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Consumer protection in loans

In response to the letters of the European Commission in January 2008 and September 2008 underlining the failure of the Romanian Government and Parliament to implement some of the provisions of the relevant European consumer protection directives, and considering the fact that the European Commission began scrutiny of Romanian consumer protection legislation, the Government of Romania enacted Government Emergency Ordinance 174/2008 amending and supplementing the relevant consumer protection legislation (GEO 174/2008).

GEO 174/2008 became effective as of December 31 2008 and the amendments introduced by it refer mainly to consumer protection in financial services, but also cover consumer protection in services of real estate agents, in product sales and product guarantees and in concluding and executing distant contracts.

Generally speaking, in relation to consumer protection in financial services, GEO 174/2008 aims at enlarging and broadening the obligations of banks towards consumers under consumer loan agreements.

Therefore, in order to achieve a higher level of protection of consumers, the Romanian Government by adopting GEO 174/2008 decided that banks are prohibited from unilaterally changing fees and interest rates (the loan costs) under a consumer loan agreement. Under the amended consumer protection legislation, the banks may change or introduce new fees and interest rates only with the prior consent of the consumer and by concluding an addendum to the loan agreement to reflect such changes.

However, the aforementioned prohibition does not cover the variation and change of variable loan costs provided that the variation is:

(a) absolutely independent and outside the control of the bank; and

(b) expressly made dependent on any of the following: (i) either movements and fluctuations of any determinable (or verifiable) external index or reference rates; or (ii) movements and fluctuations of the bank's own internal reference interest rate, provided that such reference rate remains valid and unchanged for all similar consumer loan agreements and it is not increased over a pre-determined level (clearly specified in the consumer loan agreement); or (iii) legislative changes imposing such variations of interest rates (for example, such change might be caused or triggered by the National Bank of Romania increasing the minimum mandatory reserves level); and

(c) calculated according to a computation method of such variability of the interest rate or other loan costs, whose description is clearly and expressly inserted in the consumer loan agreement.

Additionally, the banks have an obligation to: make available to the consumer, prior to concluding the loan agreement, the draft loan agreement together with an estimation of costs; to present the customer with the total costs of the loan agreement; to insert in the loan agreement all the fees applied in relation to the financial service offered; reflect all the amendments agreed upon with the consumer in an addendum to the loan agreement; and, upon the termination of the loan agreement, to close the account opened in relation therewith.

By imposing the aforementioned obligations on the banks, the Romanian Government aims to ensure a high level of consumer protection in financial services, in order to increase a consumer's trust of the financial services offered by the banks and other financial institutions. Moreover, the amendments brought about by GEO 174/2008 and concerning financial services will transfer the surveillance powers referring to consumer protection from the National Bank of Romania to the national consumer protection authority.

Even though the amendments are salutary and welcomed, there are issues that the new enactment fails to address. For instance, practical difficulties may be triggered by the fact that GEO 174/2008 does not provide for any transitory rules on conflict of successive laws and regulations. The enactment does not regulate the conflict of consecutive rules of Romania applicable to consumer loan agreements, which have been entered into before the enactment came into force and will continue to remain in force after the entry into force of GEO 174/2008 according to the specific terms of such consumer loan agreements.

As part of the legislative procedure, the Parliament is in the process of approving GEO 174/2008 by issuing a law to that aim. The draft approving law encompasses minor amendments to the provisions of GEO 174/2008 on consumer protection in financial services inserted merely for clarification purposes. However, the issue pertaining to the conflict of successive laws, for instance, remains unsolved being therefore up to practitioners and scholars to state and establish a practice in this sense.

Claudia Arnautu

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