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For the second time in a few months, the Danish Consumer Ombudsman has declared numerous loan agreements invalid. Once again, the problem is lenders' inadequate credit assessment of borrowers. The many cases concerning invalid loan agreements should probably be viewed in connection with the new, stricter rules for loans and instant loans.

100 invalid loan agreements
In June 2020 Bech-Bruun published the news that the Consumer Ombudsman declared 66 loan agreements invalid, as the lenders had not observed their duty to perform thorough credit assessments of the borrowers. Now the Consumer Ombudsman is back with 100 new similar cases.

The 100 new cases arose on the basis of numerous complaints from over-indebted consumers, with loans granted by 18 different banks and consumer loan providers. In the decision, the Consumer Ombudsman finds that all 100 loan agreements are invalid as a result of the lenders' failure to observe the statutory credit assessment of the consumers. In all the cases, the Consumer Ombudsman thus finds that a statutory credit assessment would have revealed that the consumers were far from having the required financial prerequisites for complying with the loan agreements. In practice, invalidity of the loan agreements means that the lenders in the 100 new cases are not entitled to charge interest or fees but only repayment of the loan itself (the principal amount). Thus in total we are looking at 166 invalid loan agreements in just a few months.

Of the 166 cases, most lenders have accepted the decision of the Consumer Ombudsman and cancelled interest payments, costs and in special cases even the entire loan. However, a few lenders disagree with the Consumer Ombudsman, and the cases will be settled by the courts.


Credit assessment requirements
The 18 lenders in the 100 cases all made the mistake of not basing their credit assessments on the individual consumer's financial situation. This means that the lenders should have collected information about the consumers' assets and debts as well as their current fixed incomes and expenses. Lenders may gather this information from eSKAT, the land register, the motor vehicles securities register, debt registers and through account information services that collect data from consumers' bank accounts. The Consumer Ombudsman also emphasises in the decision that documentation in the form of bank transaction data must never stand alone, since in such event the documentation does not give a fair representation of the consumer's ability to repay the loan. For instance, bank transaction data does not allow for cash withdrawals or unpaid bills. In our news of June 2020 we set out the further documentation requirements applying to lenders in connection with the credit assessment of prospective borrowers.

Comments by Bech-Bruun
The decision by the Consumer Ombudsman in the 100 new cases once again emphasises the importance for lenders to perform the required, statutory credit assessment of borrowers. Banks and consumer loan providers should have clear, written guidelines for how to gather and then apply documentation.  

As also described in our news in June 2020, the cases seem to indicate a new, increased focus on irresponsible loans and instant loans, including the new limits as to how high the annual costs of a loan may be, and a cap on how much a consumer will repay in interest and fees.

More information about the new rules for loan and instant loans here.