CELEX: 51988PC0201
Language: en
Date: 1988-05-02
Title: Proposal for a COUNCIL DIRECTIVE amending Directive 87/102/EEC for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit (presented by the Commission)

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DOCUMENTS "COM"
COM (88) 201
Vol. 1988/0062
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COMMISSION OF THE EUROPEAN COMMUNITIES
                                               COM(88 ) 201 final - SYN 132
                                               Brussels , 2 May 1988
                              Proposai for a
                            COUNCIL DIRECTIVE
  amending Directive 87 / 102 / EEC for the approximation of the laws ,
   regulations and administrative provisions of the Member States
                      concerning consumer credit
                    (presented by the Commission )
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                               EXPLANATORY MEMORANDUM
The Council adopted Directive 87 / 102 / EEC , concerning consumer credit , on
 22 December 1986 .
 Following Parliament 's Resolution concerning the Commission 's original proposal
 and Parliament 's suggestions for amendment of it ^\ the Commission issued an
 amended proposal in 1984 ^^ which, as desired by the European Parliament ^^,
 provided for the establishing of a uniform method of calculating the annual
 percentage rate of charge for credit .
 The ninth recital and Article 5 of Directive 87 / 102 / EEC of 22 December 1986
 duly anticipate the introduction of a Community method or methods of
 calculating the annual percentage rate of charge for credit .
 For the purposes of calculating the annual percentage rate of charge it is
 necessary :
 1 . to use a mathematical formula ;
 2 . to bring into account the various items of charge , including the interest .
 The Commission has had many discussions with government experts from all the
 Member States upon those two essential questions : mathematical formula and
 items of charge . There is at present no consensus on the latter point .
 As regards the mathematics , however , it appears that most Member States are now
 willing to take the necessary steps to require their lenders to use the
 actuarial method recommended by Professor E.S. Kirschen , the Commission 's
 consultant in the matter , in his Report dated 19 October 1984, which has been
                                                                                      ./.
 ( 1 ) OJ No L 42 , 12.2.1987 , p. 48
 ( 2 ) See in OJ No C 68, 14.3.1983, p. 91 the suggestions made by Parliament for
       amendment of the Commission 's original proposal published in OJ No C 80,
       27.3.1979, p. 4; also Parliament 's Resolution concerning that proposal , OJ No
       C 242 , 12.9.1983 , p. 10 .
 ( 3 ) OJ No C 183, 10.7.1984, p. 4 .
 ---pagebreak---                                                                                      2.
  widely distributed and discussed .
  The present proposal deals only with the mathematical aspect of the calculation .
 In so doing , it proceeds as follows :
 1 . Article 1 substitutes a new definition of "annual percentage rate of charge "
      for that contained in Article 1(2)(e ) of Council Directive 87 / 102 / EEC ("the
      principal Directive "). The new definition is as follows :
      "annual percentage rate of charge " means the total cost of the credit to
      the consumer , expressed as an annual percentage of the amount of the credit
      granted and calculated in accordance with Article 1A of this Directive ".
2 . Article 1 inserts into the text of the principal Directive a new Article ,
      numbered Article 1A , which reads as follows :
  " 1 . For the purpose of stating the annual percentage rate of charge for a
         credit the rate which equalises the present values of the prospective or
         actual commitments of the lender and borrower shall be calculated in
         accordance with the method set out in Annex II .
   2 . The annual percentage rate of charge shall be calculated at the time of
       concluding an agreement for credit .
   3 . The use in a Member State of a method of calculation other than that shown
        in Annex II shall be allowed only if the resulting annual percentage rate
        of charge does not diverge by more than one tenth of one per cent from the
        rate of charge yielded by the method shown in the said Annex .
   4 . In the case of credit on running account , the method of calculation shown
        in Annex II shall be applied on the basis of the assumptions mentioned
        in .Annex III ."
                                                                                ./.
                                                                                        3
 ---pagebreak---                                                                                         J
                                                                                        3.
       3 . Annex I of the principal Directive contains a list of "essential " terms of
           contract as mentioned in Article 4(3 ) of that Directive .
           Article 1 of the present proposal not only adds a new Article 1A to the
           principal Directive ; it also adds two further annexes to that
 y'i,
           Directive .   The first of these new Annexes ( Annex II of the principal
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           Directive ) indicates the mathematical method which is to be used in
           calculating the annual percentage rate of charge .
       4 - By virtue of paragraph 3 of Article 1(2 ) of the present proposal the use in a
           Member State of a method of calculation other than that one will be
           allowed only if the resulting percentage rate of charge does not diverge by
           more than one tenth of one per cent from the rate of charge yielded by the
           said method .
       5 . Article 1 of the present proposal adds a further Annex ( Annex III ) to the
           principal Directive .   This Annex indicates the assumptions which are to
           be made for the purpose of calculating the annual percentage rate of charge
           for credit in the case of a running account .
       6 . The present proposal revokes Article 5 of the principal Directive , which
           contains    interim provisions concerning the disclosure of the total cost
           of credit to the consumer .
       7 . The present proposal provides for implementation not later than 31 December 1992
The Directive is based on Article 100A of the Treaty and aims at a high level of
protection . It does not create special problems for less developed economies .
There is , therefore , no need to propose provisions appropriate to their case .
 ---pagebreak---                                   Proposai for a
                                COUNCIL DIRECTIVE
      amending Directive 87 / 102 / EEC for the approximation of the laws ,
       regulations and administrative provisions of the Member States
                          concerning consumer credit
THE COUNCIL OF THE EUROPEAN COMMUNITIES ,
Having regard to the Treaty establishing the European Economic Community , and
in particular Article 100a thereof ,
Having regard to the proposal from the Commission ,
In cooperation with the European Parliament ,
Having regard to the opinion of the Economic and Social Committee ,
Whereas it is desirable , in order to promote the establishment and functioning
of the internal market and to safeguard its consumers at a high level of
protection , that , despite the differences in development of certain economies ,
one method of calculating the annual percentage rate of charge for credit
should be used throughout the Community ;
                                                      1
Whereas Article 5 of Council Directive 87 / 102 / EEC   anticipates the introduction
of a Community method of calculating the annual, percentage rate of charge for
credi t ;
Whereas it is desirable , as a first step towards the establishing of such a
method , that an appropriate mathematical formula be laid down for the purpose
of calculating the annual percentage rate of charge ; whereas it is useful to
adopt common rules concerning such a formula , although the cost items which will
have to be taken into account in calculating the annual percentage rate of
charge remain to be determined ,
HAS ADOPTED THIS DIRECTIVE :
1 0J No L 42, 12.2.1987, p. 48 .
 ---pagebreak---                                      - 2 -
                                    Article 1              • i .··.· ;
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Council Directive 87 / 102 / EEC is hereby amended as follows :
    In Article 1(2)(e ) the definition of "annual percentage rate of charge "
    is replaced by the following :                          ,
    "annual percentage rate of charge " means the total cost of the credit to'
    the consumer , expressed as an annual percentage of the amount of the
    credit granted and calculated in accordance with Article 1A of this
    Directive ".
2.  The following Article is inserted :
                                 " Article 1a
    1.  For the purpose of stating the annual percentage rate of charge for
        credit , the rate which equalises the present values of the prospective
        or actual commitments of the lender and borrower shall be calculated
        in accordance with the method set out in Annex II .
    2.  The annual percentage rate of charge shall be calculated at the time
        of concluding an agreement for credit .
    3.  The use in a Member State of a method of calculation other than that
        shown in Annex II shall be allowed only if the resulting annual
        percentage rate of charge does not diverge by more than one tenth of
        one per cent from the rate of charge yielded by the method shown in
        the said Annex .
    4.  In the case of credit on current account , the method of calculation
        shown in Annex II shallbe applied on the basis of the assumptions set
        out in Annex III ."
3.  Article 5 of the said Directive is repealed .
4.  The Annex becomes Annex I.
    Annexes II and III in the Annex to this Directive are added .
                                                                                έ
 ---pagebreak---                                 Artide 2
Member States shall take the necessary measures to comply with this Directive
not later than 31 December 1992 and shall forthwith inform the Commission
thereof .
Member States shall communicate to the Commission the texts of the main
provisions of national law which they adopt in the field covered by this
Directive .                                                                 \
                                                                            I
                                Article 3
This Directive is addressed to the Member States .
Done at                                                 For the Counci l
 ---pagebreak---                                               Annex
                                           " Annex II
                                    The method of calculation
 The general formula                                               A simple illustration
 The lender advances a sum S                      S  = 1 000 ECU
 Borrower repays in n payments , numbered          Two repayments : 1 and 2
 1,2,3 _ k . n                                               n = 2
                                                   of 600 ECU each
 These payments are not necessarily of             The payments are of equal amount
equal amount , nor are the intervals
between them necessarily of equal length .
 The dates to be considered are the date of
the loan and the dates of the repayments .
Payment k is made t^ years after the               The payments are made at equal intervals ,
date of the loan (^ being no t necessarily        after one and two years , respectively ;
a full number ).
                                                  t ^ = 1 and t ^ = 2
The effective annual rate is i                    The effective annual rate is i
The equation which equalizes the present          The equation then appears as follows :
values of the loan and repayments by the
borrower is as follows :
                                                  1.000      600   L   600
                                                           ( 1+i )   ( 1+i ) 2
   S =  2.
        n = 1       ( 1+i ) t k
This enables i to be calculated    provided       The loan = the present value of the first
                                                               payment plus the present value of
the amounts of payments A^ are all known .                     the second payment .
                                                  This is a quadratic equation with i , which
                                                  can be solved by algebra : i = 0.1306623 ...
                                                  This can be rounded off to i = 13.1 or 13.07
                                                  depending on whether the State , or usage
                                                  permits a margin of tolerance of 1 or 2
                                                  decimal points .
Inversely , the amount of a repayment can         If the payment at the end of the first year
be calculated in this way if one knows the       was reduced from 600 to 500 ECU , and if i
amounts and dates of other repayments , and      was rounded off to 13.1 % , payment at the
the effective annual rate i .                    end of the second year would be 713.66 ECU
                                                  ( linear equation )
 ---pagebreak---                                     Annex III
Adaptation of the method of calculation shown in Annex I to the case of
running account credit
Where the annual percentage rate of charge is to be indicated in relation
to an agreement for credit on a current account , the following assumptions
shall be made :
( a ) the rate of interest does not change ;
Cb )   Ci )    if there is no fixed timetable for payment , the duration of the
               credit is one year ;
       ( ii ) if there is a fixed timetable for payment , it is observed by
               the borrower ;
le )     ( i ) if the agreement spécifiés a crédit limit , the crédit granted is equal
               to that limit ;
       ( ii ) if no credit limit is stated i-n the agreement, the credit granted is
               equal to the amount fixed by the relevant Member State , not
               exceeding 200 ECU ;
(d)    unless otherwise specified , the credit is , made available and the payments
       are made at the earliest moment provided for in the agreement ."
 ---pagebreak---                        COMPETITIVENESS AND EMPLOYMENT IMPACT STATEMENT
   PROPOSA- FOR A DIRECTIVE ON THE AWUAL PERCENTAGE RATE OF CHARGE FOR CREDIT ( 1 )
    I.      What is the main reason for introducing the measure ?
            To institute a uniform method of calculation of the annual percentage rate of charge for
 XX .       Features of the businesses in question .                 In particular .
           »( a ) Are there many SMEs ? Yes
            ( b ) Have any mergers been noted in any regions which are .
                    ( S ) eligible for regionsi sid in the Member Ststes ? NO
                  ( ii ) eligible under the ERDF ? ^
III .       What direct obligations does this measure impose on businesses . Mien granting
            credit, to use the mathematical method specified in the proposal for a directive when calcu¬
            lating the rate of charge which the consumer-borrower will pay . There will be initial *
 IV .       What indirect obligations are local authorities likely to impose
            on businesses ?
                   None
    V.      Are there any special measures in respect of SMEs ?                       No
            Please specify . No
                                                                                                          /
                                                                                                         /
 VI .       What is the likely effect on :
             ( a ) the competitiveness of businesses ? They will become more conscious of price
                    competition
             ( b ) employment ? Nil <
VII .       Have both sides of industry been consulted ? Yes
            Please indicate their opinions - There is general agreement that the measure is
            sensible, realistic and totally appropriate both for , and in seeking to create, a single
            market .
  ( 1 ) The exact title is : Proposal for a Directive to amend Council Directive 87/102 / EEC of
        22/12/1986 for the approx i (ration of the laws, regulations and administrative provisions of
        the Member States concerning consumer credit .
        Council Directive 87/102/EEC anticipates, expressly, the present proposal on APR calculation .
     • *inccnvenience for lenders until they are familar with the method . No costs are involved .