Newsletter
NEW RULES ON CONSUMER FINANCE
APR Disclosure Rules
In order to attract customers with lower headline interest rates, businesses often break down their interest charge into various charges, with the result that consumers may be unable to clearly recognize the true credit cost. To curb this practice, in February 2005 a new Article 22-1 was added to the Consumer Protection Act, re-quiring lenders to explicitly state in their adver-tisement an annual percentage rate (APR) based on the total interest and charges payable. Article 22-1 also empowers the competent authorities to stipulate related regulations.
The Financial Supervisory Commission and the Ministry of Economic Affairs have now jointly completed the Scope of Charges to Be Disclosed in Advertisement and Method for Calculating Annual Percentage Rates for Banking and In-surance Enterprises Engaged in Consumer Credit Transactions, and the Standard for the Scope of Charges to Be Disclosed in Advertisement and Method for Calculating Annual Percentage Rates for Leasing Enterprises Engaged in Consumer Financial Leasing Business (jointly referred to below as the "APR Disclosure Rules"). The APR Disclosure Rules will take effect from 1 January 2006, and will apply to housing pur-chase loans, loans for housing repairs, durable consumer goods (including housing and motor vehicles), tuition fee payments and other loans extended to individuals, credit card and cash card revolving credit transactions, and financial leasing transactions for consumption purpose.
The main criterion for determining which charges should be included for the purpose of the APR calculation is whether their payment is a mandatory requirement imposed by the lender, such that the consumer has no freedom of choice in their payment. For example, origination fees, risk management fees, and draw down fees all fall within the scope of total charges payable.
The APR Disclosure Rules define the scope of fees to be included in the APR calculation by exclusion; i.e., the fees other than the following should be taken into account when calculating the APR:
1.Fees arising from the failure of a consumer to fulfill his/her contractual obligations (e.g. penalties for late repayment).
2.Fees not mandatorily required by the lender/lessor and the payment of which is at the discretion of the consumer (e.g. scrivener fees).
3.Fees related to the repayment of the loan, of which the consumer is a direct beneficiary (e.g. premiums for fire or earthquake insurance on the loan collateral and fees related to the per-fection of security interest over collateral).
4.Fees that are not necessary for the consumer to obtain or repay the loan (e.g. credit insurance premiums not mandatorily required by the bank, interbank remittance fees when using an ATM to make repayments, and processing fees for replacement of lost cards).
Rules for Outsourced Marketing
Financial institutions often outsource the pro-motion of their loan and credit card business to other institutions, which in turn collaborate with appointed businesses (such as retailers of mo-torcycles, computers, electrical appliances, fur-niture, sports equipment, beauty products and services, travel services or other con-sumer-oriented goods and services) to provide the financial institution's loan agreements or loan application forms to consumers when they pur-chase goods or services from the appointed businesses. However, such practice may also easily lead to consumers' unwittingly entering into loan agreements with financial institutions and so that may give rise to disputes.
In September 2005, the Fair Trade Commission issued its Guidelines for Financial Institutions to Outsource the Marketing of Loan Business in respect of Consumer-Oriented Goods, in which it requires financial institutions to comply with the following requirements when they outsource the marketing of consumer loan business:
The loan agreement or loan application form must fully disclose that the nature of the transaction is a loan. The document should preferably be titled "Consumer Loan Agree-ment" or "Consumer Loan Application Form." In order to avoid consumers being misled into believing that they are applying for an in-stallment payment plan for the purchase price of the goods concerned, wording such as "In-stallment Payment Agreement" or "Install-ment Payment Application" or merely "Ap-plication Form" should not be used as titles of relevant loan documents.
Important information regarding the loan transaction, such as the name of the financial institution and the consequences of default should be prominently displayed in large or bold type on the front of the loan agreement or application form.
The aforementioned loan agreement or appli-cation form should be kept distinct from other documents such as installment payment pur-chase agreements, product or service sub-scription forms, etc.
The financial institution must require the outsourced institutions to ensure that proce-dures to verify customers' identity and to ver-ify that customers have personally signed the relevant agreements are correctly carried out so that borrowers may be fully aware that they are entering into a loan relationship with the financial institution.
Financial institutions must also comply with the above requirements when marketing consumer loans themselves.