Ex-officio powers of national courts in enforcing Directive 2008/48/EC: the CJEU in C-679/18 OPR-Finance

Earlier today the European Court of Justice (CJEU) delivered its judgment C-679/18 OPR-Finance s.r.o. v GK on the interpretation of Articles 8 and 23 of Directive 2008/48/EC on Consumer Credit (CCD).

The facts

In April 2017 the consumer concluded a revolving credit agreement with OPR Finance for 192 EUR. After defaulting on payment of due installments, the creditor started enforcement action infront of the District Court of Ostrava (Czech Republic), claiming 307 EUR plus statutory interest. It appeared to  be clear for the referring court that OPR Finance did not claim they have assessed the consumers creditworthiness prior to granting the loan, and it was also clear that the consumer did not raise the objection of nullity  of the contract, the applicable penalty for failing to assess creditworthiness under Czech law.

The legal issues

The referring national court was unsure whether Article 8 on creditors obligation to assess consumers creditworthiness read in conjunction with Article 23 on the obligation of Member States to provide for effective, proportionate and dissuasive penalties for the breach of national provisions adopted pursuant to the CCD, provides for the national courts ex officio obligation to act i.e. obligation of national courts to examine on their own motion whether the creditors have complied with their obligation to assess consumers creditworthiness and ex officio obligation to apply the appropriate penalties provided by national laws.

At second instance, the national court asked whether the national provisions that provide for an obligation of consumers to raise the objection of nullity of the credit agreement within a 3 year time limit are contrary to the said provisions.

The ruling

The first question the CJEU answered positively, ruling that there is an ex officio obligation of national courts to examine whether creditors have complied with their obligation to assess consumers creditworthiness. Not only that national courts must assess ex officio whether the duty of creditworthiness assessment has been complied with but they should also apply the appropriate penalties ex officio, provided they are compliant with Article 23.

In its reasoning the CJEU referred to its previous case-law on establishing an obligation of national courts to rule ex officio on infringements of EU consumer law (para. 18), reinforcing the justification for such approach the weaker position of consumers vis-a-vis businesses in their contractual relationships (para. 19). It has also considered the importance of ex officio powers for achieving the objectives of the CCD. Importantly, it has highlighted that the purpose of Article 8(1) is to make creditors accountable for their lending decisions and to prevent them from providing consumers with unaffordable credit (para. 20). Moreover, the CJEU emphasized the importance of ex officio powers for the protection of consumers against the risks of over-indebtedness and bankruptcy and for the emergence of a well-functioning internal market in consumer credit with a high level of consumer protection (para. 21).

The CJEU further ruled that where national courts find the infringement of Article 8 on their own motion, they should also apply the appropriate sanctions without waiting for consumers to make applications to that effect, provided that national provisions on penalties are compliant with Article 23 and the associated CJEU on its interpretation (paras. 25-27). As mentioned above, under the applicable provisions of Czech law, the penalty of nullity of the contract only applied under the condition that consumers raised an objection of nullity within the limitation period of 3 years. The sanction of nullity itself relieved consumers from paying interest and associated costs to the credit, only requiring the repayment of the principle sum borrowed (para. 29). The CJEU examined the these requirements from the aspects of equivalence and effectiveness (paras. 32-33) and concluded that they are contrary to principle of effectiveness (para. 36). The said conditions make the sanction impossible or excessively difficult to operate in practice. Importantly, the CJEU dismissed the relevance of administrative penalties of competent supervisory authorities, emphasizing the separation of civil and administrative penalties for breaches of consumer credit law (para. 37), given that such penalties have no effect on harmed consumers, consumers to whom the credit was granted in the infringement of Article 8 of the CCD (para. 38).

Concluding thoughts 

This seems to be a well reasoned judgment that provides additional important protection for consumers against the risks involved in borrowing and raises the responsibility of creditors for complying with their obligation to assess consumers creditworthiness. It is now important that national courts follow the judgment and use their powers where appropriate.

Dissuasive penalties for irresponsible lending - CJEU in LCL Le Crédit Lyonnais (C-565/12)

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)

Mortgage credit directive adopted by the Council

Towards the end of last year, we had announced that the European Parliament had approved the proposed Mortgage Credit Directive, leaving it up to the Council to have its final say. A few days ago, the Concil approved the Directive, which seeks to enhance both consumer information and sustainable lending practices.

Although the Directive has been approved with no discussion, three countries have abstained and other governments have asked to add some critical remarks to the meeting's minutes.

Mortgage Credit Directive, the ball is now in the Council's court

Earlier this year, we had reported that the European Parliament, both through its Economic and Monetary Affairs Committee and in a plenary vote, had manifested its support for the Commission's proposal on a Morgage Credit Directive. On Tuesday, the Directive has been approved in first reading, which means that now the word is to the Council, that might decide to approve the directive or to send it back to the Parliament with amendments.

Some key features of the proposed directive are:

• the introduction of a standardised information sheet, which should make comparing different offers easier and also include "worst case scenario" information;

• the establishment of a series of business conduct rules aimed at preventing malpractice and conflicts of interests;

• esuring that consumers are given the chance to repay the debt earlier than originally agreed;

• a "passport" regime aimed at making it easier for credit providers to do business cross-borders;

• european-wide standards for the credit-worthiness assessment of mortgage applicants.

• rules facilitating the "smooth" handling of arrears and other repayment difficulties.

The impact of the rules would vary greatly from country to country. For instance, the Commission's impact assessment reports that in 2006/2007, a stunning 45% of UK mortgages were granted without the consumer's income being verified, a figure which is unlikely to represent the EU's average. An interesting collection of fact and figures has been put together in a rich Commission memo.

The text of the proposed directive can be dowloaded here (part II).