Consumer credit protection laws in the U.S. and in Germany

Consumer Credit Protection Laws in the U.S. and in Germany

I) Consumer credit

II) Structure of legislative and administrative approaches to consumer credit protection

III) How credit products can be shaped by law (examples)

IV) Summary: U.S./California versus Germany (GE)

These exhibits are incomplete without the explanations given during their presentation. This presentation is designed to provide students of Business Administration with selective insights into contents, structures and legislative intents of certain international approaches to protect borrowing consumers with the instruments provided by law. As the present German Consumer Credit Protection Law is subject to major changes which were enacted in July 2009 and will become effective in June 2010, the focus is on the future German law.

***

Sources: www.gesetze-im-internet.de/bgb

www.bundesgesetzblatt.de (Bürgerzugang, BGBl 2009 Teil 1 Nr. 49 pages 2355 - 2408)

U.S. federal law and regulations: www4.law.cornell.edu; www.findlaw.com; many others

California Law: www.leginfo.ca.gov

Pauluhn, Burkhardt, Verbraucherkreditrecht im internationalen Vergleich, Frankfurt/Main 2004

What is a consumer credit? (I) Simplified; for full definitions see statutes

1) Consumer

a) U.S.: Natural person(s) who borrow(s) primarily for personal, family or household

purposes (15 U.S.C. § 1602 (h)

b) Germany: Natural person(s) who borrow(s) for other than business or professional purposes

(§ 13 BGB = GE Civil Code)

2) Credit: Loan of money, credit sale (distinction more important in the U.S. than in GE)

a) Open-end credit: U.S.: In the credit contract, the creditor reasonably contemplates repeated transact-ions; finance charge is computed from time to time on the outstanding balance (15 U.S.C. § 1602 (i). Example: Revolving line of credit combined with a credit card.

GE: Line of credit. Overdraft facility with simplified attributes (old § 493 BGB)

What is a consumer credit? (II) Simplified; for full definitions see statutes

b) Closed-end credit Credit contract provides for payments which fully amortize the loan transaction (a demand clause is sufficient). Examples: Mortgage loan, auto loan, “small” loan.

Private Household Debt (Aug. 2009) (I)

Big business for lenders, potentially a significant financial burden to those who borrow…

U.S. (Federal Reserve)

Total: 14,287 bn USD, of which 11,819 bn USD residential mortgages (1-4 and multifamily res.)

Per capita: 46,538 USD + credit sales, others e. g. insurance loans

Germany (Deutsche Bundesbank):

Total: 1,015.2 bn €, of which 792 bn € housing/mortgaged loans (consumer lending)

Per capita: 12,350 € + credit sales, insurance loans

… with the potential to cause problems to those borrowers who

do not understand their obligations/risks, cannot afford their indebtedness

Private Household Debt (Aug. 2009) (II)

… who need protection from deceptive, abusive and unfair practices e. g.

suboptimal business (e. g. not the lender´s best available product)

threats to financial independency (e. g. A djustable R ates M ortgage s)

threat of loosing critical assets and of bankruptcy (e. g. reverse redlining, negative amortization as a teaser)

Consumer Credit Protection Laws in the U.S. and in Germany

I) Consumer credit

II) Structure of legislative and administrative approaches to consumer credit protection

III) How credit products can be shaped by law (examples )

IV) Summary: U.S./California versus Germany (GE)

Tool kit for powerful consumer credit protection

Addressees: Consumers + Lenders + Regulators

Admission of lenders: Who is entitled to be a creditor (lender of money) to consumers?

Disclosure: What information has a consumer to be furnished with, when and in which form?

Prohibitions: What terms and practices violate the law?

Contracts and legally

binding statements: Which form and content must contracts and associated statements have?

Supervision and

regulatory interventions: Is anyone out there to assist a consumer in trouble and to resolve her/his conflict?

Sanctions: What is a creditor´s “penalty” if violating consumer rights; what is the award/the compensation for the consumer whose rights have been violated?

Consumer Credit Protection: Structure of legislative approaches in detail (U.S.) (I)

Admission: Certain lenders of certain types of credit (i. e. loans of money) need a license.

Specific licenses may apply (subject to range of other products than credit offered, type of legal exemptions applied for e. g. sub-prime pricing, state vs. federal licenses etc.).

Even a “credit-only provider” needs to meet specific requirements (capital, reliability).

Consumer Credit Protection: Structure of legislative approaches in detail (U.S.) (IIa)

Disclosure: Public - Campaigns to prevent consumers from becoming a victim of predatory lending

- Publishing (e. g. www) regulatory findings and sanctions

Public/ - E. g.: A sanctioned lender must finance campaigns against predatory lending

private - If disclosing anything regarding credit offered, legal standards must be met (e. g.

further information to be given such as APR, specific text, kind of language, form of statement, conspicuous presentation in an advertisement/mailing etc.)