In a preliminary ruling requested by the Ravensburg Regional Courts in relation to Volkswagen Bank, Skoda Bank and BMW Bank (the "Banks") (Cases C 33/20, C 155/20 & C 187/20) (the "Joined Cases"), the Court of Justice of the European Union (the "CJEU") has delivered a decision aimed at strengthening consumer rights with respect to loan agreements for the financing of cars (the "Loan Agreement(s)"). The CJEU found that if the information contained within loan agreements is not in line with the Consumer Credit Directive (Directive 2008/48) (the "CCD"), consumers may exercise their right of withdrawal from such contract at any time, irrespective of when the loan was originally taken out, as well as be entitled to reimbursement.
By way of background, the CCD aims to harmonise EU rules concerning Loan Agreements to finance consumers' purchases of goods and/or services and to improve the transparency of the terms and conditions in Loan Agreements and the level of consumer protection. The CCD inter alia provides the information which banks, as lenders, must sufficiently explain and disclose to their customers both in the pre-contractual stage and in the loan agreement itself. To this end, the CCD also provides a standard format of consumer credit information which ought to be followed by lenders. Generally, such information includes:
- A description of the credit product;
- the duration of the credit agreement;
- the total credit amount;
- the borrowing rate and terms applicable to this rate;
- the annual percentage rate and the total amount due by the consumer;
- the amount, number and frequency of payments;
- fees related to or resulting from the agreement;
- consequences of late payment and non-performance.
Additionally, Article 14 of the CCD gives the consumer a 14-calendar day window to withdraw from the loan agreement, without having to state a reason for revocation. Moreover, the consumer also has the right to make early repayment of their credit at any time, insofar as the lender, as the creditor, is reasonably and justifiably compensated as per Article 16 of the CCD.
The facts of the Joined Cases were essentially very similar. All applicants had entered into loan agreements with their respective Banks to finance the purchase of a vehicle and after some time, before or after the loan agreement was fully repaid, the applicants decided to revoke their contracts. However, such revocations were refuted by the Banks. Consequently, the applicants filed cases against the Banks in the Ravensburg Regional Courts. All applicants claimed that their withdrawal was to be considered valid because the withdrawal period had not yet started to run due to the required information provided in the contract being insufficient. Moreover, one of the applicants who had withdrew the loan agreement after she had fully repaid the loan and resold the vehicle to the same dealer, also claimed that in exercising her right of withdrawal, she was also entitled to be reimbursed the difference between the purchase price, including interest, and the resale price.
In their defence, the Banks claimed that such withdrawals could not be accepted since the customers were already furnished with the mandatory information under the CCD and that the 14-day withdrawal established under the CCD had long lapsed. In consideration of these claims, the Ravensburg Regional Court made a request for a preliminary ruling to interpret the CCD in terms of the required accuracy and detail of the information to be provided in Loan Agreements and the manner in which national courts are to handle cases of revocations from Loan Agreements.
In giving his opinion on the Ravensburg Court's request,
Advocate General Hogan opined that while the loan agreement must
indicate the default interest rate applicable at the time of its
conclusion as a percentage, should such interest rate be subject to
change, the formula calculating the changed rate must also be
clearly included. He also held that banks, as creditors shall
provide consumers with information related to the available
out-of-court claims or appeals procedures. Advocate General Hogan
further maintained that the bank, as lender, could not object to
consumers exercising the right of withdrawal in relying on the
principle of the prohibition of abuse of rights, solely on the
basis that a significant period of time had already elapsed since
the conclusion of the contract. The lender could only object to
cancellation if it provided the customers with the necessary
information required under the CCD.
In its preliminary ruling, the CJEU generally confirmed Advocate General Hogan's Opinion outlining the required components in interpreting the relevant provisions of the CCD, while holding that the agreements being examined did not contain all the mandatory information.
Inter alia, the Court ruled that the essential information to be included in Loan Agreements is:
- A clear and precise reference that the contract is a "Linked Credit Agreement" and that the contract is for a definite period in terms of Article 10(2)(a), (c) and (e) of the CCD;
- Any information obligations set out in the CCD cannot be fulfilled by mere references to the law in contracts as per Article 10(2);
- Pursuant to Article 10(2)(l) of the CCD, the credit agreement must specify the default interest rate in the form of a percentage, applicable at the time of conclusion of the contract together with an explanation of the mechanism for altering the default interest rate provided. To this end, the formula calculating the change in rate must be provided clearly so as to be easily understandable by an average consumer;
- In line with Article 10(2)(r) an average consumer must also be able to easily understand and calculate the amount of compensation payable to the creditor in the case of early repayment of the loan. In this regard, the calculation method of the compensation must be clearly outlined;
- The contract must also contain information concerning the applicable and available out-of-court claims or appeals procedures for consumers, which must be accompanied by a quote of the costs to be incurred in filing such complaints, and how and where the complaint is to be filed/submitted, including the formal conditions to be followed by consumers in such procedures. This is in line with Article 10(2)(t);
- Lastly, as per Article 14(1) of the CCD, creditors in loan agreements must not object to consumers' right of withdrawal for the sole reason that a considerable period of time had passed since the loan agreement was concluded. Furthermore, creditors are precluded from relying on the principle of the prohibition of abuse of rights, unless the lender itself had provided the necessary information in the loan agreement.
The CJEU effectively held that due to the fact that the banks
failed in providing the correct information in line with the CCD,
the loan agreements were not concluded correctly, meaning that the
14-day period within which revocation may be made has not yet
started to run.
In conclusion, several consumer credit agreements, are in danger of being affected by this ruling, and ultimately, of being revoked. As maintained by the CJEU, if the mandatory information, such as that outlined above, is not found in loan agreements, creditors may not refute the consumer's revocation of the same or rely on the principle of abuse of rights. Effectively, this means that certain contracts may be at risk of being revoked, even several years after their conclusion.
The author would like to thank Kyra Pullicino, student intern at Ganado Advocates, for co-authoring this article.
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.