Unfair and illegal terms of loan agreements used by banks
Article by George Kazoleas, Lawyer LL.M. (Banking & Capitalmarkets Law)
It is well known that loan agreements contain terms and conditions that disturb the balance between the parties to the detriment of the borrower and are therefore legally and judicially diagnosed as contrary to law. Despite this, most banks insist on including them in their new contracts, refusing to comply with court rulings even by the European Court of Justice.
Especially, foreign currency loan agreements (such as the Swiss franc) contain many unfair and opaque terms. Particularly:
The Bank had to inform the potential borrower of the foreign exchange risk and explain in detail the relevant clauses before concluding the loan. It is very common, that the loan agreement does not mention anything about this risk, nor does it appear that the borrower has been effectively and properly informed by a competent bank official.
According to Cypriot and European legislation and case law, the loan agreement must set out in a transparent manner the exact functioning of the foreign currency conversion mechanism and the exchange rate clause so that the consumer can assess the financial consequences of this mechanism. The borrower must be clearly informed by the bank that, by concluding a loan agreement in a foreign currency, he / she is exposed to a certain foreign exchange risk that he / she may find it difficult to cope with in the event of a devaluation of the currency against the foreign currency borrowed.
It is important to be noted that the cancellation of a foreign currency loan agreement containing an unfair foreign exchange risk clause results in retroactive effect, as this clause defines the subject of the whole loan agreement. (EU Case Law).
In most of the loan agreements is provided that in calculating the interest the number of days of each month shall be taken as the case may be, but the financial year shall be computed as the fixed divisor of 360 days.
This clause is based on using for the calculation of the daily interest the commercial year of 360 days with the understanding that all the months have 30 days. However, to calculate the monthly interest they multiply the daily interest by the actual days that the month has; it is a practice that generates an imbalance in the rights and obligations between the parties, with the result of ‘giving 5 days of extra interest to the bank’.
It must be noted that 365 days calculation is in force and applies today, as required by Directive 2008/48 / EC, which was incorporated into Cypriot law by the Consumer Protection Act of 2010 (Law No. 106/2010).
This term has repeatedly been found to be illegal und unfair and this conclusion demonstrates the borrower’s indebtedness in calculating the interest rate.
The right of early repayment of the loan by the borrower is enshrined in Cypriot and EU law. There are essentially two main effects of this right: on the one hand, the consumer/borrower is entitled to a reduction in the total cost of the credit consisting of interest and charges for the remaining period of the contract. On the other hand, the bank shall be entitled to reasonable and objectively justified compensation for any costs directly attributable to the early repayment of the credit, provided that the early repayment is made within the period for which the borrowing rate is fixed. (Article 16 (1) of Directive 2008/48 and Article 16 of the Consumer Credit Laws of 2010). In any event, the compensation that the bank may require may not exceed 1% of the portion of the credit repaid in advance, provided that the period between the early repayment and the agreed termination of the credit agreement exceeds one (1) year.
Most of loan agreements include an unfair term regarding early repayment of the loan. It is usually provided that the Debtor will pay management and operational expenses to the Bank equal to 1,5‰ of the early repayment amount, with a minimum charge or equivalent to such an amount that the Bank may decide at its absolute discretion from time to time. This term has repeatedly been found to be illegal und unfair and it is of particular importance in the event of an early repayment of the remaining loan amount.
Another term of loan agreements provides that the Bank has the right to change the interest rate, the margin, the commission and also reserves the right to vary either upwards or downwards the amount of each and every remaining instalment in case of any alteration of interest rate, so that the duration of the loan and the number of instalments are not altered.
This term has been repeatedly found to be opaque and illegal as it disrupts the contractual balance to the detriment of the consumer and is contrary to good faith.
Also a term, which is often overlooked, provides that, the loan agreement shall be governed by and construed in accordance with the Laws of Cyprus and the parties hereto hereby irrevocably submit to the jurisdiction of the courts of Cyprus but this is without prejudice to the Bank’s right to sue the Debtor in any court of any other country.
The provisions of Articles 15-17 of Regulation (EC) No. 44/2001, on jurisdiction, the recognition and enforcement of judgments in civil and commercial matters, prohibit clauses in consumer contracts which establish exclusive jurisdiction of the supplier at the place of business.
Τhe bank’s right to sue the borrower in any country other than Cyprus constitutes an unlawful clause and cannot be accepted.
It should be noted that the reference to the above unlawful and unfair terms of the loan agreement is indicative and relates to the most basic terms, without excluding any further terms that do not meet the requirements of the law.__________________________
*George Kazoleas is Senior Associate Lawyer at DP Law- Dionysiou & Partners LLC, Cyprus, Founder at Legalpost.eu, Legalnews24.gr & Cylegalnews.com