The National Bank of Ukraine welcomes parliament’s adoption of Draft Law No. 2455 On Consumer Lending in second reading. A total of 247 MPs voted in favor of this bill at today’s session held to debate financial draft laws.
Draft Law No. 2455 is one of the strategically important draft laws required to advance the financial sector reforms provided for by the Comprehensive Program of Financial Market Development of Ukraine until 2020.
Draft Law No. 2455 is intended to protect the rights and legal interests of both consumers and lenders. This draft law is designed to protect financial services consumers from having their rights violated by providing the latter with information required for decision making. The NBU regards Draft Law No. 2455 as a solid basis and a key prerequisite for the resumption of lending; market participants should be equally protected while assuming equal responsibility.
There is currently no specific law on consumer lending in place, but there are gaps in applicable laws and regulations in this regard. This particularly concerns unfair advertising practices, disclosure of information on lending terms and conditions, lending intermediation services, unfair terms and conditions of consumer loan agreements, the practice of touting additional and supplementary services by banks and financial institutions. Draft Law No.2455 addresses the existing problems and establishes a comprehensive regulatory framework for consumer lending.
The NBU is confident that Draft Law No. 2455 is yet another contribution to building confidence in financial institutions and establishing a legal framework for promoting financial awareness on consumer lending among the public. This draft law will also help create a competitive environment in the financial market as all market participants will extend consumer loans on equal and transparent terms as mandated by laws and regulations. Information disclosure practices in Ukraine are far from being appropriate, starting from practices related to the disclosure of information before conclusion of a loan agreement and during the term of validity of this agreement. This information is necessary for consumers’ understanding of terms and conditions of these agreements. Consumers, at least, should know the actual cost of a loan, effective interest rate and information about fees charged for the disbursement, servicing and repayment of a loan.
Additionally, Draft Law No. 2455 will make it possible to bring Ukrainian laws into line with international best practices and implement provisions set out in EU Directive 2008/48 on Credit Agreements for Consumers.
Draft Law No. 2455 provides for the following:
- Advertising materials on loans should reflect the actual cost of a loan. An effective interest rate on the loan should be calculated factoring in all interest rates charged on the loan, as well as loan servicing fees charged by a bank or a financial institution (lender).
- A bank or a financial institution is required to notify a consumer of the estimated cost of services rendered by third parties (insurance companies, appraisers, etc).
- A lender is required to carry out assessment of borrowers’ creditworthiness. This move will prevent banks from underwriting loans to consumers with poor creditworthiness, which would ensure the credibility of the banking and financial systems.
- This draft law has set forth the rules governing the activities of credit intermediaries that are not covered by applicable laws and regulations.
- Draft Law No. 2455 has changed the order of priorities in which debt obligations under a consumer loan agreement are settled. On a first-priority basis, borrowers are required to settle their overdue debt. On a second-priority basis, they have to make loan interest and principal payments. On a third-priority basis, borrowers are required to settle penalties (as mandated by applicable laws and regulations, all payments made by consumers are used to settle penalties, which prevents borrowers from reducing their outstanding debt).
Draft Law No. 2455 has extended the NBU’s mandate to include:
- approve a methodology for calculating the total cost of a loan and an actual interest rate under the consumer lending agreement;
- set requirements for lending intermediaries and their activities.