The new Czech Act on Consumer Loans (the “Act”) was published recently and will enter into force on 1 December 2016. Under the Act, lenders will be subject to a licensing procedure with the Czech National Bank, required to possess a capital stock of at least 20,000,000 CZK (over 740,000 EUR) and will be responsible for assessing the borrower’s financial situation.
About 60,000 non-bank financial institutions currently offer consumer loans in the Czech Republic, often to those consumers turned down by banks. This has resulted in an increasing number of Czech consumers being unable to repay their loans. The Ministry of Finance expects that the stringent requirements of the new law will significantly reduce the number of loan providers.
Loan providers will be required to obtain a licence from the Czech National Bank, which will also act as a supervisory body and have the power to issue strong penalties. The application for the license will also be able to be submitted electronically. If the Czech National Bank approves the application, it will register the consumer credit provider to the register without further issuing of the decision. The register will be publicly available and the licence will be valid for 5 years following the year in which it was granted. The licence will be able to be repeatedly prolonged for another 60 months following the payment of the administration fee.
The Act also requires lenders to review the consumer’s ability to repay the loan by assessing consumer’s income and expenses, as well as prior loans and their repayment status. Failure to carry out such an assessment will result in a void contract and the borrower will not be required to pay any interest, fees or fines. The Act also introduces other measures for protecting consumers, including capping penalties for late payments at 0,1% of the loan per day and requiring written contracts for all consumer loans, including small pay-day loans.
Although the Act is primarily aimed at regulating non-bank financial institutions, it will apply to all consumer loans, including mortgages. The borrower will be entitled to a 25% early repayment of the mortgage every year free of charge, as well as to an early repayment in the event of long-term disability or death. Certain banks warn that the new Act could substantially raise mortgage rates, though the Ministry of Finance disputes such claims.