Vol. X No.2
February 2005


Consumer Credit Law

Consumer Credit Law
Romania’s consumer protection legislation has been recently strengthened by the enactment of a law meant to restrain the abuse of consumers who enter into credit agreements in order to purchase goods and services. Law 289/2004 Concerning Credit Agreements (hereinafter “the Law”) embodies the provisions of EEC Directive 87/102/EEC of December 22, 1986, concerning consumer credit, creating a legal framework in Romania in a field which was previously unregulated. Although the credit business was qualified as a banking activity by Law 58/1998 – Banking Law, some “undertakings” i.e., credit providers, began granting consumer credit without observing the provisions of the Banking Law. This was possible because the Banking Law did not expressly forbid non-banks to pursue credit activities. As of the entry into force of the Law, the persons who wish to engage in offering consumer credit need to be licensed and must observe special consumer protection rules related to pre-contractual information, specific contractual clauses, repayment in advance and other matters commonly involved in such transactions in the European Union.

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According to the Law, a consumer is the natural person who, in agreements covered by the Law, is acting for the realization of a right or legitimate interest which can be regarded as outside of his trade or profession. A creditor is a natural or legal person who grants credit to consumers in the course of its business or profession. The Law also allows for consumer credit brokerage - a credit broker being defined as any natural or legal person that, in exchange of a fee, is acting as an intermediary by presenting or offering credit agreements, or by performing other works in preparation of such agreements. Also, a credit agreement is a legal transaction or act in law based on which a creditor grants or promises to grant, and the consumer accepts a credit in the form of a loan, deferred payment or other similar financial accommodation.

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Licensing and Supervision of Creditors and Brokers
In order to operate a consumer credit business, creditors and the credit brokers must be licensed. According to the Law, the manner of registration and authorization, as well as the competent authority to issue licenses, will be established by government resolution. Credit institutions that already require authorization from the National Bank of Romania are not subject to the licensing procedures provided in the Law. Also, after Romania’s accession to the European Union, natural persons or the branches and representative offices of creditors and intermediaries with headquarters in one of the EU or European Economic Area member states, who are authorized under the laws of such states to provide consumer credit services, will be exempt from the obligation to obtain a Romanian license. The National Consumer Protection Authority, as well as the competent authority designated by the government, will supervise and investigate the business activities of creditors and credit brokers. The National Consumer Protection Authority will receive all complaints from consumers related to credit agreements and crediting conditions, will institute the complaints’ processing procedures in view of their analysis and amicable settlement, and will apply sanctions for infringements of the Law. The competent authority will supervise compliance with the registration and issuance of licenses to the creditor or, as applicable, to the intermediary.

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Informing Consumers
Prior to the execution of the credit agreement, the creditor must provide consumers with the proposed credit agreement, the type and total amount of the credit, the advantages and disadvantages associated with what is being offered in light of the consumer’s financial position, as well as the purpose of the credit. Also, consumers have to be completely and accurately informed regarding the envisaged credit agreement and the documents necessary for the grant of credit, which must at a minimum be comprised of:
  • a description of the applicant’s and any potential guarantor’s current financial position, including a cash flow projection for the period of repayment of the credit and payment of the interest;
  • a description of the means of guarantee intended for the full reimbursement of the loan and, as applicable, an evaluation of any goods pledged; and
  • a description of the credit conditions, comprising the amount of the credit, the amount of the annual percentage rate of charge, the interest rate, the repayment schedule, and the borrower’s objectives or destination of the loan.

Related to the credit agreements under which the credit is granted in the form of advances on a current account (credit lines) other than on credit cards, the consumer has to be informed, in writing, at the latest upon the execution of the agreement, of the credit limit, if any, the annual rate of interest and the charges applicable from the time that the agreement is concluded, the conditions under which they may be amended and the procedure for terminating the credit agreement. According to the Law, any advertisement or any offer of consumer credit, which is displayed in a public place must clearly and intelligibly mention the annual percentage rate of charge and observe the provisions of Law 148/2000 related to publicity. The commercial purpose of such information must be clearly stated in common language. During the period of the agreement, the consumer must be informed of any change in the annual rate of interest or in the relevant charges occurring after the execution of the contract, at the time it occurs.

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Form and Content of Credit Agreements
The credit agreements must be made in writing, and in at least two original counterparts. The Law provides for a list of mandatory clauses to be inserted in all credit agreements such as the amount of the annual percentage rate of charge as well as a statement of the conditions under which it can be amended, a statement of the amount, number and frequency or dates of the payments which the consumer must make in order to repay the credit and the payments for interest or other charges, and the specific credit documentation as established by the creditor etc. Appendix 1 to the Law indicates the minimum mandatory clauses of credit agreements according to their respective subject matter (e.g. financing of the acquisition of goods and services).

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Annual Percentage Rate of Charge
In order to increase the transparency of the real credit cost, the Law has introduced the concept of “annual percentage rate of charge”, which is defined as the total cost of the entire credit to the consumer, expressed as an annual percentage of the amount of the credit. The annual percentage rate of charge, which equalizes, on an annual basis, the present value of all commitments represented by loans, repayments and charges, future or existing, agreed by the creditor and the beneficiary of the credit, is calculated in accordance with the formula set out in Appendix II to the Law. For the purpose of calculating the annual percentage rate of charge, the total costs of the credit to the consumer must be determined, with the exception of the charges provided for in the Law (e.g. charges payable by the borrower for non-compliance with any of his commitments laid down in the credit agreement, charges for the transfer of funds and charges for keeping an account intended to receive payments towards the reimbursement of the credit, the payment of interest and other charges except where the consumer does not have freedom of choice in the matter and where such charges are abnormally high, charges for insurance or guarantees). The annual percentage rate of charge must be calculated at the time the credit contract is concluded, based upon the assumption that the respective credit agreement will remain valid for the duration provided for in the agreement based on the parties’ covenant and that the parties shall fulfill their respective obligations according to the terms and conditions laid down in the agreement. In the case of credit agreements stipulating clauses allowing variations in the rate of interest and the amount or level of other charges contained in the annual percentage rate of charge but unquantifiable at the time when it is calculated, the annual percentage rate of charge will be calculated on the assumption that interest and other charges remain fixed and will apply until the end of the credit contract.

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Breach of Contract
In regard to credit agreements granted for the acquisition of goods, in the event of a consumer’s breach of contract, the creditor may seek all legal remedies required in order to repossess the goods after the expiration of an additional period of 30 days as of the due date of the last unpaid installment. Within such additional period of time, before attempting to repossess the goods, the creditor must immediately notify the consumer, justifying its decision and requesting the consumer’s written consent regarding the repossession of the goods. In the event the creditor repossesses the goods, the respective obligations of the parties must be settled in such a manner as to insure that the repossession of the goods does not give rise to unjustified gains. If the seller recovers the goods, it must reimburse the creditor for its cost. If the goods and services that are the subject matter of the credit agreement are not supplied, are partially supplied or do not conform to the contract concluded for their supply, the supplier and the creditor will be jointly and severally liable for indemnification of the consumer, subject to the following conditions:
  • the consumer concludes a credit agreement with a person other than the supplier of goods or services;
  • the grantor of the credit and the supplier of goods or services have a pre-existing agreement whereby the credit is made available exclusively by the creditor to the clients of the respective supplier; or
  • the consumer has been given the credit by virtue of such a pre-existing agreement.

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Other Consumer Rights
The Law provides for the consumer’s right to discharge, fully or partially, his obligations under a credit agreement, before the time fixed by the agreement. In the event of the discharge of obligations in advance, the consumer is entitled to an equitable reduction of the credit costs, pro rata, for the period during which the credit was used. Where the creditor’s rights under a credit agreement are assigned to a third person, the consumer is entitled to assert against such third person any contractual right that he has against the original creditor, including set-off. The consumer cannot be obliged to pay to a third party any amounts additional to those determined under the initial credit agreement.

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When the issue of an infringement of the Law is being assessed, the competent authorities mentioned above may order the withdrawal or annulment of the license, as well as any other measures meant to limit damage to the consumer’s material interests, including requiring a creditor to incur the indemnification resulting from the agreement, or requiring a creditor who cannot comply with the provisions of the agreement to transfer its obligations to a third party. The infringement of the provisions related to the calculation of the annual percentage rate of charge, the information that must be provided to consumers, the mandatory clauses in the credit agreements and the anticipated repayment, as well as of the provisions regarding publicity and the authorization procedures, are considered minor offences and subject to fines of up to ROL 100,000,000.

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In principle, the Law is excellent; in practice, its enforcement may raise significant problems. For example, according to the Law, the manner of registration and licensing of creditors and credit brokers, as well as the competent authority, should have been established by government resolution within 90 days as of the publication of the Law in Romania’s Official Gazette. That deadline has long passed and yet there is no sign of any such government resolution. So, even if the Law has entered into force, the “undertakings” that are willing to grant consumer credit have to wait and see who they have to apply to for a license. Moreover, even if the legislature hoped to avoid the misleading of consumers with regard to the total cost of their loans by the introduction of the concept of the annual percentage rate of charge, the complexity of the calculation scheme provided for by the Law makes it even harder for the consumers to compare different financial products.

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Editors Note: It is our policy not to mention our clients by name in The Romanian Digest™ or discuss their business unless it is a matter of public record and our clients approve. The information herein is correct to the best of our knowledge and belief at press time. Specific advice should be sought from us, however, before investment or other decisions are made.

Copyright 2005 Rubin Meyer Doru & Trandafir, societate civila de avocati. All rights reserved. No part of The Romanian Digest™ may be reproduced, reused or redistributed in any form without prior written permission from the publisher.

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