Consumer Loan Agreements

In the joined cases of Banco Santander SA v. Demba and another (Case C-96/16) and Cortes v. Banco de Sabadell SA (Case C-94/17), the European Court of Justice (ECJ) considered the application of the Unfair Contract Terms Directive (Directive) in two joined cases concerning the rate of default interest in consumer loan agreements, which were referred by the Spanish courts.

The Unfair Contract Terms Directive

The Directive protects consumers from unfair terms included in contracts. In Spain, the Directive is implemented into national law via the LGDCU (Ley General para la Defensa de los Consumidores y Usuarios y otras leyes complementarias (Royal Legislative Decree 1/2007)). The LGDCU provides that the test of fairness can be applied to all terms not individually negotiated and all practices not expressly agreed. A term may be deemed unfair if it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.

Facts of the cases

The ECJ was asked to provide a preliminary ruling on certain questions referred by the Spanish courts in two joined cases:

(i) In the first case, the default interest rates on unsecured loan agreements (concluded between individual borrowers and Banco Santander) were 18.50 per cent and 23.70 per cent, compared to ordinary interest rates of 8.50 per cent and 11.20 per cent, respectively. After the borrower’s defaulted, the bank sought enforcement of its claim by assigning its debt to a third party in accordance with Spanish law.

(ii) In the second case, an individual’s mortgage loan agreement with a bank provided an ordinary interest rate of 5.5 per cent per annum, which was subject to change after the first year, and which was 4.75 per cent at the time of the main proceedings. The default interest rate was 25 per cent per annum. The consumer argued that this was unfair.Continue Reading ECJ ruling on fairness of disproportionately high default interest rate in consumer loan agreements