“Revolutionary” bill aims to protect consumers from loan sharks

Photo: David Playford / freeimages

The Czech government has approved a bill on consumer loans aimed at protecting borrowers. The amendment significantly limits sanctions for late payments and is seen as a means of combatting extortionate interest rates.

Photo: David Playford / freeimages
Announcing the bill on Wednesday, the prime minister, Bohuslav Sobotka, tweeted that an important step had been taken in the fight against loan-sharking.

The legislation places all providers of loans under the Czech National Bank, which will issue licenses to lenders. The licenses will be compulsory and can be rescinded if providers break the rules. However, the central bank objected to the change during the review process.

Under the amendment, lenders should only hand out loans to those who are capable of repaying them from their regular income. If the lender fails to verify this ability, the loan can be declared null and void.

The borrower will not have to pay any interest and indeed will get any interest paid back in such a case. They will be required to repay the principal amount, but according to their means.

If a borrower makes late payments, the provider will be able to levy on top of the agreed interest a legally set interest on overdue payments (now 8 percentage points above the CNB’s repo rate) and a contractual fine of 0.1 percent a day of the owed amount.

If the borrower defaults, penalties and contractual fines may reach no higher than 70 percent of the borrowed sum, capped at CZK 200,000.

The Czech News Agency quoted Daniel Hůle of the NGO People in Need, which works with victims of loan-sharking (many in socially excluded localities), as saying the bill represented a “revolution” in non-bank loans. It is the first reasonable proposal made to deal with the complicated loans market for some years, he said.

At present virtually anybody can enter the business of providing loans (more than 60,000 are at present registered in the Czech Republic). The bill would change that, regulating entry into the industry and placing higher demands for expertise and making it more costly do operate in the industry.

The Czech Leasing and Finance Association, which brings together the country’s largest loan providers, says it welcomes the stricter conditions for providing and arranging consumer loans, agreeing with the idea of the CNB overseeing the provision of consumer loans.

However, the association questions some elements in the bill, such as a requirement that lenders and their employees have at least a secondary level educational qualification.

If approved by the lower house, the bill would come into effect in the first half of next year. Mr. Sobotka said lenders would have to apply for a license from the central bank within three months of it coming into effect.