Incorrect APR in contracts: a costly error
The Supreme Court recently ruled on the issue of an incorrectly calculated annual percentage rate of expense (APR) in a consumer credit contract: if the APR is stated in the contract in an incorrect amount, this constitutes a breach of the information duty. This may result in the credit providers having to apply a significantly lower interest rate, or, possibly having to return the already paid interest to the customer.
The Consumer Credit Act gives a list of obligatory information that a consumer credit contract has to contain for the sake of consumer protection. The APR has to be included in this essential information. A case dealing with an incorrect amount of APR in a contract was addressed by the Supreme Court in its recent ruling. The credit provider demanded the client repay the principal amount of a credit and contracted interest. The customer (defendant) in turn claimed that the credit provider did not have the right to collect the interest as the amount of APR had been misstated in the consumer credit contract.
In its ruling, the Supreme Court concluded that the only way a credit provider can comply with its duty to state the necessary information in the contract is by providing all the required data in a complete and accurate manner. Should the credit provider miscalculate the APR or intentionally misstate its amount, statutory duties have not been met. Such error on the part of the credit provider is penalised by law by imposing a CNB discount rate of interest on the credit (instead of the contracted rate of interest), and by rendering invalid any arrangements regarding other payments for the consumer credit (such as a fee for opening the credit). In the case before the Supreme Court, this would mean that, instead of a contracted interest rate of 25% p.a., the consumer credit would bear a CNB discount rate, which has been about 0.05% p.a. for years. The credit provider would thus have to return to the customer all interest already paid in excess of the 0.05% rate, plus all other payments made by the client apart from the instalments on the principal amount.
The decision may have very unfavourable implications for credit providers: if they fail to state the obligatory data in the consumer credit contract or state them incorrectly, they will have to deal with the clients requesting refunds of contractual interest paid in excess of the CNB discount rate, and of other payments for the provision of the credit.