Consumer Credit Act 2016 – the most important changes

The Consumer Credit Act (hereinafter referred to as the Act or the New Act) was given a new form in December 2016, which means that the original Act No. 145/2010 Coll. has been abolished and the law came into force completely new, with the number 257/2016 Coll. It introduced a lot of new obligations, especially for non-bank lenders, but also banks or building societies. The entire consumer-oriented credit market is now under the supervision of the National Bank. Let’s take a look at the most important changes brought by the new law in this area.

Extension of the category called “consumer credit”

Extension of the category called "consumer credit"

The new law extended the definition of consumer credit to include in this group all loans to consumers (end customers), even in the lowest amounts. Previously, loans up to USD 5,000 were not included in the group of consumer loans.

The new definition of consumer credit is, according to $ 2 of the Act: “deferred payment, pecuniary loan, credit or similar financial service provided or mediated by the consumer”.

It follows that loans granted to entrepreneurs, companies and sole traders do not fit into this category. These are governed by the General Commercial Code, and are not regulated in any way. It is also necessary to know that the new Consumer Credit Act does not apply, according to $ 4, to a loan granted for the purpose of investing or to the funds obtained by a consumer in a pawnshop.

The process of providing consumer credit has clear rules

The process of providing consumer credit has clear rules

The new law made it clear that consumer credit must be provided without seeking to capitalize on contractual penalties, that dealing with the consumer should be fair, transparent and taking into account the rights and interests of the consumer; the provider will also provide information in a clear, concise and clear manner.

But that is not all. In order to prevent consumers from being deliberately misled, as was the case quite often in the past, the Consumer Credit Act in $ 77 strongly prohibits: “Provider and intermediary must not use vague, false, misleading or misleading information when communicating with consumers “.

In addition, all procedures and rules must be subject to ongoing verification as well as regular evaluation of their adequacy and effectiveness.

The creditworthiness assessment has become an obligation

The creditworthiness assessment has become an obligation

The lender is now obliged to assess the applicant’s creditworthiness, in other words, its ability to repay the requested loan. Failure to carry out this assessment is a fault on the part of the provider. It must also inform the applicant in advance of what information it will require in order to be able to responsibly assess its creditworthiness.

However, the consumer (the borrower) in the law also got his obligations. Section 84 (2) states that the consumer is obliged to provide truthful and complete information, and he is also obliged to explain or supplement his claims if the provider so requests.

On the other hand, the provider is obliged to verify the information to the extent necessary (the law states “to the extent appropriate to the given situation”), including by using independently verifiable data. These are, for example, debtor registers or other online databases, such as execution databases.

It should be added that for small loans, up to ten thousand crowns, it is generally assumed that the applicant will have to repay them. And if not, there are many things in most households that can be monetized for execution for ten thousand plus fees and penalties. This is one of the reasons why the creditworthiness assessment of small loans is still rather formal.

Where there is no creditworthiness, there must be no credit

Where there is no creditworthiness, there must be no credit

If the lender, regardless of whether it is a bank or a non-bank company, finds serious shortcomings in the applicant’s creditworthiness or if the applicant’s creditworthiness is not evaluable, the provider may not grant the required credit under $ 84. At the same time, the lender must tell the applicant where to find additional information, in other words which register or database it has accessed.

Even mere advice on loans is newly linked to responsibility. Pursuant to Section 85, the Board must be based on sufficient analysis and must also bear information on the risks to which the consumer may be exposed throughout the duration of the consumer credit.

What the consumer needs to know before entering into a loan agreement

What the consumer needs to know before entering into a loan agreement

This is also dealt with in detail in the new law. Section 95 defines the information that a loan applicant must receive before signing a contract. The rules are then newly regulated in $98 also in the case of voice telephone communication when the loan is offered over the phone.

Payment for a loan in advance? Only for the necessary mortgage costs

Payment for a loan in advance? Only for the necessary mortgage costs

Advance payments for granting loans were prohibited by the new law. A bank or non-banking company may only require a prepayment in connection with a mortgage. The Act stipulates in $ 83 the right to demand payment from the consumer in advance only for the reimbursement of taxes, administrative fees and purposefully incurred costs of valuation of the collateral property.

Advertising must adhere to transparency rules

Advertising must adhere to transparency rules

The new Consumer Credit Act also more clearly defined the rules for credit advertising. It is dealt with in $ 91, where it is stated that APR must be stated as prominently as interest rate data, that the consumer must always be informed whether the interest rate is fixed or floating, and also the total amount payable by the consumer (ie aggregate payment for the loan, including overpayment).

Clearer determination of APR calculation

Clearer determination of APR calculation

Compared to the original version of the Consumer Credit Act, the calculation of the annual percentage rate of charge or APR is now much more clearly defined. This is the total cost of the loan, as defined in $ 133. According to him, the total cost of the consumer credit will therefore be used for the purposes of calculating the APRC. Logically, the costs of any defaults or delays in the APRC components are not.

The cost of real estate appraisal in connection with its collateral is part of the APRC. However, beware of the exception: the cost of maintaining an account recording payment transactions and withdrawals may be part of the APRC but may not. If they are not part of the APRC, they must be listed separately in the credit agreement. However, their prominence and placement in the contract are still not defined.

Ceiling of payments in default

Ceiling of payments in default

The Act also redefined the ceiling of sanctions that a consumer may receive if he is in default with payment. Section 122 defines specific ceilings for different situations. Normally, lenders must not exceed them.

Every year a quarter

Every year a quarter

The new Consumer Credit Act introduced the option to repay a maximum of 25% of the remaining loan each year in the period of fixation for mortgages or building savings loans. In addition to the fixation, it is still possible to repay the entire loan at the same time (eg by refinancing), of course, with possible fines.

Lenders had to change a lot

Lenders had to change a lot

So far, we have seen the changes in the Consumer Credit Act more from the point of view of the consumer – what is changing for him. However, let us also look at the changes that had to be made to banks and non-bank lending companies after March 2017, when the new rules became binding on providers.

The change was huge especially for non-banking companies. That is why most of them simply “wrapped” it, only those that have passed through the sieve set in the new law continue. The network also works for new providers who start their activities after May 2017.

License from the National Bank

License from the National Bank

Under the new law, loans may be granted to consumers only by a legal entity that is authorized to provide consumer credit on the basis of an activity authorization granted to it by the National Bank.

The authorization shall be granted for five years. After the five-year period, the authorization may be renewed for a further five years. The license or license may also be revoked. Authorization may be granted by the National Bank only on the basis of fulfillment of predetermined conditions by the legal entity of the loan provider, here the applicant for the license.

The conditions for obtaining authorization to operate are addressed to banks, credit unions or small-scale payment service providers in special laws. However, non-bank service providers have the conditions for obtaining a license from the CNB recorded here, in $ 9 – $ 13 of the Consumer Credit Act.