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Consumer debt assignment outside scope of unfair terms laws

ANALYSIS: Banks can assign or sell consumer debt to others without having to notify or gain permission from the consumers first, according to an EU court ruling.03 Oct 2018

The Court of Justice of the EU (CJEU) confirmed that that is the case because the practice of assigning or purchasing a consumer’s debt is not subject to the EU's directive on unfair terms in consumer contracts.

The CJEU's ruling clarified that the directive does not apply even if no provision has been made in the banks' loan agreements with consumers for such an assignment to take place.

Nor does it matter if the consumer is not prior notified before the assignment happens, given the chance to agree to the assignment, or given the opportunity to buy back their debt.

The ruling also addressed specific provisions of Spanish law which regulate the opportunity to buy back a debt and govern the replacement of the assignor by the assignee. The CJEU confirmed those Spanish laws are also not within the scope of the directive on unfair terms in consumer contracts.

However, the CJEU said that it is possible for case law to exist in individual EU member states where it relates to the fairness of non-negotiated terms that fix the default interest rate in a loan agreement with a consumer.

Previously Spain's Supreme Court held that a non-negotiated term fixing the default interest rate in a loan agreement with a consumer was unfair because, even though the consumer was late in performing his loan repayments, he was required to pay a disproportionately high sum in compensation, which exceeded the ordinary interest rate provided for in the agreement by more than two percentage points.

The CJEU confirmed that such case law is not precluded by the EU's directive on unfair terms in consumer contracts. It backed a non-binding opinion that an advocate general to the court had issued who said that the directive does not prohibit national judicial criterion which determines that a default interest rate of more than 2% over the ordinary contract rate of a loan is unfair so long as the criterion does not preclude national judges from finding unfair other terms of the contract taking into account all the circumstances of the case.

In its ruling, the Spanish Supreme Court had held that the consequence of the unfairness of a non-negotiated term fixing the default interest rate in a consumer loan agreement is that there is complete elimination of that interest, while the ordinary interest provided for in that agreement continues to run.

The CJEU said that that aspect of the Spanish court's ruling was also compatible with the directive on unfair terms in consumer contracts.

In line with the advocate general's opinion, this means that even if the default interest rate has been deemed unfair, consumers would still be bound to repay the debt in full under the ordinary rate of interest. All other terms in the loan agreement would continue to apply. Judges would not be able to modify the unfair default term or substitute or reduce it. It would simply not apply.

The ruling offers useful clarity for banks on how to deal with non-performing loans.

Idoya Arteagabeitia is a Madrid-based expert in banking contracts at Pinsent Masons, the law firm behind Out-Law.com.