The abuse of power & influence by credit institutions against borrowers and the moral issue of exploiting their psychological condition when concluding loan agreements

by Giorgos Kazoleas, Lawyer LL.M.

At the stage before concluding a loan agreement between the credit institution and the prospective borrower, the inequality regarding the negotiating power of the parties reaches its peak in order to complete the agreement. The pressure to agree on the contract clauses, which usually reflects the imbalance of rights and obligations between the two parties and while several of which are abusive, is not a neutral pressure, but the pressure of the financially and authoritatevely strong against the financially weak and mentally vulnerable. And this is despite the fact that the basic terms have previously been judged by case law or even legislated as abusive.

One of the ways to avoid abuse by the credit institutions' position is the requirement of good faith, in the assessment of which, special attention must be paid to the negotiating power of both parties. It should be also assessed whether the consumer was motivated in any way to accept the clause and if the supply of goods or services was made by a special order of the consumer. The requirement of good faith can be satisfied by the credit institution when it deals honestly and fairly with the counterparty whose legal interests it must take into account. [1]

The purpose of the legislation is to protect the consumer, in order to strike a balance in the asymmetric contractual relationship between professional and consumer. This asymmetry arises from the weaker position of the consumer (borrower) opposite to the professional (lending bank) in terms of both bargaining power and the level of information, a situation which leads the consumer to adhere to the conditions already drawn up by the credit institution, without being able to exercise influence on their content. [2]

It goes without saying that credit institutions are for-profit companies, although it is something else to take advantage of the weakness, need and ignorance of the other. The obligation of the bank not to use on the one hand its asymmetrically stronger negotiating position and on the other hand the difficulty, need and psychological state of the prospective borrower, at the stage before the conclusion of the loan agreement, is in the usual practice required and not given.

"Abuse of influence" is defined in law as the exploitation of a power position in relation to the consumer to exert pressure, even without the use or threat of physical violence, in a manner that significantly limits the consumer's ability to make an informed decision.[3]

The meaning of "coercion" includes in particular the practices that play a decisive role in the emotions, fears and exploitation of consumer’s trust, such as psychological pressure, i.e. psychological coercion which is closely linked to the "abuse of influence" resulting from the exploitation of the supplier's power.[4]

Although the relevant case law, European and national, does not generally overlook the issue of abuse of influence and power by credit institutions, the issue is not only legal but also ethical and as such should be taken into account by the courts. The lender has a lot of money, at the same time that the borrower is in a desperate situation. The lender has at its disposal information, legal knowledge, legislative influence and geographical presence, on the other hand, the borrower just urgently needs money. The court must assess the psychological state and the particular psychosynthesis of the potential borrowers as well as their specific personal circumstances at the pre-contractual stage shortly before signing the agreement. These circumstances must be assessed whether they affect the degree of understanding and consolidation of the true meaning and the legal consequences of the agreed terms.

The obvious inequality and imbalance of rights between the parties and the weaker position of the consumer both in terms of negotiating power and in terms of information or real knowledge of the terms to be signed with the background of intense psychological pressure to sign the contract in order to get the money, in some cases perhaps could be viewed as a defect in the borrowers' will to agree to specific contractual clauses, which if they really understood the exact content and their consequences, they would never have agreed to.

George Kazoleas is Lawyer LL.M. (Banking & Capital Markets Law)  in Cyprus & Greece

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[1] Directive 93/13/EEC on unfair terms in consumer contracts

[2] European Court of Justice judgment of 10 June 2021, VB and Others v BNP Paribas Personal Finance SA and AV and Others v BNP Paribas Personal Finance SA and Procureur de la République, Joined Cases C-776/19 to C-782/19

[3] Greek Law 2251/1994 for Consumer’s protection, article 9A

[4] Consumer’s Law, 2014, Deluka-Igglesi