Public Consultation on Responsible Lending and Borrowing in the EU
August 10, 2009
Response developed on behalf of the European Coalition for Responsible Credit
ECRC is a Coalition of not-for-profit institutions and organisations focussed on responsible credit - a concern which extends to a campaign for responsible behaviour in the provision of financial services more generally. Our goal is to organise NGO communication, facilitate exchanges between stakeholders of financial services, to develop and promote the seven principles of responsible credit annexed to this consultation response, and to help bring about sustainable financial services in the EU. Information on responsible and irresponsible credit is largely available from our partners from all over the world, who contribute to our five websites dedicated to these issues: responsible-credit.net; credit-responsible.net; credito-responsabile.net; verantwortliche-kreditvergabe.net; and globalfairfinance.net. These websites and our public newsletters contain more details about our activities (see the latest Newsletter No.13 from July 2009 under "ECRC Newsletter" section of www.responsible-credit.net).
A number of ECRC coalition partners such as vzbv, Altronconsumo, and Reseau Financement Alternatif, have already responded to the specific questions raised in the Commission's consultation document, and they have given a number of concrete examples where irresponsible lending practices exist and should be addressed. We fully support these findings and restrict our comments to the application of the principles of responsible credit as developed and endorsed world-wide by consumer, money-advice and welfare organisations as well as research institutes and public interest institutions.
II. General Reservations with regard to the Consultation inquiry
1. Responsible Lending - Responsible Borrowing: Blaming consumers for irresponsible credit is unacceptable.
(1) We appreciate that the EU Commission, unlike in the failed definition of recital 26 of Directive 2008/48/EC on Consumer Credit, extends the legal obligation for responsible behaviour of lenders beyond the check of creditworthiness of the borrower. It is commonly shared in continental law that the core obligations for a "credit responsable" arise after conclusion of the contract as well as in anticipation of future consumer problems. The present subprime crisis has revealed that "bad debt" is linked to bad credit behaviour of lenders who use predatory lending practices in order to extract a maximum of profit without regard to the ability of the consumer to use the capital productively in his or her own household finance. Adaptation to changing life circumstances, the sharing of social risks over the entire consumer population, the refraining from any exploitation of weakness and offering fair conditions in time of default and insolvency, are core elements of responsible credit, which are also strongly reflected and shared in the traditions of civil law countries.
(2) In this respect we deeply regret that the Commission chose to mix the question of irresponsible consumer behaviour with irresponsible supplier behaviour. This unique approach in consumer protection insults millions of weak consumers who suffered from the crisis. Nobody guarantees their income and jobs, nobody protects them from family break-up, illness and disease. Financial institutions were once created to share these risks equally between all consumers, and to use professional means of foresight and adaptation. They can not shift this responsibility to the consumer side, and should not be encouraged to do so.
(3) The EU should keep in mind that the decision to offer and provide credit is the sole responsibility of the supplier. The EU should refrain from paternalistic attitudes telling a consumer what would be good for him or her. The supplier has all property rights on the capital he extends and these property rights create a legal and moral obligation to use it in a responsible way. It is unacceptable that this clear duty be mystified by opening a door that will allow suppliers to blame consumers for having taken out credit irresponsibly. Consumers who need money have the right to ask for credit. It is up to the supplier to decide whether the credit can be given on the basis of the information received about the consumer. For this, the supplier has access to data bases, long term professional experience and judgement, knowledge that gives them the possibility to estimate the feasibility of future mishaps on the consumers' side, and benefits from a limited liability in company law for poor decisions. The consumer instead, must tolerate the threatening situation of having the harsh consequences of a wrong decision affect his future life.
(4) There are clear legal duties for consumers not to obtain credit by fraud but there is no duty to overtake the responsibilities of professional lenders. Blaming consumers for market failures is the opposite of consumer protection and not in line with the duty of the European Treaty to create a high level of consumer protection. It is a long standing tradition in free-market economies to blame the victim - whether this is the unemployed for having no jobs, consumers for the technically possible misuse of credit cards by third persons, or savers for having invested their money into risky unproductive investments
(5) The erroneous title of this public hearing is not only a mistake but has even turned into an agenda. The conference focuses on consumer education and invites suppliers to sit on the podium in order to judge consumer behaviour. What policy-makers should rather be interested in is having the subject of subprime lending discussed through the viewpoint of the public, and where experts and consumer advocates can ask for explanations and justifications from the banks involved in this biggest financial crisis since 1929.
2. The questionnaire gives answers instead of posing adequate questions
There is only one out of the 15 questions that touches upon the core elements of the credit crisis.
In your view, are there certain (categories of) credit products that are inherently unsuitable for sale to retail borrowers? (Q3)
In our view, all other questions try to influence consumer organisations, providers and experts not to hold bank behaviour responsible for the present crisis, but to find other scapegoats for it. In addition, the ways the questions (Q) are formulated are often suggestive of the preferred answers. Taken together they imply a general theory which can be summed in one crude statement that confounds consumer credit with investors' protection that:
Inadequate consumer behaviour is the main reason for subprime credit and the subprime crisis, since (1) consumers are uneducated and easy to mislead (Q 1, 7), should (2) be denied credit where they want to take out more credit than they can afford (Q 2, 4-6), while on the supplier-side credit (3) only intermediaries use inappropriate marketing practices (Q 10-15).
But credit is reverse investment. This is why the core elements of responsible credit neither lie with intermediaries nor where credit contracts are prepared and concluded. Risk assessment is necessary for bank safety and soundness.
3. "Responsible Credit is a Lender's Obligation"
ECRC partners widely believe that the crisis was due to irresponsible lending practices of banks using all channels of distribution, tailoring products not to the consumers' needs but to their own needs, misusing open loopholes in the EU-Directives as well as national legislation, benefiting from deregulation of securities markets (credit sales) and disproportionately burdening the weakest consumers with exorbitant high costs and unbearable repayment conditions without offering this same clientele significant help in either financial difficult times or bankruptcy.
Financial education is a process of mutual learning between banks and consumers and not a unilateral adaptation of consumer behaviour to the requirements of an unregulated system of banking and finance in consumer credit. Consumers have to learn to make the best use of the system. A system where the consumers should not blame themselves first but a system requiring from the supplier side (and the legislator) that their needs are met. Financial advice is not the advice to refrain from credit but the tailoring of financial products to the needs of the consumer while helping them to cope with unexpected situations.
The need for consumer credit is a basic need that has resulted from the transformation of former non-monetary credit relations (community, family, rent, donations, subsidies) into relationships within a market driven money society. Consumers are thus not "misled" but under high financial pressure to accept offers of the supplier side. It is this dependency which bestows such special responsibility on the shoulders of the credit providers.
Credit intermediaries play an insignificant part in the problems of the credit market because they depend entirely on the support, financing and admission of lenders who induce them to maximise their profits only for the sake of their owners or those who profit through refinancing and not for the consumers. To eliminate the negative effects blamed on agents of intermediation, the history of central European states has shown that it is sufficient to give banks a shared responsibility for the behaviour of such brokers whose credit contracts they accept. Too often, the investor perspective overrides mind frames and we forget to appreciate the fundamental difference between a credit intermediary and an intermediary for a financial investment, namely that the service associated with the credit commitment is one that extends over time.
We deeply regret that the EU passed a consumer credit directive, at exactly the time when the overriding philosophy was one that markets alone can cure problems in consumer credit, showed its failure. It was nevertheless passed and will not only burden suppliers and consumers with hundreds of more or less useless information rights and duties, but the two core information imperatives, a comprehensive APRC and clear information on the payments the consumer has to make, have not been included, let alone the total omission of a rule on responsible credit products and their marketing.
III. Specific Answers
There is only one consultation question that concerns credit products. Responsible lending questions about default procedures, adaptations and refinancing are missing. The Coalition would have liked questions to have covered these key issues for which it would have gladly prepared its response. We would nevertheless like to complement this discussion, conference and hearing with what ECRC, together with its American counterpart NCRC, assume to be responsibility in lending.>
1. Question 3
In your view, are there certain (categories of) credit products that are inherently unsuitable for sale to retail borrowers?
In our Subprime Declaration from 30 June 2008 ECRC supported by many signatures from its coalition partners had already pointed to a number of products and predatory lending practices that led to the Subprime Crisis and expressed
"our profound concern at the current worldwide credit crisis and the irresponsible lending which has created it, and which has remained unrestrained despite the warning issued by both the Council of Europe, in June 2007, and the European Council, in November 2001, that an indebted society was creating the risk of instability in the money system. In particular, we deplore practices, such as
(a) Irresponsible mortgage products
(b) Credit cards secured on borrowers' homes
(c) Costly revolving credit with ballooning interest charges
(d) Cross-selling of loans and insurance products with hidden 'kick-back' provisions
(e) Transformation of fixed-rate loans into variable rate loans prior to increases in interest rates or loans on misleadingly advantageous introductory terms
(f) Short-term lending extended on terms which trap into lifelong commitments and dependency
(g) The replacement of instalment credit with open-ended and variable rate credit
(h) Pyramiding of existing debt with further credit
(i) Loans on usurious terms
We are mindful that the causes of the current crisis include:
(1) Irresponsible lending has been a major cause of the recent escalation in house prices, creating artificial temporary demand
(2) Deregulation of the credit and investment markets caused lack of transparency, which has exposed the worldwide community to unacceptable and uncontrollable levels of risk of financial instability"
In our GlobalCRC-London Declaration from 13 November 2008, issued on the back of our last global conference on Responsible Credit end 2008, we have stated:
"The current crisis is a product of the long term neglect of consumer interests in the credit markets and inadequate regulation of the financial services industry. Over the past twenty years we have witnessed the continued weakening of consumer protections in the name of supporting free and efficient markets. The failure of this approach in the credit market is now self evident. This is not a crisis borne from providing access to credit to low income groups, but it is a product of providing them with irresponsible credit products and failing to protect their long term interests in the market.
Similar declarations have been made by us ahead of the G20 Summit, made on 30. March 2009 and distributed in many languages all over the world.
We fully subscribe to the descriptions of our German partner vzbv who has enumerated many more dangerous and harmful products in his responses to the questions which by itself only asked for information and intermediaries.
We would also like to point out to a number of withheld expertises by the EU Commission itself, in particular those reports mandated between 1995 and 2002 on predatory and irresponsible lending practices by DG SANCO. Examples of such non-used expertises within those years include those from CDC Louvain-La-Neuve who delivered an international report on credit intermediaries, or iff who delivered a report on the misuse and circumvention of APR legislation through products like endowment credit, credit card credit, variable rate credit, linked payment protection insurance with 50% kick-back provisions in 1998. In addition, five leading European scientists from different countries delivered an expertise to DG SANCO on legal rules and protection in 15 EU Member States concerning over-indebtedness and predatory lending. This report, which included analysis of phenomena like anatocism, flipping, churning, circumvention, additional default charges etc..., discussed the effectiveness as well as the loopholes of the existing rules in the EU. Instead of using this European information today, this research study has been removed from the websites of the Commission since 2004, date at which the new Draft for a Consumer Credit Directive went about dramatically changing the policy options in consumer protection. The reports, though all heartily welcome by the Commission at the time of their delivery, are simply no longer cited..
2. Additional Question
What is responsible lending?
The following answer comes from the ECRC Principles of Responsible Credit which have been endorsed in many countries of the world by social organisations. They have been developed over many years of discussions, and primarily through stakeholder interactions, especially those in the EU.
see here the ECRC Principles of responsible Credit
3. Requests from ECRC Subprime Declaration
In order to secure the restoration of confidence and stability in the financial markets and to protect consumers and vulnerable members of society we demand
(A) Action up to and including legislation by the EU, the US Government, other national governments, and recommendations from international bodies requiring adherence to the seven principles of responsible credit, and an evaluation of existing practice and legislation on the same basis.
(B) Investigation and a risk assessment by national governments and regulators of the quality and implications of existing credit products and the ways they are marketed and their effect on families all over the world.
(C) An international independent forum at which suppliers, governments, regulators, consumer organisations and advocates will meet to discuss the reasons for this credit crisis and to recommend ways in which confidence can be rebuilt in the financial markets.
(D) An increased soundness of the refinance sector through improved financial supervision and risk distribution, through greater transparency and greater scrutiny of credit rating agencies.
(E) That financial regulatory authorities provide protection against irresponsible lending in order to secure the stability of the finance markets and ensure, through international co-operation, that the market and consumers are given effective protection against irresponsible credit agreements and their de-stabilising effects.
Udo Reifner, Chair ECRC (Germany)
Damon Gibbons (Chair DOOD, UK)
Bob Schmitz (Member of the European Consumer Consultative Group's sub-group on financial services - FSCG, ULC, Luxembourg)
Benoit Granger (MicFin)
Note: The European Coalition for Responsible Credit was formed in 2006 to promote the principles of responsible credit and fair finance. It is supported by 50 consumer and non-governmental organisations, and over 100 additional association representatives and individuals from academic circles, representing 30 countries world-wide. For more information see: www.responsible-credit.net; www.credit-responsable.net; www.credito-responsabile.net; www.verantwortliche-kreditvergabe.net; www.globalfairfinance.net