One of the arguments for Directive 2008/48/EC (CCD) was the appearance of a generally accepted interest rate for consumer credit in which the consumer can compare different offers on the market and also imagine the burden the credit puts onto his or her future. This goal, as found out in research by iff in its EU survey on insurance remuneration systems, has not been achieved. The PPI scandals in many EU Member States have revealed that the changes made in the final 2008 Directive compared with its 2002 Draft, have been not only superfluous but also dangerous.
As usual the European Commission had to provide an evaluation for the parliament. This evaluation has not touched any of these problems in a nearly adequate way. While a purely legal evaluation just looked at it legal transformation which does not reveal anything about its effects for the consumer, the other report covers consumer credit markets as if the well-functioning of consumer credit for the supplier side was the main aim of this ”consumer” credit Directive.
The Commission also provides us with an Excel-Tool entitled APR simulator. Judging from all of these elements, it would seem that the basic problem of consumer credit legislation at EU level appears to be: too little knowledge about consumer problems in this area.
The calculation tool adds a lot of confusion to the already existing problems of interest calculation in Directive 2008/48/EC. Have its initiators truly understood the differences between mathematically arbitrary calculations with which banks cheat consumers for over a century, still tolerated with the so-called ”borrowing rate” and the new concept of a mathematically correct calculation for the Annual Percentage Rate of Charge (as stipulated by the CCD Annex I). The following points shed some doubt:
- The Directive speaks at least of an Annual Percentage Rate of Charge (APRC) in Art. 3 (i) (and not an ”APR”). Omitting the ”C” is quite important since by pointing to the charge the consumer gets the information that this is the correct and inclusive ”charge” he has to pay. This is even much better expressed in the German and Romanist versions by the word which are ”effektiv/effective”. (We have to add that ”Rate of Charge” in the English version instead of ”effective interest rate” is already misleading. Even more misleading is the instance where the Directive calls the ”borrowing rate” an ”interest rate” instead of an arbitrarily convened calculation parameter.
- Why ”simulation”? The APRC has to be ”calculated” according to Annex I of the Directive. ”Simulation” will confuse consumers since it indicates approximation instead of correct accurate calculation and furthermore implies that the process is somehow obscure.
- This is indeed the message. The APRC emerges only as a result out of hidden calculations. Nobody can check the correctness of these calculations. Nobody knows from this presentation how it works.
- Furthermore instead of presenting the way the APRC is correctly calculated, the Excel Programme provides a calculation made according to imagined rates (mathematically wrong rules on interest amortisation) based not on the APRC but on the ”borrowing rate”. The borrowing rate is as has been noted in many court decisions in Europe an arbitrary and mathematically wrong form of representing the interest of a credit.
- The ”simulation” of a bank loan with an assumed borrowing rate has consequently a number of flaws:
- o Instalments are supposed to be equal, the consumer has to indicate if, as it is usually (and should be) the case, he gets the money when he needs it and not only at the beginning of a month.
- o There is little space for different instalments especially no balloon rate provided for.
- o The programme assumes that there is a monthly amortisation of interest which is not the case in variable credit on a bank account. The many different varieties of ways that are possible and still not forbidden to cheat consumers can be monitored in mortgage credit.
- The programme uses the word ”drawdowns” for instalment credit. This language although used in the Directive for any form of credit is misleading. Its meaning refers to overdraft (Art. 12) and not to instalment credit, although Art. 5 ff uses it where both together are in question. Anyhow the more understandable form would have been ”total amount of credit” (Art. 3 (l)). In an understandable language it should have mentioned the ”total payment to the consumer”. ”Drawdowns” do not take place in instalment credit, total amount of credit from a consumer’s perspective is what he or she has to pay which is much more.
- The most confusing element of this table is the production of a wrong amortisation table. In this table it is assumed that capital and interest can be differentiated by calculating with a mere product of the interest rate with the outstanding credit. The Annex and the existence of the APRC make it clear that this may be allowed for the banks. Anyhow it is neither correct nor does it lead to comparable results with regard to the term of the credit. We cannot deny that the flaw already exists in the wording of the Directive which instead of requiring a correct table of amortisation, even orders the banks to produce an amortisation table based on their arbitrary rules on how to calculate. This has enormous effects for the wrongly allocated interest which is the basis for the refund of unused interest. (The reason was, that banks lobbied successfully for the advantage to give less interest back and exclude certain cost elements from it, like closing fees (which have recently be voided by the Supreme Court of Germany).
- The Excel Sheet ignores the core problems of APRC calculation: the hidden commissions and circumventions. The enormous scandals around payment protection insurance are ignored. It hides interest payments which are charged to the consumer in the form of an insurance premium although it contains an enormous amount of commission which are then handed out to the banks (”kick back”).
For many years already, iff has made a software called iff-FinanzCheck available to the consumer organisations in Germany in which according to the only correct definition in CCD Annex I, the consumer gets the true picture of his credit with, without ancillary service fees, allowing all kinds of strange deviation but juxtaposing what the consumer gets against what he or she pays. The software allows to apply different calculation rules in order to show where banks cheat. An online German language version of this software is being developed in 2014. Interested Consumer organisations from other EU Member States should contact iff for more details: firstname.lastname@example.org.
Directive 2011/90/EU amends the assumptions for the calculation of the APR to reflect more accurately the products sold on the market (http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:296:0035:0037:EN:PDF).
A simulator based on these revised assumptions allows to calculate APR for pre-defined examples and also for the terms of the contract as defined by the user (in line with the European legislation as from 1.1.2013).
See the simulator: http://ec.europa.eu/consumers/rights/docs/simulator_2014_en.xls
Description on how to use it: http://ec.europa.eu/consumers/rights/docs/simulator_description_2014_en.pdf