Consumer lending is heavily regulated in Ireland and failure to comply with the prescriptive legislative requirements can have serious consequences for lenders. In this briefing we identify the key question lenders should consider when determining whether a borrower is a consumer, we outline the legislative framework for consumer lending, we highlight the importance of communication with consumers and the danger of including an unfair term in the lending documentation.
Consumers benefit from special legal protections so when entering into a loan agreement lenders should carefully consider whether or not the borrower is a consumer as this will have important consequences for the way in which the person is to be treated. A consumer in this context is a natural person acting outside his or her business, trade or profession.
When deciding whether a borrower is a consumer, lenders should look at the nature and purpose of the relevant loan. The key question is whether or not the agreement satisfies the personal needs of the borrower. The characterisation of a borrower as a consumer can be difficult particularly where the purpose of the loan could be construed as a personal or business purpose. For example, it has been successfully argued that a loan taken out for the purpose of acquiring an investment property was a consumer loan because the purpose of the investment was to provide for the borrower in retirement. The courts have acknowledged that there must come a point when a person crosses the Rubicon from consumer to professional. From a lender’s perspective, this point will need to be determined on a case by case basis. In its determination, a lender should take into account factors identified in the case law as being indicative of a consumer relationship.
When lending to a consumer, the lender will need to identify the consumer legislation applicable to the loan. The Consumer Credit Act 1995 (“CCA”) is the cornerstone of the consumer protection framework in Ireland and certain breaches of the CCA can impact on the enforceability of the loan agreement as well as related security and guarantees. Depending on the purpose and the amount of the loan, European regulations on consumer credit1 may apply in addition to the CCA. Regulated lenders are also required to comply with the Consumer Protection Code 2012 (“CPC”) in their dealings with consumers. A consumer for the purposes of the CPC is a much broader category of borrower and includes corporate entities with a turnover of €3 million or less.
Communication and Information
Both the Irish and European consumer credit initiatives focus on communication with the borrower with a view to ensuring that the consumer is fully informed of the terms of the loan offer. The European regulations set out template information sheets which must be given to the consumer before he or she is bound by the loan offer. This enables the consumer to compare the offer with other loan offers which may be available in the market. In respect of any loan agreement governed by the CCA, lenders should ensure that the consumer receives a copy of the loan agreement upon signing the agreement or within 10 days of that date. Failure to do so will impact on the enforceability of the loan agreement.
In practice, lenders will often incorporate terms and conditions into their loan agreements by reference. The importance of ensuring such terms and conditions are actually provided to the consumer was highlighted in a recent preliminary ruling of the European Court of Justice (“CJEU”)2 . The ruling addressed questions on the interpretation of the Consumer Credit Directive3 that had been raised by the Slovak national court in the context of proceedings for loan default. Under the loan agreement in question, the borrower had confirmed that she had received the general terms and conditions, that she had read them and that she agreed to be bound by them. The CJEU held that there was no requirement under the Directive for all relevant credit information to be contained in one single document. However, it was held that, where an agreement makes reference to another document which forms an important part of the loan agreement, such as the terms and conditions, this document must actually be given to the consumer before the agreement is signed so that the consumer is aware of his or her rights and obligations before being bound.
Lenders should also be mindful of any terms in their consumer loan agreements that may be deemed by a court to be ‘unfair’. Under the European Communities (Unfair Terms in Consumer Contracts) Regulations 1995 an unfair term in a contract concluded with a consumer is not binding on the consumer. Furthermore the High Court4 , by reference to a decision of the CJEU5 , has recently held that the courts have a positive duty to consider whether a loan agreement with a consumer contains unfair terms regardless of whether or not the consumer has raised an issue with the term. This positive obligation on the courts to assess whether a term is unfair has the potential to make enforcement against consumers more difficult for lenders.
Lenders need to tread carefully when engaging in consumer lending given the protective nature of the law towards consumers. It is important to ensure that the lending documentation does not include any unfair terms, that all relevant terms and conditions are actually provided to the consumer before the loan agreement is signed and that the lender’s processes and procedures comply with any applicable legislative and regulatory requirements.