Yesterday the CJEU delivered another interesting judgment on consumer credit, C-686/19 Soho Group v Pateretaju tiesibu aizsardzibas centrs. This time the case involved the interpretation of Art. 3(g) of Directive 2008/48/EC and the question whether the term 'total cost of credit' includes loan extension fees.
The facts
Soho Group is a Latvian high cost short term credit provider, specializing in loans between 70-425 EUR for the duration of 30 days to 12 months. In performing its supervisory function the Latvian Consumer Protection Authority discovered that the firm charged high fees for extending the duration of the loan, breaching the relevant Latvian law that capped the total cost of credit. Consequently, the authority imposed a 25000 EUR fine on the firm that triggered the relevant national court process for the preliminary reference.
The legal question
The legal question in front of the court was whether the contract extension fee was within 'total cost of credit' provided by Art. 3(g) of the Directive and implemented into the relevant national law.
The ruling
The CJEU ruled in favor of the Consumer Protection Authority finding that the term 'total cost of credit' needs to be interpreted to include fees for the extension of the duration of the loan provided: the conditions for the possibility of the extension are laid down clearly and precisely in the relevant standard terms and conditions of the contract and that the costs are known to the creditor.
In reaching this conclusion, the CJEU was guided by four considerations.
In reaching this conclusion, the CJEU was guided by four considerations.
First, the fairly broad language of Art. 3(g) provides that the 'total cost of credit' includes all costs, including interest, commissions and taxes and any other fees which the consumer is required to pay except notarial fees. The definition even includes ancillary services such as insurance, if they are compulsory for obtaining the loan. Thus, the provision broadly includes all costs except notarial fees.
Second, referring to its previous case-law and the recitals of the Directive, the CJEU concluded that the provision applies not only to the understanding of total cost of credit necessary for the conclusion of the contract but also for its use, that is, performance.
Thirdly, the CJEU took into account that the 'total amount payable by the consumer' under Art. 3(h) means the sum of the total amount of the credit and the total cost of credit. Thus the CJEU reasoned that the two notions, the notion of a 'total cost of credit' and the 'total amount of credit' are mutually excluding concepts and consequently the 'total amount of credit' cannot contain any cost elements comprising the 'total amount payable by the consumer'.
Finally, the CJEU also considered the aim of the Directive to provide a high level of consumer protection and to facilitate the creation of the internal market in consumer credit.
Our evaluation
This is another important decision on the clarification of the scope of the Directive. It is particularly important that it raises and answers a substantive question on the content of the contract rather than the provision of information. Most of the CJEU case -law tackles the meaning and scope of the creditors many information obligations. Understandably so given the overwhelmingly information approach of the Directive. In practice however many cost-related questions arise, and this is now a welcomed development that the CJEU had a chance to clarify the meaning of one of these provisions.
The 'consumer friendly' approach is positive and is also justified not just by the above reasoning of the CJEU but also the broader socio-economic circumstances in which these loans are consumed. High cost short term loans are usually used by the less well of or poor(er) consumers (see more here) and it is particularly unfair to charge high fees for them because they had to extend the duration of their loans. As the facts of the case state, and this is a common practical situation, consumers would normally ask for the extension of the loan to avoid default (that would trigger even higher fees and other unwanted circumstances such as the effect of default on ones credit rating).
Looking broader than the high cost short term loans in question, regulating ancillary fees is always a positive approach. Financial firms would use these to covertly achieve high profits, with very little market control over the amount of these fees and with uncertain application of legal control mechanisms such as the unfair terms legislation. Therefore, bringing loan extension fees under the control of the Directive via the notion of the 'total cost of credit' may be necessary to provide the envisaged high level of protection for consumers.
* This comment is based on the Hungarian language version.
* This comment is based on the Hungarian language version.
