Be careful what you wish for, it might come true
In September 2014, in the Romanian Parliament several bills of law were circulated which were aiming at freezing the Swiss franc exchange rate to the one quoted at the date the consumers were granted the loan, as a measure of protection for the credit consumers in foreign currency (1.7 to 2.2 RON/CHF as compared to the current level of 3.7 RON/CHF).
At that time, the decision of the Court of Galati in case Costache vs. Volksbank Romania became notorious. In this decision, the court ordered the freezing of the exchange rate to the value of the date of granting the credit plus a variation margin of 10% of baseline (from 1,8 RON/CHF to 1,98 RON/CHF).
After I have personally covered this topic, the rate freezing issue became a media phenomenon. This matter created panic among the 8 banks that were already defendants in thousands of cases in the entire country, in which the consumers demanded the freezing of the exchange rate.
At that moment the interested parties resorted, as always, to the banking lobby.
The National Bank of Romania (NBR) and other soldiers of this army of lobbyists have triggered many debates, more or less public, addressed the Parliament, notified the Government and, of course, the IMF showing how serious the measure of freezing of the exchange rate is. Some of them organized and still organize voodoo meetings addressing me (I am thanking them for receiving me in their nightmares). The head of the supervising department in the central bank did not hesitate to throw into the fight, as in the good old days of the Cold War, the threat of bankruptcy of no less than four banks that would occur in the next second form the adoption (through either legal or juridical means) of this measure of freezing of the exchange rate. The target of all of this threats was the audience, which had to be discouraged.
Meanwhile, the bills of law were abandoned. Not necessarily because the authors would be afraid of the thermo-baric bomb that the NBR used to discourage them, but because the bills of law were weak and their authors were populists.
More important, however, was the effort to discourage the consumers and to warn the judges. And for them, the scarecrow they used was represented by the European Directive on credit agreements for consumers relating to residential immovable property (Directive 2014/ 17/ EC). NBR, by the voice of the governor, said that this Directive prohibits the freezing of the exchange rate to the historical level of the date of granting the loan and that, furthermore, it obliges to perform the conversion of the current rate. Most of the consumers believed this information and gave up claiming their rights, whereas those who were already plaintiffs began to fear that they might lose the case.
And many courts took notice.
But the defence of the bank with these so-called arguments represents a big and disqualifying lie, whereas the positioning of the NBR as spearhead of this defence is a dangerous manipulation for the rule of law and for Romania’s position in the European Union.
Directive 2014/17/ EC is a directive meant to protect the consumers, not the banks against consumers. This Directive is to be implemented by the member states, and therefore by Romania as well, until March 21, 2016. Until then, the Directive is not enforceable. Anyhow, the Directive does not apply to the contracts concluded before the 21st of March 2016 (article 43 paragraph 1). If it were retroactively applicable, then it would be acceptable only in cases favourable of consumers.
However, the said directive contains provisions that clearly contradict the defences made by NBR for the banks.
For example, the Directive provides that, in case of an increase of at least 20% in the exchange rate, which would be translated into an increase in the total amount payable by the consumer, the bank has the obligation to urgently warn the consumer, clearly and in writing, and to inform the latter about the fact it has the right to convert into an alternative currency or about other methods meant to reduce the risk of foreign exchange, to which the consumer was exposed. The bank is obliged to make such warning urgently, and not 4 months after, and in no case not 4 years after the occurrence of the risk. Only under such circumstances and only the consumer has the right to ask for the conversion to the rate applicable at the date of conversion. It is obvious for me that the conversion date is practically identical to the date of occurrence of the risk of growth or, moreover, of the explosion of the course; since the bank is obliged to immediately release the warning and the notice, in order for the consumer to be able to ask for the conversion in due time. This is what results from article 23 alin. 3-4 of the Directive.
In addition, this mechanism favourable to the consumer (and not to the banks) also results from the Preamble to the Directive, paragraph 4 and, especially, paragraph 30.
Evoking the Preamble is important form two points of view: (i) apart from the conversion to a frozen rate applicable at a historical moment, the capping of the course is also provided, as a way of limiting the risk to which the consumer is exposed (it is what, ex ante, Galati Tribunal has ordered in case Costache vs. Volksbank Romania, meaning an exchanged rate increased by 10 % in comparison to the date of the credit granting); (ii) the text also refers to the contracts that are currently in progress, subject to the regulation still in force.
Paragraph 3 of the Directive (as well as paragraph 4), states clearly that the current European economic crisis is nothing but the result of irresponsible lending. Residential real estate loans have been granted, despite the specific risks of these loans (long term of the loan and the nature of a family home of the immovable property acquired by the loan), which risks were ignored. Loans were granted in Swiss francs or other exotic currencies, despite the risks of these loans which were despised or „covered” by fraudulent techniques of risk assessment.
In Romania, these loans were given in CHF, despite the fact that the consumer’s limits of indebtedness were by far exceeded making them not eligible to take loans in RON or EUR. These loans were given by marginal banks, who wanted a quick expansion, a short – term profitability resulting from the lending volume, and not from the quality of the products sold, which led not only to ruining the consumers and banks, but also to unfair competition against other banks in the system.
It must be said that Directive 2014/17/EC is the result of a survey conducted by the European authorities during 2003 – 2013, which proposed to assess the impact of European regulations on consumer protection. It was found that these regulations have not reached their goal. The professionals have not corrected their abusive behaviour, the control and surveillance authorities have not seriously taken their role, and the member states have not complied with their obligation to ensure the effectiveness of these provisions.
The Preamble to the Directive shows, in many pages, that although the regulations relating to consumer protection and risk management were in force, were clear and were reinforced by the case-law of ECJ, the banks have ignored them, either due to their hypocrisy or their pharisaic blindness. Moreover, the control and surveillance authorities have pretended to supervise, and the member state, including Romania, have pretended to impose effectiveness to these rules. The economic crisis and the total lack of consumer confidence in the banking system were installed and became persistent.
To defend these irresponsible banks invoking, ironically, a directive that finds the economic crisis, with which we are still struggling, is due to the irresponsible lending is not only embarrassing and ridiculous, but also phantasmagorical.
This Directive is an atypical normative act – it consists of a Preamble which has 85 paragraphs and a total of only 50 articles (of which 6 are devoted to the insignificant amendment of other Directives). What does this reality tell us? That, just as in an indictment, the European Commission accuses all the participants in this “market” of not complying with the previous regulations or the regulations in force, that the spirit of these regulations was despised and the consumer protection in Europe is still a goal that seems difficult to achieve, given the disproportionate economic power and abuse of power that big financial transnational companies are still practicing, with the tacit support of the authorities.
The Directive reaffirms these principles and imposes the member states to ensure that they are respected. In paragraph 76, for example, the Directive imposes member states to establish regulations regarding the penalties applicable to infringements of these principles, showing that the sanctions should be “effective, proportionate and dissuasive”.
[I wonder how does the NBR „discourage” those irresponsible banks which he defends in the Parliament, in public and behind closed doors?]
The Directive requires, inter alia:
- That the information made available to consumers should be accurate, and the “beautified”, misleading and incorrect advertising should be prohibited; the „dishonest” advertising or the misleading one be sanctioned since it can affect the consumers’ interests; paragraph 37 of the Preamble is an invitation addressed to audio-visual control authorities (e.g. the National Audiovisual Council of Romania – the CNA) or to the NBR to take measures in order to prevent such damages, by prohibiting the advertisements that have such potential and by imposing sanctions;
- That effective annual cost of the credit (DAE) should be specifically identified, including examples of calculating models, and should predict the fluctuation potential of the payable amounts by the consumers, in such way that they could make an informed decision before signing the contract, and not during its development;
- The consumer risk evaluation should be more strict; for example, it is not recommended to the creditors to take into consideration the estimated value of the property to be bought/ built by the consumer, but the estimation of his future income and family situation, when calculating the risk assessment;
[reading carefully paragraph 55, it seems obvious to me that the Preamble of the Directive shows that, after 7 years from the onset of the US sub – prime credit crisis, Europe still practices this type of loan, that do not take into account the payment potential of the consumer, but the growth potential of the value the property; these people, the smartest of the planet, have learned nothing from the crisis]
- The assessment or evaluation of buildings should be done properly (hence the conclusion that, until now, the evaluations were not correct, but artificial);
- That the bank staff should be educated (note – this is a beautiful moral slap on those who, stating that banking is an alchemy, tell us not to interfere, because we do not know much about it, and ask the judges to specialize, because they are not trained for this alchemy…);
- The remuneration of staff to be oriented towards the quality of the products and the long – term resilience of the clients that are well evaluated in terms of risk (rating) and not depending on the volume of loans; the million euro bonuses of the irresponsible banks establishment are not justified and (in my opinion) should urgently be returned, in order to cover, at least in part, these banks’ losses (losses which are currently covered by various hidden fees and costs imposed to good – payer clients, by our taxes, through bail-out procedures, and by our stored money and savings „safely” kept by the banks, through bail-in procedures).
Moreover, the family home requires a protection system similar to the one proposed by the insolvency of individuals, regime which derives from the recent decision of the CJEU in Kusionova case (September 2014). I am reminding that in Romania of 2014 the insolvency of consumers is still not regulated, since the irresponsible banks have successfully opposed the enactment of such legislations, relying on the eternal lobby of the NBR. The NBR allied with IMF which, for 4 years, imposed the Romanian government to refrain from promoting such a law. This scenario took place despite the fact that Romania is a member state of the European Union, where the existence of such a regime is required.
In addition, this is a first settlement of the solution of writing off of the consumer’s debt towards the bank, by leaving the immovable property in the hands of the bank (datio in solutum). Perhaps out of 100 Romanians who borrowed money from banks and now are chained (legally) to them for about 25 years from now, 70 would agree to leave in the hands of the banks their apartment, which in 2007 valued 100.000 CHF and now doesn’t even value 20.000 CHF. Those 70 could resume their lives anew, moving into a rented apartment, rather than paying the debt for the rest of their lives.
Finally, I found, in paragraph 55 of the Preamble, an observation of the European Commission relating to the superficial and irresponsible way in which the rating was calculated, especially regarding the foreign currency loans.
I am hereby reminding that most of the credit consumers who were granted loans in CHF are relatively low-income employees, earning between 1500-3000 RON per month, income which was reduced by 25% by Mr. Basescu in May 2010. They would have qualified never for a loan in RON or in EUR, of, for example, 50.000 euro. These credit costs would have exceeded 70% of their monthly income, which the law prohibits. But through a horrible manipulation of the laws of statistics, they were „qualified” for CHF loans. After the explosion of RON/CHF exchange rate, these people not only do not cover the costs of their monthly income, but they have to somehow get a surplus to these 1500-3000 RON to pay the monthly rate to the bank. And now, two of the banks that have irresponsibly granted this type of loans, have the nerve to require that, in case of the recognition of the conversion and the acceptance of the freezing of the exchange rate to the value applicable at the date of granting the credit, the costs of credit in RON be applied as of the date of granting of the loan in CHF. Such a right is not only non-existent in the consumer protection legislation and civil legislations, but the granting of such a requirement would simply mean doubling the DAE. However, this is an infringement of the rules of Basel II, for which the NBR should urgently apply the defendant-banks harsh sanctions such as the measure of suspension or annulment of its licence. So, in the event certain judges would prove to be careless enough to accept these demands of the two banks who practiced the irresponsible lending, this scenario will mean the beginning of the end for these banks.
One surely knows the following saying: „Be careful what you wish for, it might come true”.
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