1. Introduction

Recently the Ministry of Finance made publicly available the amendments to the Consumer Loans Act, Official Gazette No. 75/2009 and 112/2012 (“Amendments”) which regulate consumer loans agreements, conditions for provision of consumer loans services and obligations of the creditors towards consumers. Within the scope of regulation, the Consumer Loans Act contains a number of provisions regulating consumer protection such as right to access information prior and during the loan arrangement, right of the consumers to withdraw from the loan arrangement, right to premature repayment of loan, etc.

Taking into consideration recent developments on the Croatian consumer loans market which led to constant public discussions on the loans granted in CHF, which showed to appear as the most obvious case of consumers’ inequality towards creditors and the recent judgement in “FRANAK” case where the Commercial Court found certain contractual clauses and bank practice to be against consumers’ statutory rights, the Croatian Government finds the Amendments to be one of the priorities which require fast acting.

The question whether even growing tensions between banks and consumers are the result of the general financial crisis, the low debt settling culture on the side of consumers or the aggressive exploitation policy by the credit institutions, may be subject to never-ending debates in which the experienced and convincing speakers will always find the arguments to beat the opponent. Yet, the unpopular statistic speaks for itself.

A number of 300.000 blocked accounts and the increase of “bad loans” from 5% in 2008 to 12,5% in 2012 is something that cannot just be explained by using already corny terms such as “economic crisis” but the answer requires more serious in depth-analysis not just of the market but also of the conditions under which the loan market had been functioning over the last years.

After having performed supposed market research, the left oriented Croatian Government argues that one of the reasons for such unfavourable creditworthiness may be found in irresponsible practice of credit institutions which over past few years approved loan arrangements without performing in-depth analysis of the borrowers’ creditworthiness and without providing consumers with sufficient information as to the possible risks of loan deals, especially in a part relating to the currency and interest rate risk.

  1. Variable (floating) interest rate

The Amendments give special attention to the banks’ practice to unilaterally change the floating interest rates on the basis of the banks’ general terms and conditions or internal decision, which consumers did not have a chance to influence and what has been achieved without reaching prior agreement on the applicable parameters.

It was the common practice that the loan agreements with variable interest rate did not include parameters for variation from the agreed interest rate. The banks did not provide sufficient arguments to change the omnipresent public opinion that in changing the interest rate the banks had been acting arbitrary without having a real economic justification for that move. Besides, there is even greater number of legal practitioners finding such unilateral arrangement of the counterparty’s obligations contrary to the principle of equality and good faith enacted in the Croatian Obligations Act.

The Amendments aim to correct this legal uncertainty by defining in a precise manner the parameters to be applied as a basis for adjustment of the interest rates.

The Amendment introduce the obligation to credit institutions to provide consumers in writing with all the risks relating to potential variations of the exchange rate, the interest rate and the consumer’s loss of the income. Such a notification shall be accompanied by the written simulation to be made for each of these scenarios.

  1. Application of the Amendments

It is planned that the Amendments apply to all the existing loan arrangements, which means nothing else but the retroactive application of the law. Even though the Ministry of Finance argues such an application to be justified and in line with certain principles of the contract law such as “rebus sic stantibus” it will be interesting to wait for the reaction of the Constitutional Court which is facing even more constitutional claims concerning a number of recently adopted laws, some of them imposing retroactive application.

Thus, in the existing loan arrangements in which the alteration of the interest rate lies in exclusive discretion of the creditors, the provisions on unilateral change of interest rate shall be deemed null and void. In addition, if no variation parameters in respect to interest rate have been defined, for every future variation of the interest rate, the creditors shall include in the agreement the parameters, fixed margin and time limits for the variation of the interests.

In such loan agreements that underwent the appreciation of the exchange rate for more than 20% during the repayment period, the interest rate as well as the interest margin may not be higher than the starting ones. This is expected to enable the protection of the most endangered consumers which have been exposed to both the growth of the interest rate and the exchange rate appreciation.

  1. Housing loans

The interest rates for housing loans in Croatia are above average interest rates in the member states of the EU (pursuant to information EUROSTAT, average interest rate in Eurozone countries is 3,35% whereas in Croatia 5,37%). The Amendments determine maximally allowed interest rate for the housing loans, which may not exceed the average interest rate applicable to the approved housing loans for different currencies in Republic Croatia increased for 1 percentage. The average interest rate for certain currency shall be published on the web site of the Croatian National Bank.

  1. Effective interest rate

One of the novelties concerns the effective interest rate. The total costs of the consumer loans shall be limited in that the effective interest rate may reach maximally 1 percentage below statutory interest rate provided for by the law, which would make the maximum effective interest rate to be 11%.

  1. Lending fees

In lending practice it frequently occurs that the consumers experience excessive fees charged in the course of loan approvals, sometimes also called as manipulative costs. There is an opinion present that such fees are nothing else then the instrument for gaining additional profit and that there are no actual costs behind these fees on the side of the bank. Amendments introduce limitations to lending fees stipulating that the fees shall be proportionate to the actual costs of the loan approval. Introduction of additional new fees during the life of the loan arrangement shall be prohibited. Lending fees shall be defined by the Ministry of Finance.

  1. Account overdrafts

Approving and cancelling the account overdrafts (permitted downside), have previously been decided by unilateral decision of the banks. Consumers were frequently informed of such decision by way of e-mail or text message. The market analysis has shown that more than 1.5 million of citizens use overdrafts which are subject to average repayment interest rate of 11,56%. Moreover, above 76% of the citizens are in overdraft for more than one average income, in turn making the annual income of the banks app. HRK 800 million.

The Amendments introduce restriction in respect to the maximum overdraft on the bank account to the level of one average regular monthly income within last six months. Both the consumers and the banks are obliged to adjust the overdraft status until 31 December 2014 at latest and any time after entering of the Amendments into force, the banks must approve upon consumers’ request the alternative loans with the purpose of closing the excessive overdraft. It is expected that the limitations of the overdrafts shall result in consumers using classic borrowing instruments and in decrease of borrowing price.