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What is abusive lending?

Abusive lending can manifest itself in various loaning practices and at different phases of the lending process:

• It can begin at the marketing stage and include aggressively pursuing vulnerable groups, like minorities and the most financially desperate. This is also called “predatory lending.”

• Abusive lending may entail misleading or false advertising of loan products and lenders failing to ensure that borrowers can afford loans through, for instance, proper credit assessment. This is also referred to as “reckless lending.”

• At the contract formation stage, abusive lending may take place through contracts that contain misleading or unfair terms or otherwise violate the law by, for example, omitting key terms.

• Abusive practices can also take place in the enforcement of loans, regardless of the propriety of the initial agreement. This may be the case when lenders harass borrowers in arrears or when courts order evictions even if loan agreements contain unfair terms. 

Abusive lending violates human rights

Abusive lending can compromise fundamental rights protected under European Union legislation, including the EU Charter of Fundamental Rights and the Directive on Unfair Contract Terms, as well as under other human rights instruments.

Some of the rights enumerated under the EU Charter of Fundamental Rights that abusive lending practices could violate include:

• the right to human dignity (Article 1);

• the right to respect for private and family life (Article 7);

• the rights of the elderly (Article 25);

• integration of persons with disabilities (Article 26);

• the right to family and professional life (Article 33);

• the right to social security and social assistance, including housing assistance, so as to ensure a decent existence for all those who lack sufficient resources (Article 34);

• the right to a high level of consumer protection (Article 38);

• the right to effective remedy and to a fair trial (Article 47).

When national courts in Europe adjudicate lending cases, they are supposed to carry out an assessment of the fairness of contractual terms. In repossession cases, courts are also supposed to conduct a so-called proportionality test to determine whether individuals’ fundamental rights are violated. But they have not typically done either.

As a result, legal action may be warranted when borrowers’ fundamental rights are ignored.

Abusive lending contributes to excessive indebtedness

Abusive lending has contributed to excessive indebtedness in Europe.

According to the European Economic and Social Committee, a consultative body of the European Union, certain abusive lending practices—such as “abusive clauses, misleading advertising, aggressive door-to-door selling” of loans—have been part of the problem of over-indebtedness. The committee recently concluded that excessive indebtedness has become so widespread on the continent that incidents of over-indebtedness are not “the problem of an individual” anymore but “they reflect a social and societal crisis.” 

Precise figures are not available, as there is no agreed definition of “excessive indebtedness” and official statistics often lag by a number of years. But some recent key findings include:

• In 2011, 11.4% of those surveyed for the EU income, social inclusion and living conditions survey (EU-SILC) reported being in arrears on rent, mortgage, utility, or loan payments due to financial difficulties over the previous 12 months.

• From 2012 to 2013, the proportion of people in the EU incapable of making payments related to utility bills and to their rent or mortgage increased. For example, the proportion of households that reported having been in arrears at any time during the prior 12 months just in terms of rent, mortgage or other accommodation was 13% of the households with their own mortgage (a 3% increase), 16% of households paying rent to private landlord (a 1% increase) and 17% of households paying rent in social/voluntary/municipal housing (a 1% increase), according to the European Foundation for the Improvement of Living and Working Conditions.

• Job losses and austerity have increasingly lead people to rely on credit to satisfy basic needs. People in such a position are effectively economically marginalized, and therefore, particularly susceptible to falling into excessive debt through abusive lending practices. “Vulnerable population groups are worse affected by debt as they do not have access to all forms of credit owing to their poor creditworthiness” and “are directed towards the most costly options,” the European Economic and Social Committee found.