Early repayment and reduction in the total cost of mortgage loans C-76/22

Another interesting case tackled by the CJEU was C-76/22 QI v Santander Bank Polska S.A., focusing on Directive 2014/17/EC on Mortgage Credit (MCD) and the rules on the calculation of the reduction of the total cost of credit in case of early repayment. Although the judgment was delivered almost two years ago, it remains relevant as one of the few cases interpreting the MCD, and there has been no other case on the matter.

The consumer entered into a 36-month mortgage loan with the bank. However, the consumer fully repaid the loan within 19 months. At the time of granting the loan, the consumer paid a 2.5% commission on the amount borrowed, which was included in the total cost of credit. After full repayment, the consumer requested a refund of the portion of the commission paid corresponding to the remaining loan period (the period after full repayment). 

The bank claimed that the commission for granting the mortgage was a one-off payment and was therefore excluded from the obligation of refund, but even if it would be refundable, reimbursement should not be proportionate to the period covered by the early repayment in relation to the repayment duration initially agreed, but should be proportionate to the profit expected by the creditor.

Under scrutiny was Article 25(1) of MCD, according to which '[m]ember States shall ensure that the consumer has a right to discharge fully or partially his obligations under a credit agreement prior to the expiry of that agreement. In such cases, the consumer shall be entitled to a reduction in the total cost of the credit to the consumer, such reduction consisting of the interest and the costs for the remaining duration of the contract.

The CJEU was first asked to answer whether the one-off commission falls within the category of costs considered when calculating the reduction in the total cost of the mortgage credit. In answering the question, the decisive point for the CJEU was whether charges are regular payments and whether the amount of (one-off) payments is objectively linked to the duration of the contract. However, as the bank did not provide the relevant information to be able to answer the question, the CJEU reformulated the first legal question to: whether Article 25(1) MCD must be interpreted as meaning that, in the absence of information provided by the creditor enabling a national court to ascertain whether a commission charged when concluding a mortgage agreement falls within the category of costs that are independent of the duration of that agreement, that court must consider that such a commission is covered by the right to a reduction in the total cost of the credit referred to in that provision.

The CJEU noted that national courts must satify themselves that the costs imporsed by the consumer, irrespective of the duration of the credit agreement, do not objectively constitute remuneration of the creditor for temporary use of the capital which is the subject matter of that agreement or for services which, at the time of early repayment, had not yet been provided to the consumer (para. 33). Therefore, a national court cannot presume, solely on the basis that a charge was paid by the consumer in a single instalment when concluding the mortgage agreement, that that charge falls within the costs that are independent of the duration of the agreement, which therefore cannot result in a reduction in the total cost of the credit referred to in Article 25(1) (para. 34).

The CJEU ruled that in the absence of sufficient information, whether the costs are objectively linked to the duration of the contract or whether those costs are independent of that duration, and to ensure that the consumer is not adversely affected by that absence of information, the national court is required to find that the costs concerned are not independent of the duration of the contract and are, consequently, covered by the right to a reduction in the total cost of credit in Article 25(1) MCD, even if the costs were paid in a single instalment when the agreement was concluded.

By the second question, the CJEU was asked whether Article 25(1) requires a specific methodology for calculating the reduction in the total cost of credit.

The CJEU noted that there is nothing in the wording of the provision that would suggest that, and reiterated the purpose of Article 25(1), which guarantees that Member States will provide for the consumer's right to discharge fully or partially his or her obligations under a credit agreement prior to the expiry of that agreement. Secondly, in the event of early repayment, the consumer is entitled to a reduction in the total cost of the credit, which consists of the interest and the costs for the remaining duration of the contract. In this regard, Member States enjoy discretion, provided that the chosen methodology ensures a high level of consumer protection. 

The CJEU therefore ruled that there is no specific methodology for calculating the amount of the reduction in the total cost of credit referred to in Article 25(1).

This is an important judgment that sheds light on the way that the reduction in the total cost of credit in the event of early repayment should be calculated. It is also a warning to banks to be transparent about how their costs are calculated when communicating with all stakeholders, including courts. An interesting comparative point can be added: Article 29(1) of Directive 2023/2225 on Consumer Credit (CCD2) contains a similar provision that, in a way, seems to clarify the vagueness of the MCD and support the CJEU's position. According to Article 29(1) of CCD2, early repayment entitles consumers to a reduction in the total cost of the credit for the remaining duration of the contract. When calculating that reduction, all the costs imposed on the consumer by the creditor shall be taken into consideration.  The CCD2, therefore, refers to all costs, including all fees and commissions, regardless of how and when they were payable.

Reversed burden of proof under strict conditions to exercise early repayment rights of consumer credit- the CJEU in C-326/22

Case C-326/22 Z  arose regarding Article 16(1) of Directive 2008/48/EC on consumer credit and the right to early loan repayment, which provides consumers with a right to repay their loan early and to the costs of the loan reduced accordingly.

The facts

Six consumers assigned to Z their claims regarding 15 consumer credit contracts that were repaid early, who intended to claim the total cost of credit reduction. However, under the applicable Polish law, Z needed to prove the claim's existence, which could have been only done by reference to the contract, but the consumers did not have the contract anymore. Consequently, Z requested access to the contracts, which the bank refused, saying there was no legal duty to do so. However, the referring national court rightly noted that the absence of such duty of the bank would lead to a contrary result to Article 16(1), which may, as in this case, effectively make the right to cost reduction unenforceable.

The legal question

The referring Polish court asked the CJEU whether Article 16(1), read in the light of the principle of effectiveness of EU law, must be interpreted as meaning that a consumer may request, from the creditor, a copy of that agreement and information concerning the repayment of the credit not featured in the contract when this is necessary to verify the calculation of the sum owed by the creditor connected to the early loan repayment right and for allowing that consumer to bring an action for the recovery of that amount.

The ruling

The answer was not apparent from the wording of Art. 16 (1). However, the CJEU noted that in interpreting the provisions of EU law, it is necessary to consider not only the wording but also the context of the provision and the objectives it aims to pursue, which is, achieving a high level of consumer protection.

Crucial is paragraph 26:

In that regard, it is relevant that Article 16(1) of Directive 2008/48 implies that the consumer is entitled to a reduction in the total cost of the credit, such reduction consisting of the interest and the costs for the remaining duration of the agreement, without needing to adduce evidence other than that of the early repayment of the credit. It follows that it is for the creditor to provide the information necessary to establish the amount of the reduction in the total cost of the credit to which the consumer is entitled.

If the information is unavailable in the contract, the creditor must provide that information to the consumer where it is necessary to calculate the amount owed by the creditor (para 27).

The CJEU ruled that Article 16(1) must be interpreted as meaning that a consumer may request, from the creditor, a copy of that agreement and all information concerning the repayment of the credit not featured in the agreement itself which is necessary for verifying the calculation of the sum owed by the creditor under the reduction in the total cost of the credit due to its early repayment and for allowing the consumer to bring a possible action for the recovery of that amount.

The approach was justified by the banks' duty to provide information to consumers via Article 10, which ensures a high level of consumer protection. This duty includes information to be incorporated into the contract and a copy of the agreement provided to the consumer. A credit agreement must be drawn up on a durable medium that should enable the consumer to easily access and store the information provided.

Our analysis 

This rare interpretation of Article 16 follows the only case so far (Lexitor). A seemingly very technical judgment on access to documents turns into a decision that establishes an important legal principle. The court effectively reversed the burden of proof in exercising the rights connected to early loan repayment. Depending on how we define the burden of proof, this might not technically be a reversal of the burden. However, it is based on the same idea of easing the burden of proof. This is based on an understanding that the consumer cannot access the documents and that this access is an essential condition for realising the consumer's rights. The judgment is a significant development, given that the burden of proof was only previously reversed in connection to Article 5 -providing evidence that the creditor complied with pre-contractual information duties (CA Consumer Finance). However, the reversal of the burden of proof here has important limits. It only applies when:

1)    the consumer does not have a copy of the credit agreement or if the agreement does not contain the relevant information, and

2)  the information is necessary for verifying the calculation of the sum owed by the creditor to reduce the total cost of credit due to its early repayment, and

3)   the information is necessary to allow the consumer to take action to recover the sum owed by the creditor. 

The question is whether the judgement will have a broader effect of reversing the burden of proof regarding Article 10 more generally. This seems to be the direction, but it is yet to be confirmed by further CJEU judgments. 

Lexitor saga takes (perhaps not so) unexpected twist: CJEU in UniCredit Bank Austria v VKI (C-555/21)

 Dear readers, 

while some of you may think this blogger spends too much time online (true), lately social media have been a great source of information concerning new case-law - take Thursday's CJEU decision in case C-555/21 on non-interest costs in the case of early repayment of mortgage credit as an example. Within an hour of the Court issuing a press release, I could see the judgment *everywhere*. People in my bubble were, in general, not happy (see eg fellow consumer lawyer Catalin Stanescu; however, I should say: people were not happy, except some fellow Italians, see * below). What happened? 

In 2019, the CJEU decided Lexitor, a case in which it was requested to decide whether article 16 in the 2008 Consumer Credit Directive, regulating the unwinding of consumer debt in case of early repayment, required also non-interest costs to be returned pro rata tempore. In that case (see our post here), the CJEU ruled that indeed this would be the case: a different interpretation, in particular, would have made it too tempting for credit providers, who are to a large extent unilaterally able to set up the remuneration structure for consumer credit, to set up a business model largely based on low interest and high fixed costs.

This case sent airwaves throughout Europe, even if more visibly so in some systems: in Italy, for instance, it led to a recent decision by the Constitutional Court that may or may not need to be reconsidered after today. Why?

An important question outstanding after Lexitor was whether the established interpretation should be limited to the Consumer Credit Directive or could also be extended to the 2014 Mortgage Credit Directive - this in particular given that the two directives contain textually similar provisions and hence a consistent cross-directive interpretation may be good for legal certainty. Today's decision seems to suggest that it can be extended, as a matter of national law - but such extension is anyway not required by EU law. In particular, the preliminary reference asked whether the Austrian provisions preventing the recovery of non-interest costs unconnected to the duration of the credit contract was compatible with article 25 of the 2014 Directive. The CJEU concluded that it is. 

In the case of mortgage contract, the referring court [see para 18] had already observed, much of the fees that do not depend on the duration of the credit are actually outside of the credit provider's control: think for instance of notary costs, obtaining an assessment of the value of the house and so on. In such context, the CJEU found, the risk of perverse incentives found in Lexitor does not seem so serious to justify the consequences that a strict interpretation of the right to pro rata restitution would entail [see para 32].  

While somewhat irrationally finding solace in the idea that the standardised information to be provided pursuant to the Mortgage Credit Directive would prevent abuse on the side of credit providers by empowering consumer choices [para 33-34; reader, take it from someone who has recently concluded a mortgage contract - it doesn't], the Court also makes space for appreciation of the circumstances of the case and arguably national variations. This emerges from paras 37-38, according to which it is for national courts, seized with a dispute, to ensure that the Directive's protective aims are not circumvented and that costs that are in fact remuneration for the availability of cash over time are not accounted for under different headers to avoid restitution. This is an interesting and imposing task for national courts (with possible further implications such as: what would be the contractual consequences of a misclassification? would it in any event entail an unfair commercial practice? would the courts have to perform this check ex officio if for any reason they are confronted with the case?).

In Italy, the Judgement has drawn particularly much attention - Lexitor had previously led to a consequential decision of the Italian constitutional court and had drawn quite the criticism in Law & Econ circles (see eg here), which means this weeks decision has been quickly celebrated by parts of Italian academia.