Electronic Retail Lending in Estonia: Legal Limits on the Cost of Credit

In: Review of Central and East European Law
Author: Ingrid Ulst
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In 2009, a legal limit to the annual percentage rate of charge (APRC) was established in Estonia. The limit is 'soft' in its nature, allowing a lender to opt to exceed it; simultaneously, however, the burden of proof is placed on the lender who argues that such a lending transaction should not be declared void on the ground on the basis of being contrary to good morals. This article examines the legal function of the APRC limit and addresses the legal problems with regard to the nature and extent of the burden of proof; it also makes suggestions as to how lenders could comply with their legal obligation in respect of the burden of proof when engaging in their daily practice of electronic retail lending. The legal function of an APRC limit, which is linked to the market of consumer credit, is to reduce the willingness to conclude credit agreements in which mutual obligations are unreasonably out of balance. The author suggests that identifying the extent of the lender's burden of proof could be based on the principles of reasonableness and effectiveness. Accordingly, the lender would be reasonably expected to use due care to ensure the understanding and willingness of the borrower with regard to the lending transaction, and be convinced about the repayment ability of the borrower. The principle of effectiveness implies that, at a minimum, the extent of the lender's burden of proof should include the identification of a borrower profile and, furthermore, that due care should be exercised in such identification. As there are no legal directions about the meaning of 'due care' or the details of 'profile identification' in lending, the author suggests applying the analogy of law (e.g., the provisions of the 2001 Estonian Securities Market Act). On this basis, electronic retail lenders could attempt to identify the purpose of a loan, prior lending experience, education, profession, income, assets and obligations, payment discipline and repayment sources of the borrower in order to design good practices which, in turn, should assist lenders to comply with the obligations deriving from the legal limit of the APRC.

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