27 March 2014: CJEU in case LCL Le Crédit Lyonnais (C-565/12)
What happens when a bank forgoes to check the consumer's creditworthiness and grants him a loan that the consumer ends up not being able to pay back? What sort of a penalty may national law impose that would be considered as effective and dissuasive?
Mr Kalhan took out a personal loan of EUR 38.000 from the LCL Le Crédit Lyonnais in May 2011. This loan was to be paid back in 60 monthly instalments and the contract established both the annual fixed interest rate (of 5.60%) and an APR (of 5.918%). The consumer stopped paying back his loan in January 2012, upon which the bank immediately sought back payment of the loan's outstanding amount together with interest. It became obvious during the proceedings that the bank did not properly examine Mr Kalhan's creditworthiness before agreeing to conclude a credit agreement.
The Consumer Credit Directive (Directive 2008/48) in its Article 8 obliges Member States to ensure that the creditor examines the borrower's creditworthiness based on information provided by the latter and through a consultation with relevant databases. Article 23 of this Directive forces the Member States to put in place effective, proportionate and dissuasive sanctions for breach of its provisions.
French law, which was applicable to this case, does provide for the penalty of forfeiture of entitlement to interest, in case the consumer's creditworthiness was not examined. However, the Cour de cassation interpreted this French provision restrictively. Namely, it only sees it as applying to contractual interest and not to the statutory rate. (Par. 18, 48) This means that the consumer will still have to pay the interest, albeit at statutory and not at contractual rate. In this regard, French law prescribes for an increase of that statutory rate in case the debt was not repaid in full within two months after the court's decision became enforceable. (Par. 19) In this particular case, the contractual interest rate was set at 5.60% while the statutory, increased interest rate for 2012 would amount to 5.71%, therefore, being more beneficial to the bank than to the consumer! (Par. 21, 48)
Naturally, the referring court asked for the CJEU's guidance as to whether such a penalty could be considered as effective in discouraging creditors from concluding loan agreements without examining carefully borrowers' financial situation, that is engaging in irresponsible lending. Unsurprisingly, the CJEU did not consider this penalty compliant with the Directive's purpose - consumer protection against the risks of over-indebtedness and bankruptcy:
"If, after carrying out the abovementioned comparison, the referring court were to conclude that, in the dispute before it, the application of the penalty of forfeiture of entitlement to contractual interest is liable to confer an advantage on the creditor, since the amounts which it forfeits are less than those resulting from the application of interest at the increased statutory rate, it would follow that, clearly, the system of penalties at issue in the main proceedings does not ensure that the penalty incurred is genuinely dissuasive." (Par. 51)
The Member States have to ensure that the penalties are sufficiently dissuasive. A bank would have no incentive to check borrowers' creditworthiness if he knew that in case of his failure to do so the amounts he would be likely to receive when the borrower defaults on the credit would not be significantly lower. (Par. 52)
"If the penalty of forfeiture of entitlement to interest is weakened, or even entirely undermined, by reason of the fact that the application of interest at the increased statutory rate is liable to offset the effects of such a penalty, it necessarily follows that that penalty is not genuinely dissuasive." (Par. 53)
In the given case the referring court and the European Commission mentioned that the statutory rate interest would apply regardless the CJEU judgment (the Commission therefore questioned the need for it!), but the CJEU reminds the national court of the need of such an interpretation of national law that is consistent with pursuing the Directive's objectives. (Par. 54)