Responsible lending

As seen above, an important complement to consumer financial capability is responsible lending by the banking sector. The 2008-09 financial crisis has demonstrated that aggressive and risky lending behaviour causes damage to markets, companies, and to society as a whole. Thus, for the good of the market, not only should the financial capability of consumers be improved, but firms should also be given the responsibility of evaluating the borrower’s creditworthiness, in order to prevent over-indebtedness. Concrete legislative action in this sense was missing from EU provisions until 2002, when the Commission proposed the aforementioned draft directive,[1] where the concept of ‘responsible credit’ was introduced.[2] ‘Responsible credit’ imposed on banks (and other credit providers) an obligation to assess the applicant not only on his or her ability to repay a specific loan, but from a broader financial soundness perspective.[3] This would, for example, involve lenders checking a central database of late payments before agreeing to supply further credit.[4]

Owing to pressure from financial institutions, the 2004 draft that followed was, however, less ambitious. The principle of responsible lending only became applicable to pre-contractual disclosure of information.[5] Lenders were still obliged to evaluate the creditworthiness of consumers by asking them certain information, and by consulting databases on the credit history of the consumer in question. However, no particular sanctions were determined in the case of non-compliance by the creditor.[6]

This approach to responsible lending, which remained largely unchanged in the final 2008 Consumer Agreements Directive,[7] is based upon two pillars: (1) the obligation to provide pre-contractual information and advice on the advantages and disadvantages of a product; and (2) the assessment of the creditworthiness of the consumer.

As for (1), the 2008 directive’s preliminary remark, note 24 states that ‘the consumer needs to be given comprehensive information before he concludes the credit agreement’, placing on the creditor the burden of providing such information and, except in some cases,[8] on the intermediary too. Preliminary remark 26 then affirms ‘that creditors should not engage in irresponsible lending and give out credits without prior assessment of creditworthiness, and the Member States should enact the necessary supervision to avoid such behaviour and should determine the necessary means to sanction creditors in the event of their doing so’.

Pillar (2), is established by Article 8 of the directive, entitled ‘Obligation to assess the creditworthiness of the consumer’. According to this provision, Member States are to ensure that ‘before the conclusion of the credit agreement, the creditor assesses the consumer’s creditworthiness on the basis of sufficient information, where appropriate obtained from the consumer and, where necessary, on the basis of a consultation of the relevant database’.

Furthermore, in the case of a change in the amount of credit, the creditor has to update the financial information on the consumer and re-evaluate his or her creditworthiness (Article 8(2)). Finally, the directive stipulates that creditors should receive non-discriminatory access to databases concerning consumers in a Member State in which they are not established (Article 9(1)).

These measures are an important initial step in the direction of responsible lending, placing greater responsibility on credit providers for checking the creditworthiness of consumers and for informing them adequately. However, according to some scholars, these legal innovations might be of limited use for two main reasons. On the one hand, the directive does not provide specific sanctions in the event of non-compliance. On the other, the compulsory check on creditworthiness could have a counterproductive effect by paradoxically excluding from credit the poorest individuals, who are those most in need of it.[9]

  • [1] Proposal for a Directive of the European Parliament and the Council on the harmonisationof the laws, regulations and administrative provisions of the Member States concerning credit forconsumers, COM/2002/443, Brussels, 11.9.2002.
  • [2] N. Didier, ‘Evaluation of the Consumer’s Financial Capacity’, in European CreditResearch Institute (ECRI) (ed.), Consumer Financial Capability: Empowering European Consumers(Brussels: ECRI, 2006).
  • [3] In this context, the consumer had to provide reliable information to the creditor. Article 31, preamble note 29, and the explanatory memorandum of the draft directive; more in Didier, ‘Evaluationof the Consumer’s Financial Capacity’ (n 44), p. 93.
  • [4] Article 9 and the explanatory memorandum of the draft Consumer Credit directive of 2002,COM/2002/443, presented by the Commission.
  • [5] Amended proposal for a Directive on the harmonisation of the laws, regulations and administrative provisions of the Member States concerning credit for consumers, COM(2004) 747 final,2002/0222 (COD), Brussels, 28.10.2004.
  • [6] Amended proposal for a Directive concerning credit for consumers, COM (2004) 747 final,2002/0222 (COD), Brussels, 28.10.2004.
  • [7] Directive 2008/48/EC on credit agreements for consumers, OJ L 133/66, 22.5.2008.
  • [8] These cases are those where ‘suppliers of goods and services act as credit intermediaries in anancillary capacity’, i.e. when ‘their activity as credit intermediaries is not the main purpose of theirtrade, business or profession’.
  • [9] See e.g. U. Reifner, ‘Verantwortungsvolle Kreditvergabe im europaischen Recht’, inL. Thevenoz & N. Reich (eds), Liber amicorum Bernd Stauder, Droit de la ComommatimfKonsumentenrecht/ConsumerLaw (Baden-Baden/Zurich: Nomos/Schulthess, 2006), pp. 383-403.
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