Extension temporary reduction of the maximum costs for consumer credit and other consumer credit market developments

By letter of 11 February 2021, the Dutch Secretary of Finance informed the Dutch Parliament in more detail about a number of (intended) developments with regard to the (Dutch) consumer credit market. In this contribution we highlight the main topics from the aforementioned letter.

Extension of the reduction of the maximum costs for consumer credit

In our news update of 20 May 2020, we informed you, among other things, about the intention of the Secretary of Finance to temporarily reduce the maximum costs for credit that providers of consumer credit may charge to consumers to approximately 10% (the annual percentage rate APR).

The decree introducing the new rules entered into force on 10 August 2020 (Decree) and relates to (a) new credits and (b) new drawings under existing revolving credit arrangements. The maximum APR effective before 10 August 2020 will continue to apply to loans already taken out where the outstanding balance expires.

The Decree would initially apply until 1 March 2021 and was one of many crisis measures related to corona. The Decree offers the Secretary of Finance the opportunity to extend the term of this crisis measure once by 6 months, which he now announces to do. The temporary reduction of the maximum credit costs will therefore apply until 1 September 2021 .

The Secretary of Finance has also announced that, if the consequences of the corona crisis give cause to do so, he will prepare a new decree on the basis of which the reduction can also be extended after 1 September 2021.

Payment arrears in mail-order loans, lending standards and the reduction of the threshold for mandatory verification of financial situation consumers

In his letter of 11 February 2021, the Secretary of Finance provided the Dutch Parliament with an update with regard to the figures from the Dutch Credit Registration Agency (Bureau Kredietregistratie BKR) on payment arrears in mail order loans. Mail-order loans are loans granted by mail order companies in the form of a revolving credit. Payment arrears can have a (long-term) adverse impact on consumers and the Secretary of Finance is of the opinion that this subject requires attention, partly in the context of one of the government's campaigns, the so called Broad Debt Approach.

The figures from the BKR show that the percentage of loans with payment arrears has decreased. A positive development. What remains worrying is the fact that credit agreements in arrears are often the older ones. Many of these loans have been part of receivable purchase transactions, whereby the receivables have been bought by debt purchasers (so-called NPL transactions) and are no longer dealt with by the originators. As a result, consumers continue to suffer from these problematic debts for a long time. The Association of Finance Companies in the Netherlands (VFN) currently examines, together with its members and other stakeholders in the credit management chain, how the percentage of old credit agreements in arrears can be reduced.

It has also been established that the loan amounts of the credit agreements in arrears are often less than EUR 1,000. This is the main reason for the Secretary of Finance to introduce regulations whereby the threshold of the mandatory verification of the financial situation of consumers is lowered to EUR 250. Currently this threshold is EUR 1,000. This means that providers of consumer credit are only obliged to verify the financial situation of a consumer when this consumer wants to take out a credit of EUR 1,000 or more. The Secretary of Finance wants consumer credit providers to test and verify whether the credit is in line with the financial situation of the consumer from as little as EUR 250. For providers of such "small" loans, this will cause an enormous increase in work (and compliance). They are recommended to prepare for these new obligations in good time.

Lending standards are paramount when it comes to preventing payment arrears and problematic debts. The VFN, together with the Dutch Banking Association, has further developed lending standards into codes of conduct. In addition, together with Nibud and the AFM, they have developed a new method for establishing a consumer's financial situation. This new method, for example, takes better account of the actual costs for childcare and e.g. a car, such as private lease and the financial impact of such lease agreements. The lending standards applying the new method will be effective from 1 April 2021.

Structural reduction of the maximum credit costs

In May 2020, the Secretary of Finance announced that he would investigate the pros and cons of structurally lowering the maximum credit costs. SEO Economic Research has recently conducted research on this topic. Based on the results of this study, it can be stated that a too large reduction of the maximum credit costs can have a negative impact on the market which on its turn can also work to the disadvantage of consumers. In short, further consideration will have to be given to the correct balance between the “desired and undesired” effects of a structural reduction of the maximum credit costs. A decision on this subject will have to be taken by a new government.

The Ploum Banking & Finance team will keep you informed of the developments regarding the consumer credit market. If you have any questions regarding this newsflash, please contact Matthijs Bolkenstein (m.bolkenstein@ploum.nl or +31646630866), Lucas Lustermans (l.lustermans@ploum.nl or +31619850096) or Joost Kool (j.kool@ploum.nl or +31610177339).