Author: George Kazoleas, Lawyer
The
right of early repayment of the loan by the borrower is enshrined in both
European law and national legal systems. There are essentially two main effects
of this right’s exercise: On the one hand, the consumer/ borrower is entitled
to a reduction in the total cost of the credit consisting of interest and
charges for the remaining period of the contract. On the other hand, the bank
shall be entitled to reasonable and objectively justified compensation for any
costs directly linked to early repayment of the credit, provided that the early
repayment is made within the period for which the borrowing rate is fixed.
(Article 16 (1) of Directive 2008/48).
Bank’s
compensation
The
relative clauses used by most banks regarding the issue of early repayment of
the loan are vaguely worded and non-transparent and have therefore been
repeatedly declared illegal, unfair and abusive. It is commonly stated that
compensation includes any costs, expenses, losses, or liabilities that the bank
may incur as a result of early repayment. It does not specify, however, what
the costs, expenses, etc. are, but it is left to the credit institution's
absolute discretion to determine the amount of compensation unilaterally and
without actual control by the consumer. Such a clause which, put in place by
the strong party and despite the requirement of good faith, creates a
significant disproportionate burden on the consumer between the rights and
obligations of the parties to the contract is found to be abusive and unfair.
According
to Article 16 of Directive 2008/48, compensation for early repayment shall not
be claimed: (a) if the repayment has been made under an insurance contract
intended to provide a credit repayment guarantee;
(b) in
the case of overdraft facilities; or
(c) if
the repayment falls within a period for which the borrowing rate is not fixed.
In
conclusion, the compensation claimed by the bank in case of early repayment of
the loan must be definite and limited and its calculation must be
understandable and transparent for the consumer. It should relate to any costs
that are directly linked to early repayment, also taking into account the
amounts which the bank may have saved from inflating the repayable amount. The
calculation of the creditor's compensation should be transparent and
comprehensible to the consumer from the pre-conclusion stage, in any case
during the execution of the credit agreement. In addition, the method of
calculation should be easy to apply by creditors and promote supervisory
control of compensation by responsible authorities.
The
right of the borrower to reduce the total cost of the credit
The
exercise of the right of early repayment of the loan by the borrower implies
its right to reduce the total cost of the credit. What does this cost include,
Directive 2008/48 specifies:
“The
total cost of the credit to the consumer should comprise all the costs,
including interest, commissions, taxes, fees for credit intermediaries and any
other fees which the consumer has to pay in connection with the credit
agreement, except for notarial costs. Creditors’ actual knowledge of the costs
should be assessed objectively, taking into account the requirements of
professional diligence”.
In
determining the total cost of the loan, charges and expenses that depend on the
duration of the loan agreement and those that are not dependent should be
distinguished. If the latter are not included in the total cost of the loan,
the consumer / borrower's right in this regard is limited and weakened. Banks
will only provide for costs and charges that are not subject to the term of the
loan agreement, in order to prevent such costs from being included in those
related to the reduction of the total cost of the credit, which the borrower
will be entitled to when prematurely repays its obligations.
The
recent decision of the ECJ of 11 September 2019 in Case C ‑ 383/18 provides that the
right of the consumer to reduce the total cost of credit in the event of early
repayment shall include all costs incurred, the payment of which was
charged to the consumer and therefore costs and charges that are independent of
the duration of the loan agreement.
The
Court bases its judgment in stating that “the effectiveness of the right of the
consumer to a reduction in the total cost of the credit would be reduced if the
reduction of the credit could be limited to the taking into account of only
those costs presented by the creditor as dependent on the duration of the contract,
given that …the costs and the breakdown thereof are determined unilaterally by
the bank and the charging of fees may include a certain profit margin…
In
addition… limiting the possibility of reducing the total cost of the credit
solely to costs expressly connected with the duration of the contract would
entail the risk that the consumer would be required to make a higher one-off
payment when concluding the credit agreement since the creditor could be
tempted to reduce the costs depending on the duration of the contract to a
minimum…
Furthermore…
the degree of flexibility available to credit institutions in terms of
invoicing and internal organisation makes it very difficult in practice for a
consumer or a court to determine which costs are objectively linked to the
duration of the contract”.
In
view of the above we can come to some conclusions:
1. The
borrower's early repayment right implies his right to reduce the total cost of
the credit, which includes all costs incurred by the bank.
2. The
compensation which the bank is entitled to exercise of the above right shall be
definite and limited and the calculation of it must be understandable and
transparent for the consumer. It should only concern any costs that are
directly related to early repayment. Clauses referring to compensation that
generally and indefinitely include any costs, expenses, damages, losses or
liabilities that the bank may incur as a result of early repayment are
unlawful, abusive and have no legal effect.
3. It
must not be forgotten that the bank, through early repayment, recovers the loan
amount early, which apparently uses when concludes a new credit agreement and
thus imposes new charges and commissions. In addition, early repayment of a
loan ensures that it will never become unsecured. It is therefore not
particularly critical to argue that the bank is suffering significant damage
from early repayment, even to the extent that it entitles it to claim unfair
compensation.
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