Fighting Usurious Practices in Consumer Credit – Expectations and Reality in Estonia

1. Karin Sein, dr iur Associate Professor of Civil Law, University of Tartu Fighting Usurious Practices in Consumer Credit – Expectations and Reality in Estonia

2. Introduction • SMS/electronic consumer loans – modern form of usury? • Leads to irresponsible borrowing practices and over-indebtedness of the consumers • No official statistics, different estimates of the market share of SMS loans and the number of debtors • Why do people take such loans?

3. Different methods of protecting consumers • ... against usurious loans include: • interest/APRC rate caps(used already in Roman law), • administrative methods, restricting advertising, • information obligations, right of withdrawal • educating consumers, • unconscionability doctrine

4. Measures of the CCD not enough • The consumer protection measures of the Consumer Credit Directive (implemented in the Estonian Law of Obligations Act): information obligations and right to withdrawal • Applicable to microcredit • But: not enough for efficient consumer protection

5. Response from the Estonian Legislator • Unconscionability doctrine • Amended the paragraph 86 of the Estonian General Part of Civil Code Act • Changed the notion of a transaction that is considered to be against good morals (contrabonos mores) and thus void • Entered into force on 1 May 2009

6. § 86 (2) of General Part of Civil Code Act • A transaction is deemed contrary to good morals if, inter alia, a party knew or had to know that the other party entered into the transaction due to urgent needs, dependence or inexperience of the person, or other similar circumstances (‚gross disparity’) and if • the transaction was made on grossly unfair terms for the other party or • if an imbalance contrary to good morals exists between the value of mutual obligations of the parties

7. Objective and subjective components • Not sufficient to consider a transaction contrary to good morals simply because the transaction is extremely costly for the consumer • Also required that the other party knew or could be expected to know that the consumer entered into the transaction due to reasons of gross disparity • I

8. Disproportionality in Consumer Credit Contracts, § 86 (3) of GPCCA • In case of consumer credit contracts it is assumed that the value of the parties’ mutual obligations is disproportionate if the APRC payable by the consumer exceeds more than 3 times the average APRC charged on consumer credit

9. Consumer’s Burden of Proof • Supreme Court case 3-2-1-49-11 • It is the consumer who has to plead and prove that he concluded the contract due to his urgent needs, dependence or inexperience

10. Effectiveness of the Estonian regulation • Estonian experience: the regulation has not been effective in reality • The electronic loan providers continue their activities and still offer loans with excessive APRC • Estonian credit providers have also entered the Latvian, Lithuanian and Finnish credit markets

11. Procedural reasons I • According to the Supreme Court, the consumer has to plead and prove that he concluded the contract due to his urgent needs, dependence or inexperience • Almost no cases where the consumer has been able to do that • The voidness of a usurious credit contract cannot be established ex officio by the court, particularly in case of default judgments

12. Procedural reasons II • Creditors are using the order for payment procedure hoping that consumers are not lodging a statement of opposition • If the debtor remains passive the court will issue a payment order without examining the validity of the claim

13. Other Reasons • Creditors are asserting their claims against consumers not in ordinary court proceedings but rather by using debt collection agencies • The consumers are afraid of the creditor reporting their default to the credit information registry • Use of abstract acknowledgements of debt • Debtors of usurious loans are usually persons who are not ready or do not possess financial means necessary to assert their rights in the courts

14. CJEU on Unfair Terms Directive • In disputes where the amounts involved are often limited, the lawyers' fees may be higher than the amount at stake, which may deter the consumer from contesting the application of an unfair term. /.../ there is a real risk that the consumer, particularly because of ignorance of the law, will not challenge the term pleaded against him on the grounds that it is unfair. It follows that effective protection of the consumer may be attained only if the national court acknowledges that it has power to evaluate terms of this kind of its own motion.(Oceano Grupo, p 26).

15. CJEU on Unfair Terms Directive • “The consumer is in a weak position vis-à-vis theseller or supplier, as regards both his bargaining power and his level of knowledge.” (OceanoGrupo p 25, Mostaza Claro, p 25). • “The imbalance which exists between the consumer and the seller or supplier may be corrected only by positive action unconnected with the actual parties to the contract” (OcéanoGrupo, p 27, Mostaza Claro, p 26, AsturcomTelecomunicaciones, p 31, PenzügyiLizingp 48).

16. CJEU on Unfair Terms Directive • That power of the national court has been regarded as necessary for ensuring that the consumer enjoys effective protection, in view in particular of the real risk that he is unaware of his rights or encounters difficulties in enforcing them(OcéanoGrupo, p 26, Cofidis, p 33, Mostaza Claro, p 28)

17. Thank you! • karin.sein@ut.ee