News

20 March 2024

Unfair terms in the contracts of instant loans companies; excessive interests, penalties and charges; lack of sufficient, precise and timely pre-contract information allowing for an informed decision to conclude a credit agreement or an annex thereto; minors signing empty credit applications; and small font size applied to important clauses of the agreement are some of the problems that the Ombudsman Mrs Diana Kovacheva outlined at a meeting of the Parliamentary Subcommittee on consumer protection and dismantling of monopolies.

Members of Parliament heard the chairperson of the Commission for Consumer Protection (CCP) Mr Stoil Alipiev in relation to the inspections of instant loans companies carried out by the Commission over the period 2021-2023 and the ones planned for 2024. It appeared that the CCP avails of no capacity and human resources to protect citizens against unfair terms and practices on the part of the instant loans companies.

Prof. Kovacheva underscored that Bulgaria ranks first in terms of bad loans in Europe. She pointed out that the Ombudsman institution continued to receive complaints from citizens who had suffered from arbitrary acts of instant loans companies. She reiterated further that the problem was a significant one since 90% of these non-banking financial institutions operate in violation of the law.

“It is apparent to everyone that the people who resort to instant loans have lesser credit history, i.e. these people cannot get a loan from a bank. Usually these are citizens who seek ways to repay older debts or just try to make ends meet. However, the assessment due concerns not only a decision whether to extend a credit or not, but also the type and amount of the credit so as to guarantee that the credit is tailor-made to the person in question and they will be able to repay it. I receive complaints from people who have three, five, nine instant loans provided that the salary they receive, if employed at all, cannot service these credits. Nevertheless, the instant loans companies continued to extend new credits, again and again, thus people ended with nine instant loans”, the Ombudsman said.  

Diana Kovacheva gave examples of unlawful methods for collecting debts that instant loans companies applied, with tragic consequences – deceased people and people who had taken their own life as a result of the stress and psychological harassment.

A mother whose daughter suffered from bipolar disorder took multiple instant loans. However, the family could not service these loans since the mother was permanently incapacitated to work and received a meagre pension of BGN 396. The instant loans companies started showing at their door and threatening the family. The daughter was so scared she tried to poison herself with pills.

An even more striking example that the Ombudsman gave concerned a complaint she received from a citizen regarding employees of instant loans companies who paid multiple visits to his father who was certified as permanently incapacitated for work (100% disability). They asked that the man pays back a loan taken by his grandson who was abroad. Once the employees remained for four hours in front of his house, so he was forced to go around the area in his wheelchair waiting for them to leave. The next day he had a massive heart attack and passed away.

“These two examples demonstrate that the instant loans companies do not perform in-depth checks of the client creditworthiness, despite the statutory obligation to this end”, prof. Kovacheva said.

“As regards the fees and penalties charged by the instant loans companies, according to the settled case-law, these companies resort to lawful means to achieve unlawful results, i.e. they circumvent the law”, the Ombudsman added.

She commented another recurrent complaint about penalties claimed for failure to supply a guarantor or a bank guarantee within the set time limits. The court has held that a stipulation for the debtor to pay compensation for failure to supply a collateral or guarantors within the set time limits is void since it runs contrary to accepted principles of morality. According to the court, such stipulations go outside the remit of security, compensatory and penalty functions and transfer the risk of the instant loans company’s failure to perform its obligations to conduct a preliminary assessment of the debtor’s creditworthiness to the debtor himself, thus additionally increasing their debt.  

“As far as the claimed fees for costs are concerned, the judicial acts stipulate that terms of contract according to which the debtor must pay the creditor damages for delay in addition to the damages for delay for which a demand for payment has been issued under Article 410 of the Civil Procedure Code are null and void. That is to say that there is settled case-law in this regard, but nevertheless these violations keep reoccurring, and no one seems able to stop the instant loans companies”, the public defender said.

Prof. Kovacheva underscored that according to the court the clause charging fees for express review of applications was void since it ran contrary to accepted principles of morality. This is so since the amount of the credit increases several times while the consideration remains unclear. Furthermore, these fees run contrary to the mandatory provision of Article 19, para 4 of the Consumer Credit Act.

“Apparently the court repeals the unfair terms of those agreements which reach the court and declares them void. However, not all agreements reach the court. There are many people who are literally enslaved for years on end and live in constant fear that they cannot service their debts. According to the statistics we keep in the Ombudsman institution, the amount of the loan increases twice or thrice already by the time of signing the loan agreement, that is before the amount has even become due. This is excessive and places an extremely heavy burden on people who this way or other cannot service their debts”, the Ombudsman pointed out.

Prof. Kovacheva reiterated that in practice there is no self-regulation of the instant loans sector and literally everyone may establish such a company and work in this sector.

She further added that only seven of 130 the instant loans companies at present were members of the Association for responsible non-banking lending which had adopted a Code of Conduct.

The Ombudsman concluded that consumer rights protection required effective supervision of unfair terms in the general conditions and agreements of instant loans companies as well as legislative amendments to restrict their arbitrary acts.

“I would like to remind you that the problem of instant loans is not isolated. It is closely related to the problem with the collector companies and should be viewed together with the Insolvency of Natural Persons Act or the law on the eternal debtor. That is to say that these three legislative initiatives should go hand in hand”, Diana Kovacheva stated.