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The Danish Consumer Ombudsman has just decided 66 cases of irresponsible lending. The Consumer Ombudsman assessed that the agreements were unreasonable as the lenders had failed to observe their duty to assess the creditworthiness of loan applicants. Against that background, the Consumer Ombudsman concluded that the loan agreements were void.

The 66 loan agreements were granted by 12 different banks and consumer loan providers. In the opinion of the Consumer Ombudsman, the agreements were void because an assessment of the creditworthiness rating of loan applicants would have shown that the consumers did not at all have the required financial prerequisites for complying with the loan agreements. Read the decision by the Consumer Ombudsman here (in Danish only).

The lenders do not agree with the construction of the Consumer Ombudsman and the final settlement of the issue comes within the jurisdiction of the courts, but several of the loan providers have, nevertheless, chosen to comply with the decisions and remit interest, costs and, in some cases, the debt in its entirety.

During the next few months, the Consumer Ombudsman is expected to make decisions in around 70 similar cases which are presently being processed. 

The duty to collect and use information
Lenders have a duty to assess whether a consumer is creditworthy. Consumers are creditworthy if they are able to make timely payments on the new loan when all other fixed and variable expenses have been paid. If the loan is an overdraft facility or an interest-only loan, the consumer must also be able to pay any interest and charges accrued as well as repay the debt within reasonable time.

The said duty implies that the lender must collect information on the consumer's financial situation, among other things via e-skat (online tax platform) and other easily available registers showing whether a loan will result in excessive indebtedness on the part of the consumer.

Several lenders had informed the Consumer Ombudsman that they had not made a calculation of the consumer's disposable income and, consequently, had not assessed whether the consumer was actually able to repay the loans applied for. Other lenders had stated that they had, in fact, collected such information.

In the decision, the Consumer Ombudsman has observed that the lenders did not use this information as it would have shown that the consumers were not creditworthy and would therefore not be able to repay the loans.

In several cases, the consumers would, following repayment of debt and other necessary costs, have less funds than a person subject to debt restructuring who is to maintain a modest living.

Since an actual creditworthiness rating would have shown that the consumers did not at all have the required financial prerequisites for complying with the loan agreements, the loan agreements were, in the opinion of the Consumer Ombudsman, unreasonable and hence void. 

Implications
The decisions made by the Consumer Ombudsman imply that the lenders subject to the 66 loan agreements are not entitled to claim payment of interest and charges, but only repayment of the loan itself (the principal). 

Any payments made by the consumers may be set off against the loan amount.

Since compliance with the rules on creditworthiness rating of loan applicants is one of more conditions for obtaining a licence as a consumer loan provider, the Consumer Ombudsman has informed the Danish Financial Supervisory Authority of the issue. 


Comments by Bech-Bruun 
The decisions made by the Consumer Ombudsman emphasise the lenders' duty to assess the creditworthiness of loan applicants. 

The Consumer Ombudsman also establishes that not only must information be collected, but it must also be used in such a way that consumers must not be granted any loans unless they are creditworthy and are able to repay loans and costs. 

The decisions also seem to represent an increased focus on the area of irresponsible lending and instant loans. Consequently, on 4 June 2020, the Danish Parliament adopted an Act on a tightening of the rules on instant loans introducing significant tightening of the rules on the marketing of instant loans, including a maximum limit on annual borrowing costs and a cap on interest and charges imposed on consumers. Read more about the new Act on instant loans here.