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What to be aware of before entering into credit agreements in Cyprus

There are specific factors which affect the rights of a borrower in relation to an existing loan agreement with a bank in Cyprus (known also as credit agreements).

Consumer Law: Borrower who is a consumer

The first issue which needs to be addressed is whether the borrower acts as a consumer at the time of entering into the loan agreement. Under our Consumer Laws on credit agreements, the general rule is that loans granted to natural persons who are acting outside the scope of their business or professional capacity are considered to be consumer loans. Where the loan is granted to a consumer and certain other conditions are met, the bank must provide specific information to the consumer – and if the bank fails, then the loan may be judged by the court as interest-free.

Time of entering into the loan agreement

The second issue which needs to be dealt with is the time of entering into the loan agreement. The timing of the conclusion of the agreement is important as it relates to the rights of the borrower vis-a-vis the creditor. For example, before January 2001, when the Liberalisation of Interest Rate and Related Matters Law of 1999 came in force, banks were not entitled to recover interest which exceeded the original loan amount. This provision may also be applicable to loan agreements concluded before January 2001 but which continue in existence today. It is noted that this provision applies to any loan agreements irrespective of whether the borrower is a consumer.

Purpose of the loan agreement

The third issue to be addressed is the purpose of the loan agreement and the amount of borrowing involved. Examples are consumer mortgage contracts for a loan amount of less than €200,000 or hire-purchase agreements where the loan does not exceed €35,000. In such cases, where the contract was concluded between 01/06/2002 and 09/05/2017, then the loan agreement is caught by Consumer Law provisions – more specifically the Consumer Credit (Housing Loans and Hire-Purchase Agreements) Law of 2001. Based on this Law, a bank which provides a loan falling within the above categories to a consumer, owes certain duties towards the consumer.

For example, in the case of a hire-purchase agreement, a bank who claims repayment of the loan due to a breach of contract instigated by the consumer, is required to send a notice of at least 21 days, requiring the consumer to remedy the breach. In case the bank does not proceed in the aforementioned way, it cannot then claim repayment by filing proceedings against the consumer.

Where a loan agreement was granted after 09/05/2017 and where it relates to residential property secured by mortgage or other similar collateral or where the loan agreement concerns acquisition or rights to land, existing buildings or buildings which are under construction etc, and where the loan is granted to a consumer, then the Consumer Credit (Contracts in relation to Residential Property) Law of 2017 applies. In such cases, the creditor is obliged to provide specific standardized information to the consumer. Such information includes the Annual Percentage Rate of interest (also known as “APR”). The creditor is also required to assess the creditworthiness of the consumer as well as to ensure that valuation experts who carry out valuations of mortgaged properties are professionally trained and independent. Additional requirements should be met in respect of loan agreements denominated in a foreign currency. These include giving to the consumer the right to convert the contract into an alternative currency or to hedge against the risk to which the consumer is exposed

In relation to other loan agreements between a bank and the consumer, for amounts between €200 and €75,000 which have been concluded from 19/11/2010 onwards (except where the contract relates to the renovation of a property) then the Consumer Credit Contracts Law 2010 applies. This Law contains specific information that should be provided prior to the conclusion of the contract as well as information which should be contained in the contract itself. Very important in this respect is the right to withdrawal from the contract. On the basis of this right, the consumer is entitled to withdraw from the credit agreement (i.e. to terminate the contract legally) within 14 days of the date of conclusion of the contract or the receipt of the creditor’s terms. It also entitles the consumer to pay prematurely and at no significant cost all or part of his obligations under the credit agreement.

The terms of the loan agreement

The fourth issue which the borrower must be aware of are the terms of the loan agreement itself. The terms may relate to the interest rate as well as other issues such as the right of the bank to make additional charges on the loan or to unilaterally change the interest rate. From 09/11/2014 onwards:

  • All credit institutions must notify debtors by written notice of any change in the basic rate,
  • any term in a credit agreement that allows the creditor to unilaterally increase the margin is void,
  • the default interest rate may not exceed 2%.

Another important but separate issue which relates to the terms of the loan agreement, is whether they are standardized or whether they create significant imbalance at the expense of the consumer. Where, the borrower acts as a consumer at the time of concluding the loan agreement, terms are scrutinised for fairness. For example, if it was agreed that interest rates are calculated on a yearly basis, the year consisting of 360 days, this term is considered unfair and therefore invalid. Also, according to the Liberalisation of Interest Rate and Related Matters Law of 1999, the maximum rate at which interest can be capitalised is twice a year.

At D. Hadjinestoros & Co LLC we can advise on your rights based on the terms of the loan agreement. We can also advise on whether the substance of the loan falls within specific consumer protection legislation. We can also advise on whether specific provisions are valid and can provide advice and liaise on behalf of clients in order to restructure their loan agreements.

This article is given for information purposes only and it does not constitute legal advice. Please give us a call if you would like to book a consultation with a specialist in this area from our office.

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PUBLICATIONS

Consumer Protection in Loans Relating to Residential Property in Cyprus

The Law on Consumer Loans Relating to Residential Property of 2017 (Law 41(I)/2017) (“Consumer Loans Relating to Residential Property Law”) in Cyprus transposes Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential property. The Directive is a minimum harmonization Directive.

The Consumer Loans Relating to Residential Property Law governs credit agreements (loans) concluded with consumers which are secured by a mortgage or other similar collateral and which relate to residential property. Article 4(1) of the Law states that such loans fall into two main categories. The first category are loans secured either by mortgage or a similar collateral which are intended for residential purposes or secured under a right relating to residential property intended for the consumer. The second category relates to loans the purpose of which is to acquire or maintain property rights in land or in existing or buildings under construction, provided that the person to whom the credit is given acts as a consumer.

The Law imposes specific obligations to creditors (such as banks) or credit intermediaries which deal with consumers. More specifically, under Article 7(a) of the Law, the creditor or the credit intermediary must act honestly and in good faith, transparently and professionally and should take into account the interests of consumers at the time of implementing the credit agreements as well as at the time of executing such agreements. It is very important to note that the creditor must avoid the promotion of salary policies which may involve a conflict of interest between the salaries paid to employees and the credit checks of consumers. For example, the creditor is prohibited from giving out commissions to employees based on the number of credit applications accepted. The same applies to credit intermediaries unless the credit intermediaries inform the consumer of the fact that they are receiving commission and the consumer accepts this in writing.

A rather odd provision in the Law relates to mortgages which are given out to a person who is married and acts as a consumer. In such cases the written consent of his/her spouse is required before the mortgage can become legally binding.

There are further legal provisions aimed at enhancing consumer protection such as those relating to the adequacy of employees of the creditor. Employees of the creditor must have a sufficient standard and level of knowledge and experience and be updated with current developments and practices.

Under the Consumer Loans Relating to Residential Property Law, the creditor must adhere to specific duties, prior to concluding any loans with consumers. These measures aim to achieve a higher level of consumer protection in that they better inform the consumer prior to him/her being bound by a credit agreement. For example, in case the creditor or credit intermediary advertises his/her products, the advertisement must not be unfair or aggressive or lead to false impressions in relation to the cost of credit.

In all cases, specific information must be provided to the consumer in writing or in another durable medium or electronic form. This information includes general information such as the identity and geographical position of the person giving out the information, the purposes for which the credit is given, the duration, the rate of interest, the Average Percentage Rate of Interest (“APR”) as well as a general note in relation to the consequences of default on the credit. This information must all be given out in a standard template termed as the ESIS i.e.  the European Standardised Information Sheet.

Further obligations are contained in relation to the valuation of the APR as well as for performing the credit check on the consumer. Article 18 states that the creditor must only give credit to the consumer only when the credit check shows that the consumer is likely to abide by the terms of the credit agreement. Under Article 19 the valuation of the property must be carried out by licensed valuation experts who do not have any conflicts of interest.

After the conclusion of the credit agreement, the creditor must also inform the consumer in writing whenever the interest rate changes. In case the consumer is late in repaying his loan, the creditor must allow for a reasonable period of time for the consumer to pay prior to pursuing any legal remedies.

A ground breaking new development in the law relates to loans made out in a foreign currency. In such cases, the creditor must make sure that the consumer understands the risk inherent in such loans associated with the exchange rate. In addition, the consumer must be allowed to convert the loan to another currency (provided that any guarantors agree to that). That currency need not necessarily be the Euro, but it must be the currency which is the consumer’s main source of income.

The consumer’s right to early repayment of the loan

Under Article 25 of the Consumer Loans Relating to Residential Property Law, the consumer has the right of early repayment of his loan. This includes the right to repay the loan before its agreed expiry date. If the consumer exercises this right, the cost of credit is reduced by subtracting the interest or any other charges which would accrue after the date of repayment. The creditor can claim however any damages which he has suffered.  These damages are called early repayment charges and they represent the actual damage suffered by the creditor. i.e. under no circumstances can the creditor charge a penalty to the consumer just because the consumer exercised his right of early repayment.

The authorities responsible for enforcing the provisions of the Consumer Loans Relating to Residential Property Law are the Consumer Protection Service of Cyprus and the Central Bank of Cyprus.

This article is given for information purposes only and it does not constitute legal advice.

Please contact us by email (office@dhadjinestoros.com) or give us a call if you would like to book a consultation with a specialist from our office.

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PUBLICATIONS

Consumer Protection in Consumer Loans (Unfair Terms)

In April 1993 the Council of Europe issued Directive 93/13/ΕEEC on unfair terms in consumer contracts between consumers and persons or entities providing goods or services as part of their business activities (providers). For the purposes of the Directive, services include consumer loans entered into between banks and consumers.

Cyprus implemented the Directive into national law in 1996 by enacting the Unfair Terms in Consumer Contracts Law, which was gradually amended to take into account the increasing need to protect consumers’ rights. The Law integrates the Directive’s principles on establishing whether a term is unfair and the effect of such a finding on the rights and obligations of the contracting parties.

The Law itself provides an indicative list of types of terms that may be considered unfair, of which the following are of particular interest with regards to consumer loan contracts:

  • Terms excluding or limiting legal rights of the consumer against the provider (i.e. a bank) in the event of non-performance of contractual obligations of the provider.
  • Terms limiting the right of a consumer to offset amounts owed by the consumer to the provider by virtue of a contractual obligation with claims of the consumer against the provider for a breach of contract.
  • Terms inferring the consumers’ acceptance of contractual terms, of which the consumer had no actual knowledge prior to entering the contract.
  • Terms by which the provider has the right to unilaterally modify the contract without a valid justification.
  • Terms by which the provider has the sole right to interpret a contract term.
  • Terms by which the consumer is obligated to perform contractual obligations, despite non-performance by the provider.
  • Terms by which a banking institution may demand the loan amount to be immediately paid in full without specific conditions in the contract, and/or conditions specified by any Law.
  • Terms by which a disproportionate penalty is imposed on a consumer who is in default (a penalty clause).
  • Terms by which a banking institution may charge the loan with amount other than interests or costs deemed necessary for the operation of the loan account and by which terms the amount is added to the installment amount.
  • Terms by which yearly interest is calculated on a basis other than a 365 day year.

Courts dealing with a claim that a term is unfair, must first establish whether the contract is one of a consumer nature. Specifically, whether the contracting parties are within the definitions of consumer and provider respectively.  For the purposes of the Unfair Terms in Consumer Contracts Law, a consumer is a natural entity, who is acting for purposes not related to his or her business. Therefore, the law’s provisions do not protect legal entities when entering a contract with a provider. On the other hand, for the purposes of this law, a provider is a natural or legal entity who supplies goods or services and enters an agreement for purposes related to his or her business.

The Court must then examine if the term in question was the result of individual negotiation, meaning if the term had already been drafted by the provider and the consumer was not in a position to affect the content of the term. The burden of proof lies on the provider to show that the term was the result of individual negotiation. The use of the same or a similar term in various contracts of the same provider with different consumers, or in contracts made over the course of time, is an indication that the term was not the result of individual negotiation. The same can be said for characteristics of contract documents that indicate a specific contract template.

According to Article 5 of the Law, a term is deemed unfair if despite the requirement to act in good faith, the term creates significant imbalance on the rights and obligations of the parties which is favourable to the interests of the provider. In order to determine if a requirement to act in good faith exists, the Court must take into account the bargaining power of the contracting parties, whether the consumer was urged to agree to the term in question, whether the goods or services where provided by request of the consumer and the degree to which the provider treated the consumer in fairness.

The Court must take into account all circumstances under which the contract was entered into, including information given to the consumer by the provider prior to the consumer loan, and how transparent the terms are by virtue of their wording.

According to Article 9 of the Law, the Director of the Consumer Protection Service (a department within the Ministry of Energy Commerce Industry and Tourism), has a duty to assess whether a consumer contract term is unfair either on his own or following a complaint by a consumer.

The decision of the Director on the matter is not binding on a Court dealing with the same term but such a decision Director may provide useful tools to those who wish to claim that the term is unfair and may aid the Court in establishing whether the term is unfair. The role of the Director is to provide protection to the greater consumer public and the court procedure is the only setting to obtain a legally binding decision with regards to the rights and obligations of a specific consumer against the provider.

If a term is deemed by the Court as unfair based on the above criteria, the term in question will not be binding on the consumer but the rest of the contract terms remain binding on the contracting parties unless the contract may not carry on without the term.

At D. Hadjinestoros & Co LLC we can advise on your rights based on the terms of the loan agreement. We can also advise on whether the substance of the loan falls within specific consumer protection legislation as well as whether specific provisions are valid. In considering whether specific provisions in a loan agreement are unfair we can also liaise on behalf of clients in order to restructure their loan agreements.

This article is given for information purposes only and it does not constitute legal advice. Please contact us by email (office@dhadjinestoros.com) or give us a call if you would like to book a consultation with a specialist from our office.

By George Antoniades

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PUBLICATIONS 

Consumer Protection of Borrowers under the Cyprus Law on Consumer Credit of 2010

The Contracts of Consumer Credit Law of 2010 (L.106(I)/2010)  (“Cyprus Law on Consumer Credit”) which transposes Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers and repealing Council Directive 87/102/EEC (“Consumer Credit Directive”) has entered in force on 19/11/2010.

Cyprus Law on Consumer Credit aims to protect consumers who enter into “credit agreements” with “creditors”. A Creditor is a natural or legal person who grants or promises to grant credit in the course of his trade, business or profession. A Credit Agreement is defined as an agreement whereby a creditor grants or promises to grant to a consumer credit in the form of a deferred payment, loan or other similar financial accommodation, except for agreements for the provision on a continuing basis of services or for the supply of goods of the same kind, where the consumer pays for such services or goods for the duration of their provision by means of instalments. The definition of Creditor, therefore includes a service provider or the seller of goods provided that he/she provides credit of some sort to the consumer.

Cyprus Law on Consumer Credit applies to every credit agreement between a consumer and a creditor. It is therefore of no significance if the contract is a distance contract or a contract which has been signed outside business premises. However, the Cyprus Law on Consumer Credit does not apply to credit agreements which are less than €200 or over €75,000. Also, it does not apply, to credit agreements secured by a mortgage or similar security, to credit agreements the purpose of which is to acquire or retain property rights in land or in existing or projected buildings, hiring or leasing agreements with no obligation to purchase, overdraft facilities where the credit has to be repaid within a month, credit agreement which relate to the deferred payment of an existing debt, credit agreements which are the outcome of a settlement reached in court as well as some other exception.

The Cyprus Law on Consumer Credit lays specific obligations on the Creditor to inform the Consumer prior to the contract. Such pre-contractual information includes information in advertisements as well as information relating to the contract to be signed (such as the Annual Percentage Rate of Interest (“APR”)). The burden of proof that the information has been given lies with the creditor. Furthermore, the creditor has an obligation to assess the creditworthiness of the consumer. In case the creditor rejects the application of the consumer for credit, then the creditor must inform the consumer of the reasons for the rejection.

Under section 10(3) of the Cyprus Law on Consumer Credit, the creditor must provide the consumer with a drawn copy of the credit agreement on paper or on another durable medium. In the contract, there is a list of information which must be provided in a clear and concise manner. Such information includes the type and duration of the credit, the total amount of the credit, the identities of the contracting parties, the borrowing rate, the APR, a warning regarding the consequences of default of payment, the procedure to be followed in exercising the right of termination, as well as other information. In case the APR is not mentioned, then the court may order that no interest is payable by virtue of the contract.

In case the interest rate changes, the consumer must be informed of the change prior to the new interest rate coming to effect.

Specific provisions are made in relation to an overdraft facility. In cases where the consumer retains an overdraft facility with a creditor then the creditor must inform the consumer regularly by means of a statement of account on paper or on another durable medium, providing information relating to the precise period to which the statement of account relates, the amounts and dates of drawdown, the balance and date from the previous statement, the new balance, the borrowing rate applied, the charges applied and dates and amounts of payments made by the consumer.

Further provisions are also made in relation to overrunning account. Overrunning under the law means a tacitly accepted overdraft whereby a creditor makes available to a consumer funds which exceed the current balance in the consumer’s current account or the agreed overdraft facility. In the case of an agreement to open a current account, where there is a possibility that the consumer is allowed an overrun then specific information on the overrunning, the amount involved, the borrowing rate as well as the penalties, charge or interest on arrears applicable should be given to the consumer on paper or on another durable medium.

In similar vein, credit intermediaries (i.e. persons who are not acting as a creditor and who, in the course of their trade, business or profession, for a fee, which may take a pecuniary form or any other agreed form of financial consideration, present or offer credit agreements to consumers or assist consumers by undertaking preparatory work in respect of credit agreements or conclude agreements with consumers on behalf of the creditor) are also covered by the Cyprus Law on Consumer Credit.

Under section 20 of the said law, a credit intermediary must indicate in any advertising and documentation intended for consumers the extent of his powers, in particular whether he works exclusively with one or more creditors or as an independent broker. Furthermore he must disclose to the consumer his/her fee, if any, payable by the consumer to the credit intermediary for his services. This fee must be agreed between the consumer and the credit intermediary on paper or another durable medium before the conclusion of the credit agreement. Finally, the credit intermediary must inform the creditor of his fee for the purposes of calculating the APR.

Rights of Consumers

The first right which a consumer has is that of early repayment of the credit. This means that the consumer has the right to repay the credit with minimal extra charges by the creditor. What’s more is that the extra charges are limited to what is a fair and objectively justified compensation for possible costs directly linked to early repayment of credit provided that the early repayment falls within a period for which the borrowing rate is fixed.

Another right which a consumer has is the right to withdraw from the contract. This is governed by section 14 of the Cyprus Law on Consumer Credit and it states that a consumer can withdraw from a credit agreement without mentioning any reasons within 14 days from the date of the conclusion of the credit agreement or from the date on which the consumer has received the contractual information.  When the right of withdrawal is exercised in relation to sale of goods or the provision of services contracts (for example under the Consumer Rights Law of 2013), then, any connected credit agreements are also automatically cancelled and the consumer is not bound by the credit agreement.

The Consumer Protection Service of Cyprus is the authority which has the task of enforcing the abovementioned law. At D. Hadjinestoros & Co LLC, we have unrivalled experience in the field of Consumer Protection in Cyprus as we have advised the Consumer Protection Service of Cyprus on the current status of Consumer Protection Legislation in Cyprus, suggesting amendments to the current legislation on consumer protection as well as the Bill to be passed to Parliament relating to the codification of Cyprus consumer protection law.

This article is given for information purposes only and it does not constitute legal advice. Please contact us by email (office@dhadjinestoros.com) or give us a call if you would like to book a consultation with a specialist from our office.

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