Banks' operating practices have proved to be highly variable in situations where consumers have wanted to change the reference rate of their housing loan. The Consumer Agency has reminded banks of the relevant provisions in the Consumer Protection Act.
The content of a credit relationship must reflect the promises made in marketing
In the past decade banks have marketed consumer credit with an emphasis on the flexibility of changing the reference rate. Consumers have been taken aback by increases to the fees charged for changing the reference rate and changes to the margin. In discussions leading up to the loan agreement, consumers have often been told how easy it is to change the reference rate at any time and how there will be no fees, or at most very minimal fees, charged for this.
When a consumer requests to have the reference rate changed, the creditor must take into consideration the information previously provided to the consumer regarding the credit relationship, its terms and the fee table. For instance, if a housing loan has been marketed as having flexible terms and changing the reference rate has been advertised to be easily done at any time, or if the fee for changing the reference rate has been included in the fee table, consumers are entitled to assume that the creditor will act according to the information provided.
Prices and terms must be clearly expressed
Many banks have, in practice, been eager to allow changes to reference rates and have priced the service in a transparent manner. Even when a specific fee is listed for it, the fee table may include conditions on when the reference rate may be changed or what reference rates are available to the consumer to choose from. Such restrictions are permitted as long as they are clearly indicated in the fee table.
Some banks have required that changes requested by consumers result in other changes to interest rate terms and costs of credit as well. For example, banks may have such a condition for implementing changes to reference rates that the bank's margin specified in the credit terms is increased or that the bank is compensated for the negative interest rate differential resulting from the change.
In certain circumstances the consumer does, however, have the right to expect that the change in the reference rate is implemented without changing other aspects of the agreement or increasing the margin. This is the case when the bank's fee table indicates the fee charged for changing the reference rate, the loan has been marketed to the consumer with an emphasis on the ease of changing the reference rate, or reference rates have in practice been implemented in a certain standard manner. The consumer may also not be required to approve an increase to the margin when he wishes to utilise a previously marketed no-cost option of only paying interest on the loan for a given time period.
When the above circumstances do not apply, the bank may refuse the consumer's request to change the reference rate or determine reasonable costs to charge the consumer for the change and propose, for its part, other changes to the agreement as part of normal contract negotiations.
Creditors must disclose the consequences of changes
The creditor must explain to the consumer in a clear and understandable manner what the consequences of changing credit terms are regarding the credit relationship. In particular, the debtor must be informed if a change to the reference rate results in replacing the existing credit agreement with an entirely new agreement. The consumer's attention must specifically be drawn to contract terms if new standard terms are applied to the agreement. New terms may, for example, include a provision that gives the bank the right to increase the loan's interest rate when the bank's solvency is at risk. In such cases the consumers must be given sufficient time to become familiar with the contract terms.
Any consequences the changes may have on taxes and insurance must also be reviewed. If a consumer credit has guarantors or third-party pledges, their position must also be considered in changing the reference rate. A bank must act responsibly in a credit relationship and strive to take the customer's financial security into consideration.