Consumer Credit: An Overview

Consumer Credit Preface

• In consumer credit operations, the client/consumer is generally in a weaker position as described in articles 121-126 of the Consolidated Law on Banking.
• The legislation's scope has been redefined following legislative decree 141/2010 amending the Consolidated Law on Banking.
• A loan contract is an agreement where a lender grants or promises credit through deferred payment, loan, or other financial facilitation, authorized to disburse loans professionally within the Italian Republic.
• A consumer in this context is defined as a physical person acting for reasons unrelated to business, commercial, artisan, or professional activities.

Consumer Credit Taxonomy

• Personal Loans provide funds directly to the borrower with a fixed maturity and repayment schedule.
• Special Purpose Loans are linked to purchase contracts for consumer goods like cars or household appliances, or for services.
• Revolving Credit Facilities, often on swipe cards, replenish credit as repayments are made.
• One-Fifth of Salary Deducted Loans are personal loans for public and private employees, with payments deducted from a maximum of one-fifth of their monthly wage.

Consumer Credit Common Features

• Interest charges and any expenses are repaid in installments but excludes real estate mortgages.
• Loan contracts are documented on paper or another durable medium, with information and conditions as per the Bank of Italy and the CICR.
• Clients receive a copy of the contract, as per art. 125-bis, par. 1.
• The Annual Percentage Rate (APR) is the total cost of credit to the consumer, expressed as an annual percentage of the granted loan, as defined in art. 121.
• It includes interest, fees, taxes, and other costs, but excludes notary fees.
• Lenders cannot demand or charge sums not expressly in the contract, as per art. 125-bis.

APR Calculation & Exclusions

• APR represents the ratio that equates the sum of disbursed loan amounts to the sum of repayment rates on a yearly basis.
• The Bank of Italy, in line with CICR's del, sets the APR calculation method, assuming the loan remains valid and all terms are fulfilled.
• Penalties for non-fulfilment of contractual obligations, including interest, are not included in the APR calculation.
• Costs (beyond the purchase price) paid at the time of purchase are also excluded, regardless of payment method.

Consumer Credit Regulations & Consumer Protection

• Advertisements must present essential information clearly, concisely, and prominently, as per art. 123.
• Lenders or intermediaries must provide consumers with all necessary information to make informed decisions, as detailed by the Bank of Italy (art. 124).
• Lenders assess consumer creditworthiness before contract conclusion, using consumer-provided or database information (art. 124-bis).
• Consumers have the right to withdraw from the contract within 14 days from its conclusion, or from when all legally required information is received (art. 125-ter, art. 125-bis, par. 1).

Standardized Contractual Forms

• Direct Financing (direct consumer credit) involves the client applying for credit without the lender scrutinizing how the funds will be used.
• Special Purpose Financing provides a specific sum for a determined good where the lender pays the seller directly.
• Often the seller applies for the loan for the purchased goods, making it indirect consumer credit.
• One-Fifth of Salary Deducted Loans is repaid through a deduction that lenders favor due to lower risk from insurance covering employment or mortality risks, with the employer acting as guarantor.
• Deferral of Payment via Credit Card allows the credit to be used again in the future as repayment reconstructs the credit.

Real Estate Loans to Consumers

• A new discipline from the lender applies to contracts granting consumer loans, especially mortgage loans.
• The loan is guaranteed either with a lien on property rights or other real rights like usufruct on a residential property.
• Loans relating to the purchase or conservation of property rights for housing (art. 120-quinquies, par. 1, letter c) of the Consolidated Law on Banking also apply.
• A specific framework exists for advertisements.
• There is a complex system of pre-contractual obligations safeguards for the lender, including credit intermediaries.
• A clear document with general information should be available to the consumer.
• The European Standardized Information Sheet (ESIS) can be adapted to provide personalised comparisons.
• A consumer reflection period of at least 7 days to study an offer and a loan is to be made available for consideration.
• Adequate explanations are required across offer and additional services.

Real Estate Loans to Consumers: Lender Responsibilities

• Lenders must thoroughly assess a consumer's current and future capacity to repay the loan.
• Property valuation must be impartial and objective.
• Consulting services can only be offered by lenders and credit intermediaries.
• All consulting recommendations must be personalized.

Real Estate Loan & Client Defaulting

• Client defaulting is managed through a two-phase model.
• Intermediaries must proactively manage relations with clients in difficulty.
• Legislation introduced instruments to speed up the enforcement of security.
• Specific clauses state that if a client defaults, the surrender or sale of the real estate asset will extinguish debt, even if the value doesn't cover the full amount.
• There are strict conditions for inserting this clause, including the lender not making the contract signing conditional, default defined as non-payment equivalent to 18 monthly installments.
• This clause cannot be agreed upon in subrogation, the consumer assisted by a consultant to assess its benefits, and an expert shall have been appointed by a high court judge.

Special Loans Distinguishing Features

• Real Estate or Land Loan is a medium to long-term credit line granted by a bank with a ranking based on mortgage.
• The CICR set the maximum loan to 80% of mortgaged assets or work costs, which can rise to 100% with additional guarantees.
• Liens are non-eligible for bankruptcy claw-back action if registered 10 days before bankruptcy declaration.
• The debtor gets a proportional reduction of the registered sum of money for every fifth part of the debt extinguished.
• There’s a reduction of notary and mortgage registration costs.
• Automatic extinction of the collateral will occur on the maturity date of the loan.

Other Special Loans

• Public Works Loans are used to finance public facilities, with special liens.
• The law references real estate loans when liens are guaranteed.
• Agricultural Loans are for agriculture or livestock farming.
• Fisheries Loans are for that purpose or related ancillary activities like agritourism.
• Agricultural and fishery loans typically use amortization at fixed annual installments, often with subsidies, and bills of exchange are issued for the loan rate.

Overview of Subsidized Loans Scheme and Subsidizing Bodies

• Financial concessions/subsidies are selectively given, or "across-the-board," a way the State and Regions intervene in the economy.
• There are three parties to subsidized loans: subsidizing, lending entities and beneficiaries.
• Subsidizing bodies assess applications, decide on admissibility, and disburse grants through financial intermediaries, and include the State, Regions, Autonomous Provinces, and supranational entities.
• Lending entities usually act as mediators between the subsidizing body and the beneficiary, where all banks can disburse subsidized funding within a contract with the public administration.

Beneficiaries & Criteria for Subsidized Loans

• Beneficiaries are recipients of loans and based on established ad-hoc law provisions.
• The basic criteria are: belonging to specific economic sectors (Industry, Trade, Agriculture, Construction, Artisan, Transport, etc), geographical location (North, Center, South), Company size (small and medium enterprises), and the type of investment to be financed.

Subsidized Loans - Reference Models

• Two methods of incentives exist for Low-Interest Loans; (1) the loan is concurrent with the subsidy application, but it is completed at “market conditions”.
• If admissible, the low-interest loan reduction occurs and has the same value date as the disbursal date or the acceptance date by the subsidizing body.
• (2) The loan is completed (from the start) at a subsidized rate where the loan doesn't disburse until the subsidy application's eligibility is confirmed.
• Intervention in capital allocation generally occurs through capital grants, used for both investments and specific costs.
• The application is made directly by the beneficiary to the subsidizing body and then approved.

Subsidized Loans – Fee & Share Capital Intervention

• Fee Intervention is the new subsidy introduced, which reduces a periodic service fee related to a leasing operation.
• The body provides an annual payment to the leasing company, reducing what the beneficiary owes.
• Alternatively, the entire amount can be paid to the beneficiary in one go, but the original service fee amount must remain unchanged.
• Intervention in share capital: Grant disbursed to beneficiary to facilitate or subsidize the capitalization process. Two ways of intervention:
• (a) The allocation body disburses the grant to a financial intermediary, which in turn transfers it to the beneficiary as share capital to become a shareholder.
• (b) The grant is disbursed directly to the beneficiary to increase their equity stake and shareholder.

Subsidized Loans – Other Reference Models

• Grants for current expenses are applied for determining the beneficiary company's taxable income.
• Intervention in pledge accounts aims is to facilitate access through incentivizing training, development and replenishment of specific funds established within the subsidizing body.
• The main focus here is to create SME consortia for the collective guaranteeing of credit (“Confidi”).
• Financial leverage is leveraged through recognizing a tax credit equal to production costs for investments, which can be used in the liquidation of various taxes (corporate income tax, regional business tax and VAT).