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Legal Aspects of Consumer Loans from the

Perspective of Consumer Protection

by Dragana indi
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Consumers by definition, include us all.
They are the largest economic group, affecting and
affected by almost every public and private
economic decision. Yet they are the only important
group whose views are often not heard.

John F. Kennedy
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1. Introduction
2. General notion about consumer loan and
consumer protection
3. USA legislation - Serbian legislation
4. EU legislation - Serbian legislation
5. Conclusion
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Problems in Serbian legislation concerning consumer
loan protection :

not enough laws and regulations
consumer loans are one of the most used banking product in
the market-it is the only way for many to buy certain things-
autos, house renovation, TV, etc.
consumers are not properly informed about their rights

On the other hand EU and USA have developed legislation in
this area.

The aim finding better and
more developed legal solutions
for consumer loan protection
in Serbia

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Recent changes in Serbian legislation:

New Serbian Consumer Protection Law-2011
The part concerning consumer loan is absent from this law
New Financial Service Protection Act will be effective from 2012
At the moment only Serbian Obligation Law has some articles
concerning consumer loan (it regulates loan is general)

There is no proper act that regulates consumer loan, which makes
consumers extremely vulnerable and unprotected.
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Consumer loan-general notion, history
Loan in general, is a certain amount of money lent by the financial institution (usually
bank) to the borrower, which should be returned on or before fixed date with an
The basic rights and obligations of parties of loan contract (agreement)-for lender
(bank) -giving certain amount of money to the borrower in terms and conditions
specifies in the contract and for borrower (loan beneficiary) -returning of the borrowed
amount on a date defined by the banks repayment plan.
Consumer loan is money loaned to individuals by a financial institution (bank usually)
for personal, family, or household purposes.

Development of a loan through history:
Babylon-Hammurabis Code
Greece-Pythius, metics (Pasion)
Roman Empire- bancu
Renaissance Italy - Florence, Venice, Genoa,
Jews, Bardi, Peruzzi, banca rotta, financing
the wars, Banca Monte dei Paschi 1472
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Loan Contract-legal term, contract clauses
A Loan Agreement is a contract entered into between two parties,
that defines the terms of a loan which is repayable with interest over
a fixed term.
Written form
None of the clauses are in consumers favor, because the lender
(bank) is the party that writes the contract

Clauses characteristic for consumer loan :

Insurance clause
Acceleration clause
Deficiency clause
Recourse clause

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The differences between consumer loan and consumer credit
In Serbian language the consumer loan and the consumer credit can be considered
synonyms. However, in Serbian we can draw a line between a loan and a credit from
a division based on a loaner. In the case of the credit the loaner can be only financial
institution (usually a bank), but in the case of a loan the loaner can be both financial
institution and an individual.

In English language consumer loan is part of consumer credit that besides consumer
loan includes: credit cards (classic, gold, platinum), personal loans (short-termed
loans), T&E cards (travel and entertainment cards), C&D loans (construction and
development loans), private label card, oil company cards, lines of credit and home

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Risk/Reward Ratio of Banking Products






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The Typical Content of the Consumer Loan Agreement
1. Parties to contracts with their
2. Date of the agreement
3. Definitions or interpretation
4. Responsibility
5. Breakdown of loan
6. Repayment provisions
7. Prepayment
8. Cancellation provisions
9. Late charge
10. Security
11. Default
12. Right for offset
13. Collection fees
14. Co-borrowers
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Example of consumer loan
agreement, Vojvodjanska banka

Uniformed, in written form

More powerful side of the
agreement-bank determines the
terms of agreement

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In first line of the contract are named
the parties of the contract, the bank
and loan beneficiary, a person who is
borrowing the money from the bank, as
well as their addresses and date of
signing the agreement, which is the
first and second typical content of
Consumer Loan Agreement.
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First article explains the nature of this agreement and gives definitions of the subject
of agreement and responsibilities of each party in the contract, and it is the third and
fourth element that every loan contract has to incorporate.
First article explains the nature of this agreement and
gives definitions of the subject of agreement and
responsibilities of each party in the contract, and it is
the third and fourth element that every loan contract
has to incorporate.
In first article is also given breakdown of loan (the
amount of money, interest rate, number of
installments, etc.) and repayment period and
provisions, which are content number five and six.
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Article two of the loan agreement gives the information about late payments and
consequences for the borrower in this case, which is the ninth element of the consumer
loan form.

Article three gives instructions and provisions of prepayment, the element number seven of
the list.
The tenth content, security, is covered in article four of
the agreement, and it is about financial security
instruments (bills of exchange), that guarantee the
repayment of the loan.
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In article six of the consumer loan agreement is given explanations about cancelation of the
loan (but only from the banks point of view, which is not correct).
In article seven are given provisions
and consequences of loan

Article eight can also be concerned
as part of security of the bank,
because it releases the bank from
any obligation in the case of
malfunctioning of the goods or
services, which are bought with the
consumer loan.
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Article number nine of the agreement covers fourteenth element from the list, the co-
borrowers. The loan beneficiary could not transfer his rights and obligations to another
person, without prior consent of the bank. However, bank can assign its rights and
obligations to another bank, or financial institution (offset business-twelve content from the
Article number twelve and fifteen are about
eventual disputes between parties and sources of
law in the case of dispute, which are given in the
list of contents under number eleven-default.
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Consumer protection: definition and history

Consumer protection is a way to protect consumers by applying certain standards
and laws.
The consumer protection is the product of a long civilization development of human
rights and economic growth.
Caveat emptor, contra preferntem
1960s USA-the beginning of modern consumer protection, John F. Kennedy
15.3.1962 Bill of Consumer Rights

8 Consumer Rights incorporated in
UN Resolution 39/248:

1. Basic Needs
2. Safety
3. Information
4. Choice
5. Representation
6. Redress
7. Consumer Education
8. Healthy Environment

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Economic theories on consumer protection

Adam Smith and the classic liberal economy - "the invisible hand," Welfare of the
Nations, laissez-faire convictions, the main duty of the state is to provide an environment
suitable for economic growth, to contribute to progression by failing to influence the
economy, in the center of the theory-consumers who are key force in regulating market-
offer and demand by their preferences
Keynesism- The End of Laissez-Faire, free market and consumers possibilities of choice
were restricted by international trusts, the state must intervene
Economy of welfare states - social security and education must be provided by the state
for each citizen, by the means of the redistribution of goods directed by the state, equal
rights and chance to obtain goods and services
Neoclassic school - Milton Friedman, state intervention only to the extent necessary for a
basic level of security, budget deficit, slowdown in economic growth
The awareness of need for consumer
protection and theories about this subject,
developed through the ages. The
consumers protection right is the product
of the growth in economy and
improvement of human rights. Every
period had its own economics theory
based on the present development.
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Consumer loan protection in United States of America

The Fair Credit Reporting Act - regulates the collection, dissemination, and use
of consumer information, including consumer credit information
Fair Debt Collection Practices Act - regulates debt collection practices
Equal Credit Opportunity Act - prevents discrimination in the granting of credit
Electronic Funds Transfer Act & Fair Credit Billing Act - establish
procedures for resolving mistakes on credit billing and electronic fund transfer
account statements
Fair Credit Practice Rule - define and prevent unfair or deceptive acts or
Truth in Lending Act explains in great detail disclosures, usage and
different situation in all credit business, including consumer loan
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Fair Credit Reporting Act
passed in 1970, enforced by the US Federal Trade Commission,
designed to protect consumers privacy

The major rights under the FCRA:
Consumer must be told if information in his file has been used against him
Consumer has the right to know what is in his file
Consumer has the right to ask for a credit score
Consumer has the right to dispute inaccurate or incomplete information
Consumer reporting agencies must correct or delete inaccurate, incomplete, or unverifiable
Consumer reporting agencies may not report outdated negative information
Access to consumers file is limited
Consumer must give his consent for reports to be provided to employers

Consumer may limit prescreened offers of credit
and insurance consumer gets, based on information in his credit
Consumer may seek damages from violators

FSPL-Article 18-bank has to get written consent from
consumer in order to assess his credit score-bank has to
inform consumer about the reasons of loan denial from
National Credit Bureau
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Fair Debt Collection Practices Act
purposes are to eliminate abusive practices
in the collection of consumer debts, to
promote fair debt collection

FDCPA requires debt collectors to :
Identify themselves and notify the consumer
Give the name and address of the original
Notify the consumer of their right to dispute
the debt
Provide verification of the debt
File a lawsuit in a proper venue
Abusive and deceptive actions that
FDCPA prohibits:
abusing consumer by the phone
communicating with consumers at their
place of employment
contacting consumer known to be
represented by an attorney
misrepresentation or deceit
publishing the consumer's name or address
on a "bad debt" list
seeking unjustified amounts
communication with third parties
abusive or profane language
threatening arrest or legal action
contact by embarrassing media
reporting false information on a consumer's
credit report or threatening to do so in the
process of collection
FDCPA covers final stage of consumer-bank relationship-the unwanted one, where consumer
cant fulfill his obligations to the creditor (bank). Not present in Serbian legislation. . Developing
of similar legal act will be not only beneficial to consumers, but also in legalizing of financial
institutions that collect debts on behalf of another.
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Credit Practices Rule
The purpose of the Credit Practices Rule is to declare certain acts or practices by banks in
connection with consumer credit transactions to be unlawful

Prohibited provisions are :
A confession-of-judgment clause
A waiver of exemption
An assignment of future wages
The taking of non-possessory security interests in household goods
pyramiding late charges
misrepresenting a cosigners liability

Only a confession of judgment clause is
present in Serbian Law of Financial
Services Protection. Opportunity for
consumer to be heard - National bank of
Serbia , article 42 of the Law. Consumers
right on a law suit is stated under article
46 of FSPL.

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Equal Credit Opportunity Act

unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit

Under the Equal Credit Opportunity Act:
Consumers cannot be denied credit based on race, sex, marital status, religion, age, national origin, or receipt
of public assistance.
Consumers have the right to have reliable public assistance considered in the same manner as other income.
If consumers are denied credit, they have a legal right to know why

ECOA is a very detailed and developed act and some of its solutions should be included in future
Serbian law-Serbian Antidiscrimination law have general antidiscrimination provisions, but specific
antidiscrimination regulation present in banking practice should be enacted also
Applicants 60+-difference in Serbian and USA law
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Fair Credit Billing Act and Electronic Fund Transfer Act

establish procedures for resolving mistakes on credit billing and electronic fund transfer
account statements, including :
charges or electronic fund transfers that consumer have not made;
charges or electronic fund transfers that are incorrectly identified or show the wrong date or
math errors;
failure to post payments, credits, or electronic fund transfers properly;
failure to send bills to consumer current address provided the creditor receives consumers
change of address, in writing, at least 20 days before the billing period ends;
charges or electronic fund transfers for which consumer asks for an explanation or written
proof of purchase along with a claimed error or request for clarification.

FSPL, article 31- bank is obligated to give consumer free credit
statement at least twice a year, and for current accounts at least
once a month.
FSPL does not regulate all the situations stated in U.S.A. FCBA
and EFTA act. These electronic errors are mostly regulated by
banks good business practice. When consumer notices the
error, he complains to bank, which usually finds a solution.
Nevertheless, it is better and more secure to determine all these
situations in written form and include them in FSPL.
National Bank of Serbia controls electronic fund transfers in
Serbia and there is also the Serbian Electronic Communications
Law.However, neither of these laws has provisions mentioned in

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Truth in Lending
1968 , designed to promote the informed use of consumer credit (loan)
The regulation is divided into subparts (from A to G).
Subpart A gives general information about the authority, purpose, coverage, organization, enforcement, and
liability of the act, as well as definitions and rules of construction, and exemption of the rules and finance
charge. In general, this regulation applies to each individual or business that offers or extends credit when
four conditions are met:
The credit is offered or extended to consumers
The offering or extension of credit is done regularly
The credit is subject to a finance charge
The credit is primarily for personal, family, or household purposes
Subpart C
Subpart C relates to closed-end credit. It contains rules on disclosures, treatment of credit balances,
annual percentages rate calculations, rescission requirements, and advertising
It is the most important and detailed part of TILA, that regulates consumer loan.

Rules on disclosures:
Written form
The disclosures shall reflect the terms of the legal obligation between the parties.
information necessary for an accurate disclosure is unknown to the creditor-the disclosure is based on
the best information reasonably available- state clearly that the disclosure is an estimate
transaction in which a portion of the interest is determined on a per-diem basis and collected at
consummation, any disclosure affected by the per-diem interest shall be considered accurate if the
disclosure is based on the information known to the creditor

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Actually available terms, Advertisement of rate of finance charge, Advertisement of terms that
require additional disclosures-Triggering terms, Catalogs or other multiple-page advertisements;
electronic advertisements, Alternative disclosures--television or radio advertisements, Tax
implications, Misleading comparisons in advertisements, Misrepresentations about government
endorsement, Misleading use of the current lender's name, Misleading foreign-language ad.
Subpart D - miscellaneous information (oral disclosures, Spanish language disclosure
in Puerto Rico, record retention, effect on state laws, state exemptions and rate limitations.)

FSPL contains many important provisions included in TILA act such as: right to recession,
necessary form of credit (written form), advertising of banks products, important elements
of disclosures, etc.

Calculation of interest rate and more detailed information about advertising (in FSPL there
is provision of clear and understandable advertising, prohibition of inaccurate and untrue
advertising and prescribed penalties in case of law violation) as well as subpart D should
be incorporated in future Serbian Law.
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Basic Principles of Consumer Protection in EU:

Consumer can buy what he wants, where he wants
If it doesnt work, send it back
High safety standards for food and consumer goods
Awareness of food ingredients
Contracts should be fair to consumers
Sometimes consumers can change their mind
Making the easier to compare prices
Consumers should not be misled
Protection while consumers are on holiday
Effective redress for cross-border disputes
recognized and
approved by European
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EU Directive 48/2008:
Directive 48/2008/EEC was enacted by European Parliament and Council of European Union in 2008.

Protects consumers with 4 sets of norms:
obligation of pre-contractual information
obligation of fair consumer loan advertising with minimum of information
prescribing required form and content of consumer loan agreement
definition of rights and obligations of the consumer

Pre contractual phase-main features: duration of the credit agreement, total amount of credit, the
borrowing rate ,annual percentage rate of charge and the total amount owed by the consumer, the
amount, number and frequency of installments, the cash price for goods or services supplied against
specific payment terms or a linked credit agreement, costs linked to or resulting from the agreement,
contractual obligations, consumer rights, the consequences of late payments and defaults, sureties.

adequate explanations to consumer
right to withdraw (14 days)
early repayment
Serbian FSPL = EU 48/2008
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Financial Service Protection Law
New Serbian Law, effective from 2012
regulates the rights of consumers of financial services provided by banks, financial leasing
institutions and traders, as well as conditions and ways of applying these rights
Article 5 of FSPL defines 5 principles of consumer protection in financial services:
right to equal relations with creditor
antidiscrimination right
right to information
right to definition of contractual obligation
right to protection of interest of consumer

Article 6 insures clear and understandable way of advertising financial services.
It prohibits placement of inaccurate information and possibility of misinterpretation about credit
Article 7 prescribes written form of credit contract. Every party should receive a copy of a contract.
The contract cant contain articles where consumer declines his rights guaranteed by this Law.

In Article 10 it is prescribed that creditor must inform consumer
about his general provisions and gives him the explanation and
instructions about applying of general provisions. Creditor is
obligated to provide consumer with the written form of general
provisions on consumers request.
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Financial Service Protection Law
Article 12 entitles consumer on right to recession of loan. Consumer can rescind from credit agreement within
14 days after signing, without giving any reasons, if he hasnt start using the credit. Consumer must inform the
bank about his change of mind. If consumer wishes to rescind from contract of trade (in 3 party loan
agreement), consumer is obligated to return the object of trade. Consumer has an obligation to compensate to
seller, if any damage were detected o the object of trade.
Consumer has no obligation to pay any fees to bank, except the real costs that bank had in process of
granting the credit.
Article 13 explains consumers right to information. Consumer has the right to receive instructions and
conditions concerning consumer loan.
Article 14 is a request for minimum professional qualifications. Employees in bank have to have education,
experience and knowledge as well as professional and personal qualities. They have to respect consumer
and to inform consumers accurately and completely about consumer loan.
The bank has an obligation to give a proper training and instructions to its employees.
In article 15 are given pre-contractual information that bank has to provide to consumers : nominal interest
rate, effective interest rate, currency, period covered by the contract, total amount of loan and all other costs
borne by consumer. This information has to allow consumer to compare offer of different banks.
Article 17 of Financial Services Protection Law
provides the elements of credit offer that bank must
provide to consumer .
Article 18 explains credit reporting and consumers
right to view his credit report, without charge.
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Article 19 prescribes provides the basic elements of credit agreement
article 28 is provided that bank cant single-sided change the elements of agreement. Bank has to
obtain written consent from consumer.
In article 30 gives consumer right to free credit statement. Bank has to provide at least twice a
year consumer with a free credit statement.
Article 32 gives bank the right to charge penalty rate in case of late payments

article 40 of FSPL states that if the consumer rescinds the contract of sale, seller has an
obligation to inform the bank about recession of the contract. Bank has to return the amount
that consumer already paid, including interest rates.
This article covers the situation when consumer is denied a consumer loan. As a result of this,
previous contract of sale must be rescind.
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Confusing situation in Serbian Law concerning consumer loan-without the proper
New regulation-FSPL, effective 2012 completely transcribed from EU Directive
Absolute need of the law dedicated solely to consumer loan as a special type of
credit transaction (example Croatian Consumer Loan from 2009)
Improvement in FSPL : currency clause, prohibition of aggressive and abusive bank
marketing, required current account alongside credit account)
National Bank of Serbia should follow and harmonize its regulations with other not
financial regulations (example-Financial Service Protection Law and Consumer
Protection Law should have complementary articles)
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