A new framework for consumer credit

Czech Republic: The new Consumer Credit Act improves the position of the borrower and imposes more stringent conditions on the lender

The House of Deputies is currently debating the bill for a new Consumer Credit Act which seeks inter alia the implementation into national law of Directive 2014/17/EU on credit agreements for consumers relating to residential immovable property. This directive governs mortgage loans, which were previously excluded from the ambit of national consumer credit law. The new act should also improve the position of consumers in areas in which its rights have been repeatedly violated, and unify the legal framework for distribution in the financial market.

The new Consumer Credit Act improves the legal position of consumers as borrowers e.g. by granting them the right to walk away from a consumer credit contract within the first 14 days without having to state their reasons. Also, consumers will be able to repay all or part of their loan at any time during its term and claim a reduction of the costs of borrowing by that portion of interest and fees which the consumer would have had to pay if not for the premature repayment. Also, the Consumer Credit Act caps the sanctions which the lender may impose in the event that a borrower fails to duly and timely repay the credit.

By contrast, lenders face a host of new obligations vis-a-vis consumers and more stringent rules for the provision of consumer credit in general. Under the new law, even those providers of consumer loans who are not banks will be subject to supervision by the Czech National Bank. This relieves the Czech Trade Inspection from a controlling duty which it has been unable to perform in the first place, having been overwhelmed by the sheer number of lending operations in the market. Newly, each non-banking lender must obtain a license from the Czech National Bank. This presupposes compliance with newly introduced capital adequacy rules, and the implementation of binding rules for administrative processes, internal controlling, a risk management system, compliance rules, and internal auditing. Currently operating non-banking credit institutions will have three months from the enactment of the new Consumer Credit Act to file an application for the credit business license with the Czech National Bank; failure to do so means that they may no longer lend to consumers. With all this in mind, we may expect the enactment of the new law to be followed by some serious pruning in the consumer credit market.

Source: Bill for a Consumer Credit Act (Parliamentary Press 679)


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