SLOVAKS now have a weapon to fight what cabinet calls legalised loan sharking. Parliament has passed a package of laws that will bring more transparency to the Slovak loan market, regulate voluntary auctions and protect citizens from losing their property due to harmful loan conditions, the Justice Ministry said.
Parliament passed the legislation on October 25 and President Ivan Gašparovič has already signed the bill into law.
However, critics say the laws might also limit some citizens from getting loans and cause the illegal loan market to grow.
The term legal usury has been used to describe the activities of companies that offer fast cash, usually within 24 hours, but ask clients to use their real estate as collateral. The client pays astronomical interest rates that are several times higher than the amount of the loan.
If the client is late paying a single installment, his property moves to a voluntary auction even before the company suggests an alternative installment calendar.
"For example, someone borrowed Sk250,000 (€7,500) and was expected to return Sk450,000," said Peter Straka, a judge who is currently on an internship at the Justice Ministry's civil and commercial law section. "However, when they signed the contract, they had to sign a transfer of ownership rights to the company for an apartment worth Sk3 million.
"There have been several cases where a company started to execute its right to the collateral even before the original term for paying off the loan expired, and then they sold these rights without limits."
After that, the company is not interested in getting the installments - it actually becomes the owner of the apartment, Straka added.
The new loan legislation, which is part of the law on voluntary auctions, puts a ceiling on how much banks, financial companies or credit companies can charge for a consumer loan.
It also obliges financial companies to tell clients the total cost of the loan, including interest and all the fees involved in the transaction, and the average market price.
The ceiling will be proposed by the Finance Ministry and then approved by the cabinet as a regulation.
The mandatory information form will be included in the contract that consumers sign to take out the loan. It will help them detect loans that are financially risky, Justice Ministry spokesman Michal Jurči wrote on the ministry's official website.
"Citizens must be able to properly evaluate the loans they take out from companies that do not have banking licenses," said Justice Minister Štefan Harabin in an official release. "Even a seemingly attractive offer might end up as a family tragedy."
Victims of bad loans should be able to use all the available means of protection, according to Harabin.
"We have to fight legal usury," he said.
The Justice Ministry advises citizens to borrow money from institutions that are under strict supervision by the National Bank of Slovakia (NBS).
Loan limit questioned
The Finance Ministry has been critical of the law's wording from the very beginning. It submitted a different version of the draft legislation to parliament, said ministry spokesman Miroslav Šmál.
The ministry preferred educating clients about loans instead of putting a limit on a wide range of loan products.
It proposed that certain companies would have to provide their clients truthful information about their products, and that the contract would include all the necessary facts, Šmál told The Slovak Spectator.
"It is very complicated to set the maximum cost of a loan when it comes to consumer loans. It is not very reasonable," he said. "It has to apply to different credit, installment and leasing companies, for example. The structure of the loan products that these companies provide is different, so it is hard to set a single limit."
The Slovak Banking Association, which favoured the Finance Ministry's proposal when the law was being prepared, has also been critical of the loan ceiling. The association's executive director, Ladislav Unčovský, said the new law talks about "maximum repayment" but does not define what that is.
The maximum loan amount eventually made it into the law through an MP's proposal during parliamentary debate.
According to talks between Finance and Justice Ministries that followed parliament's decision, the maximum total amount that clients repay for the loan, including interest, will be based on the annual percentage rates of consumer loan products. The annual percentage rate is a banking term that includes interest rates and other loan fees.
The maximum repayment amount would be a multiple of the average annual percentage rate for several categories of loan products.
The Finance Ministry will collect the percentage figures from loan providers, who will have to tell the ministry and the NBS the annual percentage rates of their loans starting next year.
The exact maximum repayment figures are expected to be published during the second quarter of 2008, Straka said.
Richard Ďurana, director of the Institute of Economic and Social Studies, said that the measure will not fulfill the ministry's goal of limiting loan sharking, but paradoxically, it will stimulate the practice.
"Based on the government's rhetoric, we can expect that it will set the maximum price of the loan - de facto, the interest rate - lower than some of the groups operating on the market have," Ďurana told The Slovak Spectator. "That will limit low-income groups' access to loans, and they will try to solve their situation by seeking products that are available on the illegal market."
Surveys conducted in 2004 by the Policies Institute for the British Department for Business, Enterprise and Regulatory Reform say that imposing a limit makes it impossible for some citizens to acquire loans and creates room for an illegal loan market, the banking association's Unčovský said.
"The association wants to make sure that setting the limit does not hurt bank clients, and that some groups of clients will not have their access to the market hindered," he told The Slovak Spectator.
"Any form of ceiling distorts the market because it inherently represents a form of price regulation. From our point of view, it is ineffective on a competitive market."
Ďurana said there is no reason for the state to intervene in a voluntary contract between the client and the provider of loan.
A paternalistic approach by the state lowers the responsibility of clients, "who then are more likely to trust everybody without analysing any deeper."
But Straka said the measure will not harm the market and he does not expect a massive outflow of loan firms.
The legislation brings more transparency to voluntary auctions and makes sure that loan companies cannot take ownership of the property clients use as collateral before the loan actually matures, he said.
