The Regulation on Consumer Loan Agreements was published in the Official Gazette dated May 22, 2015 ("Regulation"). Legal standards applicable to consumer loan agreements ("Agreement") have been regulated in detail under the Regulation.
However, it is important to note that the Regulation will not be applicable to:
- Housing finance agreements,
- Overdraft account agreements requiring re-payment of the loan within 30 days, and
- Non-cash loan agreements (e.g. check, letter of guarantee
In summary, the Regulation intends to provide protection to the consumers against their lenders; banks and financial institutions.
In the interest of protecting the consumers, the Regulation provides that lenders shall have the obligation of informing their consumers by means of providing the consumers with information forms with respect to the consumer loan which they will receive prior to the execution of the Agreement. These information forms shall be in at least 12 font and the language used therein shall be clear, simple and readable. In order to be valid, a copy of these forms shall be provided to the consumer in writing or through a permanent data storage unit. Permanent data storage unit has been defined under the Regulation as:
"all kinds of instruments and environments including short messages, electronic mail, internet, discs, CD's, DVD's, memory cards providing sufficient storage of the information sent by or to the consumer allowing the information to be inspected for a reasonable time period relevant to the purpose of such information and copying of the information without any change and enabling access to the information"
Information forms provided by the lenders shall include all items listed under the Regulation.
It is important to mention that the obligation of the lenders to provide information forms to the consumers is applicable to both fixed term Agreements and Agreements executed for an indefinite period.
The Regulation also provides an exemption to this obligation. In this respect, suppliers or service providers who act as a loan intermediary in its capacity as assistant, are not obliged to provide these information forms to the consumers. This however, does not prejudice the lenders' obligation to provide such information forms.
Legal form of the Agreements has been strictly regulated under the Regulation. Accordingly, Agreements (except for distance contracts) shall be executed in writing in order to be valid. The lenders cannot assert claims against the consumers regarding invalidity of Agreements resulting from non-compliance with the mandatory legal form set forth under the Regulation. Similar to the information forms, Agreements shall also be in at least 12 font and the language used therein shall be clear, simple and readable. The mandatory items which should be included under both fixed term Agreements and Agreements executed for an indefinite period have been listed under the Regulation.
There is a distinction between fixed term Agreements and Agreements executed for an indefinite period in terms of amending the terms of these agreements. According to the Regulation, terms under fixed term Agreements cannot be amended to the detriment of the consumers.
On the other hand, contractual interest rates determined under Agreements executed for an indefinite period can be amended. However, such amendment shall be notified to the consumer in writing or through the permanent data storage unit. In case of an increase, the increased contractual interest rates shall not be applicable retrospectively. The consumer shall not be effected by such increase in the contractual interest rate if the consumer has fully paid the debt and stopped using the consumer loan within at most 60 days, starting from the date when the consumer has been notified of the increase in the contractual interest rate.
If the lender intends to make any amendments to the Agreement executed for an indefinite period other than the contractual interest rate, then such change shall be notified to the consumer in writing or through the permanent data storage unit within 30 days prior to the effective date of such amendments. In this case, the consumer shall have the right to terminate the Agreement if it does not accept such amendment.
The Regulation also includes provisions regarding pre-payments, interim payments and events of default which are quite important in terms of the both lenders and consumers.
In this regard, the Regulation provides that consumers can make pre-payment(s) for undue installments or can pay the loan debt entirely or partially before it is due. In such case, lenders are obliged to provide their consumers with the discounts mentioned under the Regulation.
In connection with the paragraph above, the Regulation considers payments of any amounts undue as an interim payment provided that such payment is not less than a single installment amount determined under the payment plan.
If the consumer makes an interim payment, then the lender will collect the (i) contractual interest, (ii) interest over the outstanding principal debt which will be calculated by taking into account the number of days lapsed starting from the previous installment and (iii) taxes, levies and duties to be calculated over the interest mentioned under item (ii). The remaining amount shall be deducted from the principal debt and a new payment plan will be prepared.
In the event that the consumer is in default of payment of the installments of the consumer loan, then the lender may exercise its right to request payment of the entire debt amount provided that (i) the lender has reserved its right to request such payment under the Agreement, (ii) the consumer has defaulted in the payment of at least two consecutive installments and (iii) the lender has issued a maturity warning to the consumer by providing 30 days to the consumer to remedy the situation.
The Regulation also includes a provision which grants the consumer a right of withdrawal from the Agreement. In this respect, the consumer shall have the right to withdraw from the Agreement within 14 days starting from the date of its execution without any need to provide any reasoning, and without having to pay any penalties. However, if the date when a copy of the Agreement has been provided to the consumer either in writing or through the permanent data storage unit is later than the execution date of the Agreement, then the date when the Agreement was provided to the consumer shall be taken into account whilst calculating the abovementioned 14 day period instead of the execution date. The lender shall be obliged to prove that the consumer was informed that it has the right to withdraw from the Agreement.
Termination of the Agreements have been regulated in detail by the Regulation. However, the Regulation only includes provisions regarding termination of Agreements executed for an indefinite period. The Regulation is actually silent in relation to termination of fixed term Agreements.
According to the Regulation, the consumer can terminate the Agreement at any time without making any payments to the lender by providing a notice in writing or through the permanent data storage unit if the Agreement does not include any period regarding termination notices. Should the Agreement include a period for termination notices, such period shall not exceed 1 month.
The lender shall also have a right to terminate the Agreement by providing a 2 month prior notice in writing or through the permanent data storage unit provided that the Agreement grants a right of termination to the lender.
Prior to the Regulation, lenders were requiring the consumers to obtain insurances against death, injury and other events which may endanger repayment of the loan.
However, with the passing of the Regulation, lenders are prohibited from requesting their consumers to obtain insurance cover in relation to the loan without the explicit request of the consumer submitted in writing or through the permanent data storage unit. In case the consumer decides to obtain an insurance policy, then the lenders must accept the cover provided by the insurance company chosen by the consumer.
Another important provision introduced under the Regulation is in relation to sureties provided by both consumers and lenders. The Regulation states that all personal guarantees obtained as security for the performance of the consumer's obligations under the Agreement shall be considered as an ordinary guarantee.
Finally, the Regulation will enter into force on November 22, 2015 which should give enough time to the lenders to amend the legal form of their existing Agreements in compliance with the Regulation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.