On 02 August 2016 a new Law on loans extended in relation to acquisition of real estate properties entered into force. By the said Law the regulations of Directive 2014/17/ EC of the European Parliament and the Council dated 04.02.2014 are being implemented in the national legislation. The Law applies for credit agreements concluded between lenders and consumers after the date of its entry into force. As per the definition of the law, a consumer is considered a natural person acting outside the scope of his/her commercial or professional activity. A real estate loan is considered a loan secured by a mortgage or another comparable security established over real estate property and loan extended for the purpose of acquisition or retention of title over real estate property.
- General requirements
One of the main purposes of the law is to ensure that the consumer makes an informed decision to enter into the loan, that he/she is capable to compare the conditions offered on the market and to assess the impact of the contract on his/her financial state. In this point, the law imposes an obligation on the lenders and credit intermediaries to provide the main information concerning the credit agreement in accessible and clear form including general information about the purpose of the contract, securities, term, levels and types of interest rates, amount of the overall expenses under the credit agreement, overall amount of consumer’s obligations, additional expenses, repayment schedule and possible consequences in case of non-performance of the obligations under the credit agreement.
In addition to the above-described general information, the lender is obliged to present to consumers personalized information about the loan, corresponding to his/her personal needs, financial status and preferences so that the consumer can make an informed decision and compare the offered conditions. The information shall be provided in a standard form representing Appendix to the Law.
- Creditworthiness assessment
Another purpose of the law is to prevent over-indebtedness. For that reason, the law arranges an obligation of the lender to assess the ability of the consumer to perform his/her obligations under the credit agreement (the so-called creditworthiness assessment) prior to extension of the loan. The assessment shall be performed on the basis of the information about consumer’s income and expenses and other circumstances of financial and economical matter as the law forbids extension of the loan in case of negative assessment of creditworthiness.
After conclusion of the credit agreement, the lender may not terminate or amend the agreement to the detriment of the consumer, based on incorrect assessment, except for the occasions where the consumer has intentionally concealed information or used incorrect information. In case subsequent agreement on the increase of the extended amount is reached between the parties, the lender shall up-date the available financial information about the debtor and perform a new creditworthiness assessment prior to each significant increase, unless such increase was previously agreed and included in the initial creditworthiness assessment.
- Conclusion of a credit agreement
After positive creditworthiness assessment, the lender shall provide the consumer with a binding offer. A draft credit agreement containing all terms and conditions agreed between the parties is considered as such offer. After obtaining the offer the consumer shall have a term of at least 14 days in order to decide whether to enter into the agreement or not.
The law requires a written form for the validity of the credit agreement. The law also stipulates the obligatory requisites of the contract including its term, total amount of the loan, conditions for utilization and repayment of the amounts, interest rates, annual percentage rate of charge and total amount due under the contract. The lack of any of the said elements shall make the contract invalid.
In case the lender requires conclusion of insurance contract for the sake of extension of the loan, the lender is specifically obliged to accept insurance policies of insurance companies providing the same coverage as the one provided by the insurance company the lender works with.
Regarding the interest rate, in case the credit agreement contains variable interest rate, the lender shall apply a referent rate under a methodology defined by the lender, which shall include clear calculation mechanism and a formula, indicating the type, quantity and relevant weight of each component of the rate (market indices and indicators). The methodology for calculation of the interest rate shall be indicated in the contract and it may not be amended unilaterally by the lender.
The new law provides additional rules concerning the security established in favour of the lender. The lender shall be obliged to give the consumer the choice between a contract arranging that the entire property of the debtor shall serve for the satisfaction of the lender in case of enforcement, or a contract stipulating that the lender shall fully satisfy itself from the sale of the asset serving as security under the credit agreement.
In addition, the lender shall no longer oblige consumers to issue a promissory note or a bill of exchange, in order for the said instruments to serve as additional security under the contract. However, in case the issuing of such instruments is agreed by the parties, the lender shall up-date the documents and make sure that the actual amount of the debt is indicated after each payment under the loan. The lender shall also be obliged to return the bill of exchange or the promissory note to the consumer immediately after full repayment of the debt.
- Taxes and fees. Annual percentage rate of charge (APRC)
The law introduces regulations concerning taxes and fees. It allows the lender to collect taxes and fees for additional services related to the credit agreement, but expressly forbids such fees for the utilization of the loan and its management. Second collection of fees for one and the same service is also forbidden. In order to be collected the tax/fee and the service/action it is collected for, shall be clearly indicated in the credit agreement, as the lender may not request payment of amounts of expenses which were not expressly agreed in the credit agreement, as the same rule applies for subsequent amendments and supplements to the credit agreement.
The law stipulates a maximum threshold of the annual percentage rate of charge (APRC) – it may not exceed 5 times the statutory interest rate. The APRC is one of the obligatory elements of the credit agreement. It indicates the overall amount of expenses under the loan, calculated on annual basis upon the overall amount of the loan, according to a formula stipulated by the law. Its calculation is based on the presumption that the credit agreement shall remain effective within the agreed term and both parties shall perform their contractual obligations according to the terms and conditions of the agreement. Clauses, arranging costs in higher amounts, are deemed void. In case payments under such invalid clauses are performed under the contract, the overpaid amounts exceeding the threshold should be offset with subsequent installments under the loan. In case the whole contract is declared void by the court, due to non-compliance with the provisions of the new law, the consumer shall owe payment of the overall amount of the loan, but not any interests and other expenses under the contract.
- Changes in the interest rates
In case of changes in the levels of the interest rates the lender shall inform the consumer for each change affecting the interest rates indicating the amount of the repayment installments after application of the new rates, the number and regularity of the installments, in case they are amended. If the interest rate depends on certain referent indicators – whose rates are publicly available, the parties may agree that such information may be provided on a monthly basis together with the information regarding the new amount of the monthly instalments.
In case of changes in the terms and conditions under the credit agreement, the lender shall provide the debtor with a new repayment schedule indicating the change.
- A new service – credit advice
The law also provides and new specific service provided by lenders and credit intermediaries – advice concerning the credit agreement. The law differentiates two types of credit intermediaries: intermediaries related to certain lender/s and independent counsels. Related intermediaries review significant number of credit agreements provided by the lenders they work with, as they shall recommend one or several contracts applicable to the personal needs and financial situation of the consumer. The independent counsels shall review credit agreements available on the market as they shall also recommend one or several loans. The interests of the consumer shall govern the activity of the credit intermediaries.
- Changes in the currency of the loan
The consumer shall have the right to exchange the loan extended in foreign currency into the currency in which the consumer receives its incomes and owns assets or the currency corresponding to consumer’s domicile. Unless otherwise agreed, the exchange rate of the Bulgarian National Bank stipulated for the respective date of exchange shall apply. In case of exchange in a different currency used by the bank in its credit agreements, the exchange shall be governed by the terms and conditions arranged by the specific credit agreement.
- Pre-payment and delayed payment
The new law introduces clear rules concerning pre-payment of the loan. They stipulate that the loan may be fully or partially pre-paid which shall lead to decrease in the overall expenses under the loan achieved by decrease in the interest and all other expenses due for the remaining period of the credit agreement. Lenders may not refuse full or partial pre-payment as their compensation for the damages arising out of the pre-payment is limited to 1% of the pre-paid amount. Such compensation is due only in cases of pre-payment before 12 monthly installments after the assimilation. As an exception, lenders may seek damages in higher amounts but only if they prove their loss. Such compensation shall not be due after payment of 12 monthly installments.
The rules concerning delays in payment and the damages due provide that the lender shall be entitled to compensation calculated upon the amount of the delayed amount and due for the period of the delay. The damages for delay may not exceed the statutory interest rate, and the lender shall not refuse partial payments.
Lender’s receivables under the credit agreement may be assigned to a third party in case the provisions of the credit agreement allow such action.
- Dispute resolution
Consumers shall be entitled to file their complaints related to credit agreements at the Consumer Protection Commission (“CPC”), which shall supervise the observance of the act.
Beside complaints addressed to the CPC, each lender and credit intermediary shall arrange an internal procedure for submission of objections, dispute resolution and compensations due in relation to such complaints. Each complaint shall be reviewed by the lender as the latter shall introduce its position within the term of 30 days. Otherwise, or in case the debtor does not agree with lender’s position, the dispute may be referred to the an alternative dispute resolution body – a conciliation committee with the CPC. In case of international disputes the committee shall cooperate with the competent alternative dispute resolution bodies of other member states, by exchanging information and positions.