The Verkhovna Rada, Ukraine`s parliament on Tuesday, November 15, passed a bill that will introduce mandatory examination of a borrower`s creditworthiness by a lender along with notification of the borrower of an effective interest rate and a change in debt seniority in case of a delayed debt repayment.
Bill No. 2455 on consumer lending passed its first reading with 247 MPs` votes for with the minimum required being 226 votes.
While presenting the bill, deputy head of the Rada`s financial policy and banking committee Ruslan Demchak said that the current Ukrainian laws on consumer protection do not cover the specifics of the financial sector. In particular, they do not regulate advertising of consumer crediting, the assessment of a consumer`s creditworthiness, notification of consumers of an effective interest rate, and other terms and conditions of a credit agreement, as it is provided by European legislation.
”The goal of the bill is to create a consumer lending mechanism, which will safeguard both consumers and lending institutions, create a competitive environment on the financial market, and raise households` trust in it,” Demchak said.
In his words, such legislative norms have long been in effect in the European Union, and Ukraine has undertaken to implement them within three years since the signing of the Ukraine-EU Association Agreement. This bill was developed in line with the implementation of EU rules for consumer lending agreements. It also streamlines separate crediting-related laws currently effective in Ukraine.
A survey of consumer lending in Ukraine, which was conducted in September 2011, showed that creditors do not fulfill the requirement concerning the disclosure of information about actual interest rates on credits to potential borrowers prior to the signing of a loan agreement.
The survey showed that in some cases, the actual annual interest rate was 135%. In other cases, it was impossible to calculate applicable interest rates, as there was no information about additional commission or other fees.
The bill provides for mandatory checks by a bank or other financial institution of a borrower`s creditworthiness. Nowadays, these norms are regulated by legal acts of the National Bank of Ukraine only. Non-bank lenders are not obliged to assess a borrower`s creditworthiness. Lending institutions` obligation to check a borrower`s creditworthiness assumes the borrower`s duty to submit relevant documents.
Further, lending institutions will have to inform a borrower about their effective interest rate. The calculation of the effective rate will include all interest on a loan and fees for other services provided by a lender. This requirement will be applicable only if credit advertisements contain any consumer spending data.
The bill also introduces a change in debt seniority under an agreement on consumer lending: first to be paid is the amount of overdue debt, which is followed by current repayments of principal debt and interest, and penalties should be paid on a third-priority basis. Under the current law, the borrower should pay fines first, then repay principal debt, which leads to the situation when consumers spend all their available funds on payment of accrued penalties, and there is no reduction in principal debt.
In addition, before a loan agreement is signed, the lender must notify the borrower of estimated costs of services provided by third parties, i.e. insurers, appraisers, etc., if the costs are known. At the same time, the draft law does not oblige the lender to include the costs of third parties` services in the calculation of the effective interest rate and the total cost of a loan.