New EU consumer credit rules approved by summer
A committee of the European Parliament will vote in June on the proposed Consumer Credit Directive (CCD) with a view to obtaining final approval in plenary session before the summer holidays. Lawmakers will discuss proposed amendments to the text tomorrow, May 17.
Following the rise of digital lenders and the increasing online distribution of consumer credit, the European Commission proposed a revision of the CCD in June 2021. The existing CCD dates from 2008, and although it introduced a a number of consumer benefits, it does include many new lending initiatives widely used by consumers, such as buy now, pay later (BNPL), payday loans or short-term overdraft facilities.
The Commission’s proposal aims to respond to these technological developments by broadening its scope, introducing pricing rules for certain credits, clarifying information requirements and revising creditworthiness assessments.
As regards the scope of the proposal, the existing CCD covers the vast majority of consumer loans, ranging in value from EUR 200 to EUR 75,000. However, loans below EUR 200 do not fall within its scope. This means that many of the BNPL loans that are so widely used these days are not covered by the existing rules. The proposed CCD aims to change this situation by including BNPL schemes, payday loans, short-term overdrafts, interest-free credits and loans offered through crowdlending platforms.
Lawmakers introduced an amendment to remove crowdfunding loans from the proposed CCD. However, they are still asking the European Commission to examine whether these types of crowdfunding platforms require regulation, and if so, to propose a revision of this CCD in 2024.
Information requirements should also be standardized in this proposal. In order to raise consumer awareness and promote responsible lending practices, the proposal aims to streamline and reflect the growing importance of digital services in the pre-contractual phase. The proposal aims to improve the provision of pre-contractual information by requiring lenders to focus more on key information such as borrowing rates and costs, annual percentage rate (APR) and total amount of credit. This information would be summarized in a standard European consumer credit information form (SECCI), and Parliament is amending the form to add information on missed payments and the right of withdrawal.
Still in connection with the information provided, the Parliament proposes the prohibition of personalized advertising and the obligation to show only standardized offers. In addition, the Parliament also suggests that Member States ban misleading advertising which understates the consequences of a loan and which could create over-indebtedness by emphasizing the ease of obtaining a loan.
Perhaps one area that could have attracted industry opposition is price regulation or caps on consumer loans, but the proposed CCD still leaves wide latitude to member states to regulate this space. In the absence of EU-wide regulation for certain loans, most member states have introduced interest rates or APR caps. Some drafts of the new proposal included caps on interest rates, APRs and the total cost of credit agreements, but the final proposal leaves the decision on the level of caps to member states. Countries will have the option, but not the obligation, to impose caps if they deem it appropriate.
Credit assessment is another important area where the new CCD aims to harmonize practices between Member States. The new regulations will tighten the rules and require lenders for all loans to carry out a credit check. For example, the Parliament and the Commission agree that data from social media should never be used in these assessments, and they propose a list of objective financial data that can be used for these purposes. Health data may also be subject to restrictions. The parliament proposes to prohibit the use of data on the health and medical situation of the consumer or his history of cancer.
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