leaves a space to maneuver for the bank in disclosing information to the consumers about such an interest rate.

The Law has also regulated the matters of advertizing of consumer credits, in particular contents of such advertizing messages. Standard information must contain maximum amount of the credit and maximum term of the credit, real interest rate, the amount of the initial contribution if the credit is provided in the form of deferred payment or payment by installments.

At the same time it is legislatively forbidden to advertize interest-free loans which, though, is not a novelty. Provision of such loans is also forbidden by the Law of Ukraine “On banks and banking activities”.

In general the document constitutes a serious step towards improvement of banking legislation of Ukraine and bringing it in compliance with European standards.

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