2012 12 MEP Letters To EUR COM ESA and Replies

UNIVERSITY OF ICELAND
SCHOOL OF SOCIAL SCIENCES
FACULTY OF LAW
M. Elvira Mendez Pinedo. Professor of European law.

Lgberg 306. University of Iceland. Tel. + 354 5255224. E-mail: mep@hi.is
To the European Commission

Attention: Commissioner Tonio BORG- Health and Consumer Policy and Commissioner tefan FLE Enlargement and European Neighbourhood Policy
Copy to EFTA Surveillance Authority
Reykjavk, 3 December 2012
rd
Reference: European consumer credit and mortgage law. Petition to the European Commission to
assess the legality of the price-indexation practice in Iceland (vertrygging) in the light of Directives
2008/48/EC as recently modified, Directive On Unfair Contract Terms 1993/13/EEC, Directive On
Unfair Commercial Practices 2005/29/EC and general principles of consumer credit law.
Dear Mr. BORG and Mr. FLE,
As a researcher specialised in the field of European consumer law and currently working on
consumer credit and mortgages issues, I have been requested by the Icelandic Parliament to issue a
legal opinion and give advice on the compatibility with European Law of the newest Icelandic
legislative proposal on consumer credit law submitted by Minister Steingrmur J. Sigfussn .
1
Following my research I have a strong conviction that the legislative proposal - which intends to
incorporate Directive 2008/48/EC to the domestic legal order conciliating the duty to disclose
information about financial commitments ex-ante (total cost of credit and APCR rules) with an
Icelandic unique practice of indexation of the principal of the loan to the consumer price index a
posteriori does not in fact comply with some fundamental requirements of European consumer
credit law as it is understood and constructed by EU institutions. In this letter i request the
Commission to give guidance concerning several issues. Before submitting some questions I will
explain the background of the problem.
See proposal in Icelandic at http://www.althingi.is/altext/141/s/0228.html

1
Logberg v. Sudurgotu 101 Reykjavik Telephone: (+354) 525 4376 Fax: (+354) 525 4388 * lagadeild@hi.is www.lagadeild.hi.is
FACULTY OF LAW
1. Icelandic legislation and the equal treatment of secured and non-secured loans for consumer
protection purposes
Since December 2000, Icelandic legislation gives identical consumer protection to all loans both
secured (mortgages) and non-secured (credit). The intention of the legislator is thus to continue to
afford identical protection to all credit extending the scope of Directive 2008/48/EC. This is allowed
by EU/EEA law as the latest case-law from the European Court of Justice confirms. The legislator also
intends to increase the level of consumer protection regarding small loans and setting interest caps
to prevent usury which I also understand as complying with EU/EEA law as it is left to their discretion.
2. European legislation on the definition, method, formula to disclose total cost of credit in the way
prescribed by Directive 2008/48/EC
Directive 2008/48/EC on consumer credit law, the Directive On Unfair Contract Terms 1993/13/EEC,
the Directive On Unfair Commercial Practices 2005/29/EC, the proposal on credit for residential
property COM(2011)142 as well as the general principles of consumer law established by the Court
of Justice of the European Union define the framework of legal obligations for EU/EEA Member
States regarding the information disclosure duties, the methodology used to calculate total cost of
credit and Annual Percentage Rates of Charge and the prohibition of abusive clauses in detriment of
consumers.
The most recent legal argumentation of the Commission on full harmonisation, consistency and
interpretation regarding "total cost" of credit is the following:
For reasons of legal certainty, the Union framework in the area of credit agreements relating to
residential immovable property should be consistent with and complementary to other Union acts,
particularly in the areas of consumer protection and prudential supervision. Essential definitions of
terms such as 'consumer', 'creditor', 'credit intermediary', 'credit agreements' and 'durable medium'
as well as key concepts used in standard information to designate the financial characteristics of the
credit, such as the total cost of the credit to the consumer, the total amount payable by the consumer,
the annual percentage rate of charge and the borrowing rate, should be in line with those in Directive
2008/48/EC so that the same terminology refers to the same type of facts irrespective of whether the
credit is a consumer credit or a credit relating to residential immovable property. Member States
should therefore ensure in the transposition of this Directive that there is a consistency of application
and interpretation.
2
In order to promote the establishment and functioning of the internal market and to ensure a high
degree of protection for consumers throughout the Union, it is necessary to ensure the comparability
of information relating to annual percentage rates of charge throughout the Union. The total cost of
the credit to the consumer should comprise all the costs that the consumer has to pay in connection
with the credit agreement, except for notarial costs, It should therefore include interest, commissions,
taxes, fees for credit intermediaries and any other fees as well as the cost of insurance or other
ancillary products, where these are obligatory in order to obtain the credit on the terms and
COM (2011) 142 on p. 16 (recital 11). 52

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FACULTY OF LAW
conditions marketed. As the annual percentage rate of charge can at the pre-contractual stage be
indicated only through an example, such an example should be representative. Therefore, it should
correspond, for instance, to the average duration and total amount of credit granted for the type of
credit agreement under consideration. Given the complexities of calculating an annual percentage
rate of charge (for instance, for credits based on variable interest rates or non-standard amortisation)
and in order to be able to accommodate product innovation, technical regulatory standards could be
employed to amend or specify the method of calculation of the annual percentage rate of charge. The
definition of and methodology used for calculating the annual percentage rate of charge in this
Directive should be the same as those in Directive 2008/48/EC in order to facilitate consumer
understanding and comparison. Those definitions and methodologies may, however, differ in the
future should Directive 2008/48/EC be modified at a later date. Member States are free to maintain or
introduce prohibitions on unilateral changes to the borrowing rate by the creditor.
3
As the European Commission explains in the website the application of Directive 2008/48/EC is not
easy and some guidance has been given on several questions.
To help Member States to correctly apply the Consumer Credit Directive, the Commission published
on 8 May 2012 Guidelines on the application of the Directive 2008/48/EC in relation to costs and the
Annual Percentage Rate of charge. They provide comprehensive explanations how to delineate the
total cost of credit, in particular to be included in the calculation of APR, and how to apply
assumptions
as
amended
by
the
Directive
2011/90/EU
(http://ec.europa.eu/consumers/rights/docs/guidelines_consumer_credit_directive_swd2012_128_en
.pdf)
The Commission has published a final report of the study which adapts the examples to Directive
2008/48/EC and the products marketed in the EU. It explains the calculation method and the way the
cost of the credit and anatocism are reflected in the APR, together with the analysis of the
assumptions used for the calculation of the APR, The report presents an analysis of the regulatory
framework, the technical and financial aspects of the APR and the reality of the market for consumer
credit agreements in the EU areas with respect to the relevant aspects regarding the disclosure and
calculation of the APR. It provides a new set of examples for the calculation of the APR and extends
the possibilities of obtaining the APR on consumer credit agreements for interested parties by
providing an Excel simulator for the calculation of the APR coherent with the new Directive
(http://ec.europa.eu/consumers/rights/docs/study_APR_en.pdf)
A simulator was developed as part of APR study. It can be used until 31 December 2012 when the one
adapted
to
Directive
2011/90/EC
will
be
available
(available
at
http://ec.europa.eu/consumers/rights/fin_serv_en.htm)
3. An example of a loan with price-indexed principal as usually calculated in Iceland
Please see the example provided in the document annexed entitled "The explosive loan machine" by
Gumundur sgeirsson from the consumer association Samtk heimilanna (Association of Homes
www.heimilin.is)
COM (2011) 142 Recital (23) on p. 19

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FACULTY OF LAW
In this example we clearly see how a principal of 20 million ISK, with an interest rate of 4,5% and
inflation of 5,98% gives way to a final payment of 169,127,914 ISK.
With a consumer price -indexed loan and annuity repayment plan, as calculated by Icelandic banks
the payments done after 40 years are:
Total payments based on indexation of credit calculated a posteriori: 83,946,153
Total payments based on capital: 103,946,153
Total payment for interest: 65,088,161ISK
Invoice fees: 93,600
Grand total of 169,127,914
What is interesting to note is the methodology followed.
3.1. Creditors are allowed by a Regulation of the Central Bank to do unilateral changes to the
principal of a loan borrowed a posteriori and to the borrowing cost of capital also a posteriori. The
Icelandic methodology to charge interest is therefore to continuously update the principal and
interest payments with real inflation rather than to offer financial credit with nominal interest rates
predicted beforehand.
3.2. Please note that Icelandic Act on interest and indexation 38/2001 only allows indexation of
payments so that, in my view, the regulation of the Central Bank goes beyond the scope of the law
and so do financial institutions when they engage in this practice.
3.3. Please note that consumers are usually not informed at the precontractual stage of the impact of
future inflation upon their contracts. Sometimes the inflation is announced as 0%. Some other times
it is left for the consumer to predict future inflation.
3.4. The methodology of calculating inflation affecting the principal of the loan and the payments is
an index elaborated by the Statistical Office of Iceland which reflects 3 year previous inflation. The
Index for mortgage payment adjustment 2008-2012 can be accessed and calculated at the webpage
http://www.statice.is/Statistics/Prices-and-consumption/Wage-index
3.5. In fact, when consumers commit to their future financial obligation they ignore the future total
amount of credit and the future cost of the credit as inflation is unpredictable and the methodology
to update both principal and indexation costs with inflation (real interest) is opaque and not
disclosed.
3.6. This methodology of price-indexation a posteriori is used for the so-called price-indexed loans
concerning credit (ie. car loans) or residential property (ie. mortgages).
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FACULTY OF LAW
3.7. Please note that, in spite of this practice of ex-post price indexation of financial obligations to
charge for real inflation a posteriori, financial institutions also charge for interest (fix or variable). For
instance,
Icelandic
House
Financing
Fund
offers
interest
rates
of
4,20
or
4,70%
http://www.ils.is/einstaklingar/kjor-og-kostir/lan-ibudalanasjods/). Financial institutions charge for

nominal interest calculated before hand and, at the same time, for real interest calculated a
posterior. They charge two times for interest in a different way.
4. Questions for the European Commission
A firm and clear reply from the services of the European Commission is requested on these questions
as the Directive 2008/48/EC is a maximum harmonisation measure on issues such as the total cost of
credit and APCR rules:
1. When EU/EEA law refers to the total cost of credit, does the terminology and hypothesis refer to
the repayment of the principal borrowed plus a nominal interest previously agreed between creditor
and debtor
or to the repayment of the principal borrowed plus a real interest calculated with
inflation after the signature of the loan agreement?

2. Can EU/EEA Member States allow for the calculation of cost of credit outside the APCR rules?
2. Does European law allow creditors of non-secured credit falling under Directive 2008/48/EC to do
unilateral changes to the principal of a loan borrowed a posteriori in order to update that principal
with inflation? What about unilateral changes to the payments of a loan done a posteriori in order to
update those payments with inflation?
3. Can EU/EEA Member States introduce by law permissions for creditors to do unilateral changes to
the principal of a loan borrowed a posteriori for non-secured credit falling under Directive
2008/48/EC which updates that principal with inflation and regularly consolidate interest non paid
through negative amortisation into unpaid capital (minimum payment of interest similar to revolving
credit card schemes which leads to anatocism -interest on interest)?
the borrowing cost of capital a posteriori in any other way for non-secured credit falling under
Directive 2008/48/EC?
the borrowing cost of capital a posteriori for non-secured credit falling under Directive 2008/48/EC if
the price-indexation affects only the payment of interests (as current Icelandic Act 38/2001 states)?
6. In case reply to question 1-5 is affirmative, how would this price-indexation affecting both
principal and payment of interests (charge of real interest calculated a posteriori) could be disclosed
to consumers through the formulas on total cost of credit and Annual Percentage Rates of Charge in
advance and in a transparent way so to comply with Directive 2008/48/EC as recently modified?
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FACULTY OF LAW
7. Is it possible for financial institutions to charge two times for interest (1) through nominal interest
rates previously disclosed and 2) through indexation of principal and/or payments to real inflation
done a posteriori?
8. What is the current margin of manouver for regulating information duties on total cost of credit in
residential property credit? Can EU/EEA Member States introduce by law permissions for creditors to
do unilateral changes to the principal of a loan and/or to the borrowing cost of capital a posteriori
(through consumer price-indexation clauses) for secured credit falling under new Proposal COM
(2011) 142 for credit on residential property?
9. On one hand, the Directive On Unfair Contract Terms 1993/13/EEC and the Directive On Unfair
Commercial Practices 2005/29/EC contain a general ban and prohibition of abusive clauses in
contracts and commercial practices with an explicit requirement of fairness. Abuse is defined by lack
of balance between rights and obligations in contracts in detriment of consumers.
Misleading
information is considered abusive practice. The ECJ has declared that terms that are found unfair
under the Directive are not binding for consumers (see CJEU, among others Case C-240/98 Ocano
Grupo Editorial SA v Roci Murciano
Quintero)
On the other hand, it is a proven fact and widely recognised in Iceland that price-indexation of credit
and mortgage as it is currently practiced by financial institutions passes all the risk and consequences
of inflation to consumers who cannot protect/insure themselves against this risk. Contrary to Europe,
creditors are the only parties secured against inflation through real interest rates (which they charge
together with nominal rates). Financial institutions are therefore not encouraged for responsible
lending and debtors end up inevitably overindebted which is not responsible borrowing.
Questions:
9.1. Is the price-indexation of the principal of a loan and the borrowing cost of capital with an opaque
and non-disclosed method of calculation which guarantees a claim on real interest rate calculated
unilaterally by creditor after the signature of the contract -together with other interest rates- an
abusive clause in the light of European law?
9.2. As calculation of future inflation and its impact on the total amount of credit and total cost of
credit cannot be disclosed in advance, are creditors who do not disclose the impact of future inflation
giving misleading information to consumers?
9.3. Does European law allow national legislators to justify abusive clauses through information and
disclosure requirements?
5. Why guidance is needed specifically from the European Commission regarding application of
Consumer Credit Directive.
In view of the complexity of the European legislation and the difficulty to adapt Icelandic business
practices to the requirements of the EU/EEA internal market,it is thus essential to clarify the issue
6
FACULTY OF LAW
before the legislator takes a final decision. The reasons why I address this petition to the European
Commission are the following:
Icelandic consumer credit legislation has to be nevertheless assessed by the European
Commission in the framework of the accession negotiations to the EU now in progress.
It is too early to send a formal complaint to the EFTA Surveillance Authority (ESA) while the
legislation is under preparation. At the same time, the ESA has already started an
infringement procedure against Iceland for the late incorporation of Directive 2008/48/EC to
the domestic legal order.
Recent experience with the problem of illegal foreign-indexed loans in Iceland shows that the
EFTA Surveillance Authority unfortunately does not have the same research capacity, historic
memory and overview of the situation in 30 EEA Member States concerning consumer credit
and mortgage law. Their competences under the EEA Agreement are more limited regarding
fundamental rights and do not enjoy a presumption of compliance with the European
Convention of Human Rights as Judge ECtHR David r Bjrgvinsson declared in a Conference
organised by the EFTA Court in Iceland in 2012.
Because EEA law is mostly economic law and a mix between international law and EU law,
there is a serious risk that the ESA favours internal market considerations over consumer
protection issues which touch economic fundamental rights such as property rights (due to
their lack of competence in this regard). Last but not least, in the last instance, ESA relies on
the expertise and final assessment of the European Commission.
The jurisdiction of the Court of Justice of the European Union (ECJ) on EFTA and EEA matters
is very restricted and limited to disputes not settled by the EFTA Joint Committee (Article
111 para. 3 EEA Agreement).
Access to the ECJ is almost impossible in practice. Apart from a real complaint needed, access
to the ECJ through a preliminary reference procedure by a petition from a district court in
Iceland (Protocol 34 EEA Agreement) would be probably denied by the Supreme Court of
Iceland for reasons due to constitutional constraints and Icelandic procedural law since their
constitutional role is to preserve the autonomy of the Icelandic legal order.
In view of all the above information, it is extremely important for Icelandic legislator and Icelandic
society to clarify this problematic as soon as possible. I request therefore the services of the
European Commission to provide this guidance needed and to reply as clearly as they can to the
questions 1-9 in two weeks since reception of this request.
I send the same request to the EFTA Surveillance Authority so that your institutions collaborate
together to answer to these important questions.
Sincerely yours
MEMP
7
FACULTY OF LAW
Reykjavk 12 December 2012

REF: INCORPORATION DIRECTIVE 2008/48/EC TO ICELAND
To the European Commission, European Parliament and EFTA Surveillance Authority,

Following my letter of 4 December 2012, I would like to provide you with a current real example of
recent payments of two price indexed loans by a consumer in lceland. For personal data protection I
request not to disclose the identity of this individual.
1. EU and EEA consumer credit legislation - obligations for lceland
lceland is obliged to incorporate all relevant legislation through the EEA Agreement. Please note that
the lcelandic legal system incorporated the obligations of Directive 87/102/EEC through Act nr.
121/1994 on consumer credit and extended protection to all loans (secured or non-secured by
immovable property or other guarantees) through Act nr. 179/2000.
European Directive 87/102/EEC in Article 6 imposes ex-ante obligation information of the total cost
of credit and annual rate of interest and the charges applicable from the time the agreement is
concluded and the conditions under which these may be amended. This information had to be
confirmed in writing. Furthermore, Article 6 states that, during the period of the agreement, the
consumer shall be informed of any change in the annual rate of interest or in the relevant charges at
the time it occurs. Such information may be given in a statement of account or in any other manner
acceptable to Member States.
Similar and more detailed provisions can be found in the lcelandic Act. Nr. 121/1994 (as reformed in
December 2000) in articles 5-12.
The question now is to examine the validity of current lcelandic framework and business practices in
the light of the newest Directive 2008/48/EC which is discussed by the lcelandic Parliament.
2. Credit and cost of credit. What is commonlv practiced in Europe
The European Directive 2008/48/EC works with the hypothesis, definition, methods and formula
supposing we have a clear principal of a loan determinate. Consumers must know the total cost of
the credit in advance and the Annual Percentage Rate of Charge (APRC).
As the website of the European Commission summarises the content of Directive 2008/48/EC
lcelandic
Act
No
121/1994
on
Consumer
Credit
can
be
accessed
in
English
at the
website
http://eng.idnadarraduneyti.is/laws-and-regulations/nr/1137
2
See summary from the European Commission at webpage
http://ec.europa.eu/consumers/rights/fin_serv_en.htm
Logberg v. Sudurgotu 101 Reykjavk Telephone: (+354) 525 4376/4386/4387 Fax: (+354) 525 4388 lagadeild@hi.is www.lagadeild.hi.is
FACULTY OF LAW
"Further integration of the markets and a high level of consumer protection are the main objectives of
the new Directive on Credit Agreements for consumers . The Directive focuses on transparency and
consumer rights. It provides for a comprehensible set of information to be given to consumers in good
time before the contract is concluded and also as part of the credit agreement, In order to enhance
the comparability of different offers and to make the information better understandable, the precontractual information needs to be supplied in a standardised form (Standard European Consumer
Credit Information), i.e. every creditor has to use this form when marketing a consumer credit in any
Member State, and consumers wlll receive the Annual Percentage Rate of Charge (APR, a single figure,
harmonised at EU level, representing the cost of the credit)."
In order to charge for credit, European financial institutions in Europe usually consider two main
options: the payment of nominal interest charges agreed beforehand (fix rates of interest) or
revisable regularly (variable rates).
In Europe clients usually pay back credit in this way:
Small part of the principal every month
Interest on the principal (fix or variable nominal rates agreed before hand)
3. Credit and cost of credit. What is commonly practiced in lceland
In lceland clients can pay back credit to financial institutions under 4 different concepts : (as in the
example from House Financing Fund in annex 1 and 2)
1. Repayment of principal of loan at a nominal price
2. Payment due to price indexation of principal (calculated ex-post)
3. Payment of interest on principal initially agreed (5,1%)
4. Payment due to price indexation of interest (calculated ex-post)
Two comments must be made here.
In the first place, the payment done under nr. 2 above is usually done with the scheme of negative
amortisation (called annuitet). This means that only a part of the real cost of the indexation of the
principal is payed each month. Most of it is consolidated into the principal, so a new principal due is
created each month.
FACULTY OF LAW
In the second place, this scheme means that consumers are paying in practice three sorts of different
interest as the cost of borrowing the same principal. As the inflation is unpredictable all the
calculations of final figures to be paid by consumers are done after the contract is signed.
4. Case-study. Two loans taken from the House Financing Fund of lceland.
As it can be seen in the payment of the two bills in annex 1 and annex 2, European legislation has had
no real impact on consumer protection in lceland so far. This is so even if legislation adopted in
December 2000 extended the protection of consumer credit provisions originating in Directive
87/102/EC to ali kinds of credit, including mortgages for residential property.
A consumer who took two different loans , one in 1999 and other in 2003, from the same institution
(balnasjur-
House Financing Fund) -has trusted us with these documents as evidence for the
claims put forward in this letter. In the loan agreement signed it says that the principal will change
with consumer price index, but no attempt is ever made by the lender to explain what that means in
practice, which method of calculation is followed or how this indexation has evolved over time.
Furthermore this consumer was never properly informed of:
Total amount of loan (principal) in reality
Total cost of credit in reality
Annual rate of interest through Annual Percentage Rate of Charge
Payment plan with actual payments for the whole life of the credit
Payment for price indexation of principal and interest is calculated a posteriori, on the basis of real
effective inflation. Financial institutions change unilaterally every month the amount of credit and
total cost of credit on the basis of the price consumer index published by the Statistical Office of the
country.
Loan 1.
Original amount borrowed in 1999 (credit)
4.900.000 ISK
but recalculated (with inflation until 15 August 2011)
10.062.500 ISK
Original amount equals to 61.350 Euros at the date of contracting
A unique specificity for the consumer price indexation in lceland is that real estate price index is included. To
the best of my knowledge this is not a normal practice n any other OECD country.
FACULTY OF LAW
Loan 2
Original amount borrowed in 2003 (credit)
2.196.824 ISK
but recalculated (with inflation until 15 August 2011)
3.675.903 ISK
Original amount equals to 25.236 Euros at the date of contracting

As inflation is never a negative figure, the principal of the loan grows only in one direction. Within
some months the recalculation figures will be higher as the amount of credit and cost of credit will be
adjusted.
The exponential growth of the principal is explained by simple arithmetic. With the so -called
annuitet system a negative amortisation scheme is used so that clients do not reimburse all interest
due and the rest is consolidated into the capitai. This is one of the reasons why the capital grows
exponentally, as it incorporates interest into the principal a never-ending way. The principal grows
and so does interest. In reality, clients pay interest on interest on interest on interest... (extreme
form of anatocism based on an opaque methodology). This has been commonly defined by
specialists in consumer credit as an unethical lending practice very common in the USA business of
credit cards.
5. The problem of price indexation - compatibility with EU-EEA consumer credit l a w - request for
legal opinion
Vertrygging or the indexation of financial obligations to inflation is, in reality, real interest
calculated a posteriori (instead of nominal interest predicted by financial institutions ex-ante).
As I told you in my previous letter, it is my opinion that it is illegal in the light of European law to
index the principal of the loan to inflation in the way it is practiced in lceland (ex-post). This is so
because under lcelandic current system and legislative proposal this means that the principal is left
indeterminate and is always unclear. Plan of payments is always wrong by definition as nobody can
predict inflation. The total cost of credit announced and disclosed at the time of negotiations and
contract signature is wrong. The information and transparency paradigms required by EU/EEA law
fail to operate for future inflation.
It is my strong conviction that European consumer law has not been adopted on the hypothesis of
real interest adjusted a posteriori with inflation and unilateral changes introduced to the contract by
creditors as these examples show.
It is also my view that indexation of payments of interest (not the principal of the loan) could be
acceptable if the method is properly disclosed ex ante (pre-contractual and contractual stages) and it
is done in a transparent way within the framework allowed by the Directive (through the technique
of Annual Percentage Rate of Charge) as the model supplied by the European Commission indicates.
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FACULTY OF LAW
For all these reasons I request a clarification of the position of the European Commission and the
European Surveillance Authority in this regard.
M. Elvira Mendez Pinedo

PS. Together with Annexes 1 and 2 there is another document enclosed with the effective history of
payments for the loans discussed. Please note that it is not a plan of payments but a summary of
payments done. It is called Greisluyfirlit - ,
. This consumer never got a
full plan of payments for the whole life of the credit at the contractual stage. Confidentiality is
requested concerning the identity of this individual and the personal financial data disclosed.
Ref. Ares(2013)181543 - 12/02/2013
EUROPEAN COMMISSION
HEALTH AND CONSUMERS DIRECTORATE-GENERAL
Director-General
Brussels,
SANCO.B4/ML/at D(2013)69971
Ms Elvira Mndez-Pinedo
Professor of European L a w
University of Iceland.
Faculty of Law 306.
Sudurgata s/n. 101 Reykjavik
Iceland
mailto:mep@hi.is
Dear Ms Mendez Pinedo,
Subject:
Your letter on European consumer credit and mortgage law - registered

under ref. ARES(2012)1452101
Thank you for your letter of 3 December 2012, to Commissioners Borg and Fle to which I
reply on their behalf. In this letter you provide your assessment of Icelandic transposition of
Directive 2008/48/EC on credit agreements for consumers.
I would like to draw your attention to the fact that it is the European Free Trade Association
(EFTA)
Surveillance
Authority that is competent
to supervise
the transposition
and
application of Directive 2008/48/EC into the national legal order of Iceland.

As to the technical questions you raise in your letter, please find some feedback in the Annex
to this letter that we hope will be helpful to you. Please note that this Annex constitutes an
opinion of my services; a binding interpretation of Union law can only be given by the
European Court of Justice. It is also provided to you for your own assistance and is without
prejudice to the ultimate assessment of EFTA in relation to the transposition exercise.
Should you require additional clarification, please do not hesitate to contact Ms Maria
Lissowska, email; Maria.Lissowska@ec.europa,eu, tel +3222980905.
Yours sincerely,
Paola Testori-Coggi
Annex:
Technical reply
Commission europenne/Europese Commissie, 1049 Bruxelles/Brussel, BELGIQUE/BELGI - Tel. +32 22991111
Annex
Technical reply to Ms Mendez Pinedo's questions

Directive
2008/48/EC
on consumer credit
(CCD) does
not regulate the
contractual
relationships between creditors and borrowers. However, it fully harmonises the provision
of information at the advertising, pre-contractual and contractual stages. Its objective is to
facilitate the functioning of the internal market (recital 7) and to offer a sufficient degree of
protection to ensure consumer confidence, in particular enabling free movement of credit
offers (recital 8).
In 2012, the European Commission published a guidance document on the application of the
CCD in relation to costs and the annual percentage rate of charge. The guidance document is
available on the Commission website at:
http://ec.europa.eu/consumers/rights/docs/guidelines_consumer_credit_directive_swd201
2
128_en.pdf
As to your specific questions in section 4:

4.1. The total cost of credit according to definition 3(g) means all the costs, including
interest, commissions, taxes and any type of fees the consumer is required to pay in
connection with the credit agreement and which are known to the creditor. Also, Article 3(1)
defines the total amount of credit as a ceiling or total sums made available under the credit
contract. The sum of the total cost of credit and the amount of credit gives the total amount
payable by the consumer, as defined in 3(h).
As far as w e understood from your letter, the indexation of the principal does not mean that
the sums available to the borrower increase. Thus the indexed principal cannot be treated as
a total amount of credit.
4.2. Specific rules apply for the calculation of APR. In particular, according to Article 19(4),
for credit agreements containing clauses allowing variations in the borrowing rate and
charges, w h i c h are unquantifiable at the time of calculation, the APR shall be calculated on
the assumption that the borrowing rate and charges remain fixed at the initial level until the
end of the contract. Thus, in the case you describe, the APR shall be calculated according to
the initial level of interest rates and inflation, where relevant, for example in the indexation
of the principal of the credit.
4.3. The CCD establishes strict information disclosure requirements during the credit
process. In particular, in the pre-contractual information (Article 5.1(f)) the creditor shall
specify the conditions governing the application of the borrowing rate and, where available,
This technical document does not constitute the official position of the Commission.

Maria.Lissowska@ec.europa.eu
any index or reference rate applicable to the initial borrowing rate, as well as the periods,
conditions and procedure for changing the borrowing rate. The same obligation with regard
t o the borrowing rate applies to the contract (Article 10.2(f)).
A n identical disclosure requirement applies to charges other than the borrowing rate. That
indexation is part of the borrowing rate or applied to the principal should be clearly stated
a n d its effect on the total cost of credit and the APR should be quantified (taking into
account Article 19.4).
4.4.and 4.5. As stated, it is foreseen that creditors may apply variable interest rates and
charges unquantifiable at the time of calculation of the APR. However, creditors should
inform the borrowers, at the pre-contractual and contractual stages, about the conditions
under which the rates and the charges may be changed.
4.6. For the calculation of the APR, in the case of unquantifiable changes of interest rates
and charges, according to Article 19.4, the initial values of borrowing rates and charges
(including initial inflation rate for indexation) should be applied up to the end of the
agreement. T h u s the amortisation table of the credit, including the indexing of capital, the
borrowing rate and any other charges included in the total cost of credit should be
calculated. The total cost of credit would be the difference between the total amount
payable by the consumer (given by the sums of all the payments made by the consumer) and
the total amount of credit (the value made available to the consumer). Finally, the payments
m a d e by the consumer and the amount of credit drawn down shall be used in the calculation
of the APR.
4.7. EU consumer legislation (other than the CCD) does not prohibit per se the practice of
charging nominal interest rates previously disclosed and/or the indexation to real inflation of
principals and/or payments of a loan.
Directive 93/13/EC on Unfair Contract Terms (the "UCT") cannot be invoked to assess the
unfairness of the price or remuneration (e.g. interest rates in a loan) of a product. In
addition, the indicative list under Art 3(3) of the UCT carves out terms where the price is
linked to indexes or other financial market rates that the seller or supplier does not control,
such as in the present case, where indexes are calculated by official bodies in Iceland (e.g.
the Statistical Office) (see A n n e x 2 (c)). Moreover, price indexation clauses are explicitly
allowed under the UCT (see Annex 2 (d)). However, consumer legislation requires that
consumers are properly and timely informed about the products offered (e.g. a loan),
including on their price and key characteristics. In this connection, the UCT provides that
terms should be drafted in clear and intelligible language and that applicable
price
indexation methods must be explicitly described.

Directive 2005/29/EC on Unfair Commercial Practices (the "UCPD"), on the other hand,
requires that traders inform consumers from the very initial stage (e.g. marketing or

commercial offer), about the benefits and risks (such as those related to inflation) that
consumers should expect from a product, in addition to the total price.
The lawfulness of the practices described under EU consumer legislation is therefore subject
to a case by case assessment by national enforcers based on all facts and circumstances of
real situations.
4.8. The Commission proposal on Credit Agreements relating to Residential p r o p e r t y tackles
2
the issue of information disclosure on total cost of the credit both at pre-contractual and
contractual stage. Before signing the credit agreement creditors are required to provide
borrowers with an "indicative example of the total cost of the credit for consumers and the
annual percentage rate of c h a r g e " . Beside this article the Commission proposal contains a
3
specific provision on the information concerning the borrowing r a t e . According to the initial
4
Commission proposal formulation "Member States shall ensure that the creditor informs the
consumer of any change in the borrowing rate, on paper or another durable m e d i u m , before
the change enters into force." Additional information requirements have been inserted in
the legislative process both by the EP and the Council, but since this proposal is currently
under trilogue negotiations w e are not able to provide you with a final text.
4.9.
4.9.1 See reply to question 4.7 above. Potentially yes (subject to case by case assessment by
national authorities) if the method of calculation for the indexation is not properly disclosed
(see Annex 2 (c) and (d)) of the UCT.
4.9.2. See reply to question 4.7 above - Potentially yes (subject to case by case assessment
by national authorities) both under the UCPD and the UCT.
4.9.3. See reply to question 4.7 above - EU consumer legislation (other than the CCD) does
not prohibit per se the practice of charging nominal interest rates previously disclosed
and/or the indexation to real inflation of principals and/or payments of a loan.
C O M (2011) 142
Art 9(1)d COM proposal
Art 13 COM proposal

Case handler: Steven Verhulst

Tel: (+32)(0)2 286 1858
e-mail: sve@eftasurv.int
Brussels, 25 February 2013

Case No: 72894
Event No: 657326
EFTA SURVEILLANCE
AUTHORITY
Professor Elvira Mendez Pinedo

Lgberg 306
University of Iceland
101 Reykjavik
Iceland
Dear Prof. Mendez Pinedo,

Subject:
1
Request for opinion on the legality of price-indexation of consumer

loan agreements under EEA law on consumer protection
Introduction
By letter of 3 December 2012, you requested the EFTA Surveillance Authority (the
Authority) to give an opinion on whether the practice of price-indexation (vertrygging)
in consumer loan agreements in Iceland could be considered in compliance with EEA law
on consumer protection, and with Directive 2008/48/EC on consumer credit in particular.
You explained that the issue is raised in light of the current implementation process of
Directive 2008/48/EC into Icelandic law. In light of your request, you invited the
Authority to answer a number of concrete questions, listed in point 4 of your letter.
1
A similar request was sent to the European Commission (the Commission), by way of a
letter addressed to Commissioner Borg (DG SANCO) and Commissioner Fle (DG
Enlargement). It should be observed, however, as also referred to in the Commissions
letter, that the EFTA Surveillance Authority is the sole institution having competence to
monitor the compliance with Directive 2008/48/EC in the EFTA States, and that the
Commission has no competence in this regard.
2
Your request has been assessed by the Internal Market Affairs Directorate of the Authority
(the Directorate), which hereby presents you its opinion on the matter.
Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit
agreements for consumers and repealing Council Directive 87/102/EEC is the Act referred to in point 7h of
Annex XIX of the EEA Agreement, which was incorporated into the EEA Agreement by Joint Committee
Decision 16/2009 of 5 February 2009. 1 November 2011 was the final date for the EFTA States to adopt the
necessary measures to make the Act part of the internal legal order. So far, Iceland has not yet notified such
measures to the Authority. Therefore, by letter of formal notice of 1 February 2012, the Authority opened
infringement proceedings aginst Iceland for non-implementation of Directive 2008/48/EC (Case 70926). The
case is currently pending at the EFTA Court.
It is stated in the Commission's reply that this technical documents does not constitute the official
position of the Commission.
1
Rue Belliard 35, B-1040 Brussels, tel: (+32)(0)2 286 18 11, fax: (+32)(0)2 286 18 00, www.eftasurv.int
EFTA SURVEILLANCE
AUTHORITY
Page 2
Main conclusions of the Directorate on the scope of Directive 2008/48/EC
In light of your request, the Directorate has made the following conclusions on the scope
of Directive 2008/48/EC:
The Directive regulates, inter alia, the information requirements concerning the
terms in consumer credit agreements, but not the content of these terms. It provides
how the consumer should be informed about such charges, including, potentially,
"charges" involving price indexation - though this is not explicitly contemplated;
The Directive does not regulate price indexation of consumer credit agreements. It
does not contemplate such indexation, and nowhere is it explicitly mentioned. The
practice of price-indexation as such falls outside the scope of the Directive. Hence,
the Directive does not prohibit the practice of price-indexation. It further does not
regulate the level of interest charges or other charges, or the method for calculating
these charges;
3
Further, residential property credit agreements (mortgages) are, in principle, not

covered by the Directive. In case the Icelandic legislator, nevertheless, choses to
apply the provisions of the Directive to mortgage credit agreements by analogy,
this is done on a voluntary basis and, therefore, not mandatory. The voluntary
application of these provisions to mortgage credit agreements in Iceland should,
therefore, primarily be considered to be a matter of national law and not of EEA
law;
The EFTA States are under an obligation to ensure that their national legislation
fully complies with the requirements of Directive 2008/48/EC from 1 November
2011. This entails that any credit agreements concluded before this date will, in
principle, not be affected by the Directive's obligations.
A detailed reply to the concrete questions referred to in point 4 of your letter will be
addressed by the Directorate in the annex to this letter.
Yours sincerely,
lafur Jhannes Einarsson

Director
Internal Market Affairs Directorate
Enclosure: Annex I
See point 2.2 of the Commission's Staff Working Document on Directive 2008/48/EC: The APR should
not therefore be confused with the borrowing rate charged by the creditor or with the internal calculation
the creditor makes in relation to calculating interest charges, for which the creditor may use different
methods of calculation in accordance with applicable national law. These different methods could include,
for instance, the use of simple interest or compound interest, or different compound frequencies
(daily,
weekly, monthly, etc.). As the CCD does not regulate the method used for calculating interest charges,
Member States and/or creditors are able to determine the calculation method used for those charges.
3
EFTA SURVEILLANCE
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Copy:
Ministry of Industries and Innovation
Sklagtu 4
150 Reykjavik
Iceland
AUTHORITY
EFTA SURVEILLANCE
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AUTHORITY
ANNEX I
Question 1
When EU/EEA law refers to the total cost of credit, does the terminology and hypothesis
refer to the repayment of the principal borrowed plus a nominal interest previously
agreed between creditor and debtor or to the repayment of the principal borrowed plus a
real interest calculated with inflation after the signature of the loan agreement?
Article 3(g) of Directive 2008/48/EC defines the total cost of credit to the consumer as
follows:
total cost of the credit to the consumer means all the costs, including interest,
commissions, taxes and any other kind of fees which the consumer is required to
pay in connection with the credit agreement and which are known to the creditor,
except for notarial costs; costs in respect of ancillary services relating to the credit
agreement, in particular insurance premiums, are also included if, in addition, the
conclusion of a service contract is compulsory in order to obtain the credit or to
obtain it on the terms and conditions marketed
The total cost of credit thus comprises all costs that the consumer is liable to pay in
connection to the credit agreement and which are known to the creditor, except for notarial
costs. Hence, both interest charges and charges resulting from a price indexation of the
principal are included in the total cost of credit. The Directive, however, does not make a
distinction between what you refer to as nominal interest or real interest. On the other
hand, the Directive does take account of the fact that interest charges or other charges can
be fixed or variable. This follows, for example, from the definition of the term borrowing
rate in Article 3(j):
borrowing rate means the interest rate expressed as a fixed or variable
percentage applied on an annual basis to the amount of credit drawn down;
The Directive, however, does not regulate how interest charges or other charges have to be
established or calculated (see point 2 above) and must, therefore, be considered to be
neutral with respect to the level of charges. The Directive only regulates how the cost of
the interest charges or other charges should be taken into account for the purpose of
establishing the borrowing rate and the annual percentage rate of charge (APR) and how
that has to be done in case the charge is variable, for example when it is linked to a
variable factor such as the consumer price index.
In relation to the calculation of the APR, Article 19(4) provides that:
in the case of credit agreements containing clauses allowing variations in the
borrowing rate and, where applicable, charges contained in the annual percentage
rate of charge but unquantifiable at the time of calculation, the annual percentage
rate of charge shall be calculated on the assumption that the borrowing rate and
other charges will remain fixed in relation to the initial level and will remain
applicable until the end of the credit agreement.
Page 5
EFTA SURVEILLANCE
AUTHORITY
As the APR is in fact the total cost of credit, expressed as an annual percentage of the total
amount of credit (see the definition in Article 3(i)), it must be assumed that for the purpose
of establishing the total cost of credit, the borrowing rate and other charges shall be
calculated on the assumption that they will remain fixed in relation to the initial level and
will remain applicable until the end of the credit agreement.
Question 2 A
Can EU/EEA Member States allow for the calculation of cost of credit outside the
APCR rules?
Directive 2008/48/EC fully harmonises the issues covered by its scope (Article 22(1)).
This means that EEA States may not maintain or introduce in their national law provisions
diverging from those laid down in the Directive. The definition and the method of
calculation of the APR are laid down in the Directive, respectively in Article 3(i) and
Article 19. It is stipulated, inter alia, that the APR must be calculated in accordance with
the mathematical formula set out in Part I of Annex I. Therefore, the Directorate concludes
that EEA States are not allowed to calculate the cost of credit in a manner which is
different than the one provided for in Directive 2008/48/EC.
Question 2 B
Does European law allow creditors of non-secured credit falling under Directive
2008/48/EC to do unilateral changes to the principal of a loan borrowed a posteriori in
order to update that principal with inflation? What about unilateral changes to the
payments of a loan done a posterior in order to update those payments with inflation?
Directive 2008/48/EC does not regulate all contractual aspects of consumer credit
agreements and, as stated above, the level of charges or the indexation of charges are not
issues which are regulated by Directive 2008/48/EC. In fact, Directive 2008/48/EC only
provides (per Article 5(1)(f)) that the consumer must be duly informed of any index or
reference rate applicable to the initial borrowing rate, both at the pre-contractual and the
contractual stage, and how that should be accomplished.
The Directorate further observes that any change by credit providers to interest rates or
other charges in consumer credit agreements as a result of a price-index clause, and
whereby the price index is established by an independent public authority, such as the
Central Bank of Iceland, should not be considered as a unilateral change to the initial
contract terms by the credit provider. On the contrary, the fact that a price-index
mechanism is provided for in the contract allows for such changes during the course of the
contract. Directive 2008/48/EC does not prejudice that possibility.
Question 3
Can EU/EEA Member States introduce by law permissions for creditors to do unilateral
changes to the principal of a loan borrowed a posterior for non-secured credit falling
under Directive 2008/48/EC which updates that principal with inflation and regularly
consolidate interest non paid through negative amortisation into unpaid capital
(minimum payment of interest similar to revolving credit card schemes which lead to
anatocism - interest on interest)?
EFTA SURVEILLANCE
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AUTHORITY
The possibility for credit providers to modify interest charges after the conclusion of the
contract is not an issue which is regulated by Directive 2008/48/EC. Moreover, any
change by credit providers to interest rates or other charges as a result of a price-index
clause explicitly provided for in the contract must not be considered as a unilateral change
by the credit provider. See the answer to question 2 B).
Question 4
changes to the borrowing cost of capital a posteriori in any other way for non-secured
credit falling under Directive 2008/48/EC?
This is not an issue which is regulated by Directive 2008/48/EC. See the answer to
question 2 B).
Question 5
changes to the borrowing cost of capital a posteriori for non-secured credit falling
under Directive 2008/48/EC if the price-indexation affects only the payment of interests
(as current Icelandic Act 38/2001 states)?
This is not an issue which is regulated by Directive 2008/48/EC. See the answer to
question 2 B).
Question 6
In case reply to question 1-5 is affirmative, how would this price-indexation affecting
both principal and payment of interest (charge of real interest calculated a posteriori)
could be disclosed to consumers through the formulas on total cost of credit and Annual
Percentage Rate of Charge in advance and in a transparent way so to comply with
Directive 2008/48/EC as recently modified?
The Directorate observes, first of all, that pursuant to Article 5(1)(f) and Article 10(2)(f) of
the Directive, the consumer must be informed about any indexation of the initial
borrowing rate, which is the interest rate expressed as a fixed or variable percentage
applied on an annual basis to the amount of credit drawn down (Article 3(j)). However, it
is important to state that this does not correspond to the current situation in Iceland, where
the borrowing rate is not subjected to any (additional) indexation via a link to the rate of
inflation. As regards the indexation of the principal, on the other hand, the Directive does
not expressly contemplate such a scenario, and does not contain any specific provisions in
this regard.
Second, it follows from Article 5(1)(g) and Article 10(2)(g) that, when informing the
consumer of the Annual Percentage Rate of Charge, all the assumptions used in order to
calculate that rate shall be mentioned and that, in the pre-contractual information, it has to
be illustrated by a representative example.
Third, Article 19(4) of the Directive provides how variable cost factors should be taken
into account in the Annual Percentage Rate of Charge (APR):
EFTA SURVEILLANCE
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AUTHORITY
In the case of credit agreements containing clauses allowing variations in the

borrowing rate and, where applicable, charges contained in the annual percentage
rate of charge but unquantifiable at the time of calculation, the annual percentage
rate of charge shall be calculated on the assumption that the borrowing rate and
other charges will remain fixed in relation to the initial level and will remain
applicable until the end of the credit agreement.
Again, considering, first of all, that the price indexation of the principal is not directly and
explicitly contemplated by the Directive, it is clear, however, that it could potentially be
considered to represent a charge contained in the annual percentage rate of charge - since
the annual percentage rate of charge is the total cost of the credit to the consumer,
expressed as an annual percentage of the total amount of credit (per the definition in
Article 3(i)) - but, in any case, falling outside the definition of the borrowing rate.
As regards the price-indexed principal, the price-indexation cannot be considered as a
variable factor linked to another charge, as the principal is not, in and of itself, a charge.
Hence, the price-indexation may be considered as constituting a separate charge, which
should be taken into account in the APR.
Provided any price-indexation clauses comply with the information requirements
described in the previous answers, and with the provisions of Article 19(4), they will be
compliant with the Directives provisions.
However, further guidance is provided by Point 3.4 of the Staff Working Document:
Creditors should make reasonable efforts to ascertain such costs, in line with the
requirements of professional diligence, and should only exclude them from the APR
calculation (and disclose separately to the consumer) if this is not practicable. If
estimated information is used, the consumer shall be made aware of this fact, indicating
that estimates are expected to be representative of the type of agreement in question.
At the pre-contractual stage, the consumer should also be provided with information
regarding the nature of the assumptions used by the creditor in the calculations for the
mortgage.
If however it is not possible to ascertain the costs, or to estimate them with a reasonable
degree of certainty in a specific situation, then they should not be included in the
calculation of the total cost of credit (and consequently in the APR). In this case the
creditor must inform the consumer of the existence of such costs at the advertising and
pre-contractual stages (Articles 4(3) and 5(1)(k) and Recital 22).
Should it still not be possible to ascertain costs at contractual stage despite the
requirements of professional diligence, the consumer should be informed accordingly.
Question 7
Is it possible for financial institutions to charge two times for interest (1) through
nominal interest rates previously disclosed and (2) through indexation of principal
and/or payments to real inflation done a posteriori?
In the view of the Directorate, the price-indexation of the interest rate or the principal in a
consumer credit agreement, in accordance with national law and whereby the consumer
EFTA SURVEILLANCE
AUTHORITY
Page 8
price index is established by an independent body on the basis of national law, does not
per se amount to a breach of EEA law in the field of consumer protection. See also the
answer to question 2 B).
Question 8
What is the current margin of manouver for regulating information duties on total cost
of credit in residential property credit? Can EU/EEA Member States introduce by law
permissions for creditors to do unilateral changes to the principal of a loan and/or to
the borrowing cost of capital a posterior (through consumer price-indexation clauses)
for secured credit falling under new proposal COM (2011) 142 for credit on residential
property?
The Directorate observes, first of all, that residential property credit agreements are, in
principle, not covered by Directive 2008/48/EC. In that regard, Article 2(2) of the
Directive provides that:
This Directive shall not apply to the following:
(a) credit agreements which are secured either by a mortgage or by another
comparable security commonly used in a Member State on immovable property or
secured by a right related to immovable property;
(b) credit agreements the purpose of which is to acquire or retain property rights
in land or in an existing or projected building;
(...)
In case the Icelandic legislator, nevertheless, choses to apply the provisions of Directive
2008/48/EC to mortgage credit agreements by analogy, this is done on a voluntary basis
and, therefore, not mandatory. The fact that the Icelandic legislator intends to expand
voluntarily the protection provided for by Directive 2008/48/EC to mortgage credit
agreements does not have any bearing on the scope of the Directive. The voluntary
application of the provisions of Directive 2008/48/EC to mortgage credit agreements in
Iceland should, therefore, primarily be considered to be a matter of national law and not of
EEA law. Moreover, as stated above, Directive 2008/48/EC does not prejudice the
possibility for creditors to include a price-indexation mechanism in their credit
agreements.
As regards the Commissions Proposal for a Directive of the European parliament and of
the Council on credit agreements relating to residential property, the Directorate observes
that it is premature to comment on the scope of secondary EEA legislation which is in a
draft stage.
As a final note in this regard, the Directorate draws your attention to Article 30 of the
Directive, headed Transitional measures, which provides that:
1. This Directive shall not apply to credit agreements existing on the date
when the national implementing measures enter into force.
2. However, Member States shall ensure that Articles 11, 12, 13 and 17, the
second sentence of Article 18(1), and Article 18(2) are applied also to open-end
credit agreements existing on the date when the national implementing measures
enter into force.
EFTA SURVEILLANCE
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AUTHORITY
Bearing this in mind, it is important to remain aware of the fact that, for the EFTA States,
November 1 2011 was the final date by which the measures to implement the Directive
had to be taken. This entails that any credit agreements concluded before this date will not
be affected by the Directive's content, except to the extent provided for in Article 30(2)
quoted above.
st
Question 9.1
Is the price-indexation of the principal of a loan and the borrowing cost of capital with
an opaque and non-disclosed method of calculation which guarantees a claim on real
interest rate calculated unilaterally by creditor after the signature of the contract together with other interest rates - an abusive clause in the light of European law?
Directive 93/13/EEC provides for harmonised secondary EEA legislation with regard to
the terms used in consumer contracts. Directive 93/13/EEC on unfair terms in consumer
contracts does not, however, prohibit price indexation clauses as a matter of principle. On
the contrary, in follows from point 2(d) in the Annex to the Directive that price indexation
clauses should not be considered unfair, provided that they are lawful and that the method
by which prices vary is explicitly described:
Subparagraph (l) is without hindrance to price-indexation clauses, where lawful,
provided that the method by which prices vary is explicitly described.
The Directorate notes that price-indexation is lawful according to Icelandic law.
Moreover, the Directorate has no indications that the condition of explicit description of
the price-index mechanism in the contract is in general not fulfilled in consumer credit
agreements in Iceland, which is without prejudice to individual contracts. The Directorate
further observes that Directive 93/13/EEC is intended to protect consumers against the
abuse of power by sellers or suppliers, and it follows both from the preamble and from
Article 1 (2) that the Directive does not apply to contractual terms that reflect mandatory
statutory or regulatory provisions. Again, the Directorate recalls that any change by credit
providers to interest rates in consumer credit agreements as a result of a price index clause,
and whereby the price index is established by an independent public authority, such as the
Central Bank of Iceland, should not be considered as a unilateral change by the credit
provider, provided that it is clearly stipulated in the credit agreement.
4
Directive 2005/29/EC on unfair commercial practices provides for harmonised secondary

EEA legislation with regard to practices applied by traders in the context of their trade,
business or profession towards consumers, which are contrary to the requirements of
professional diligence and which materially distort or are likely to distort the economic
behaviour of consumers. In light of the question in point 9.1, it must be assessed whether
the price-indexation of consumer credit agreements, and any change to the interest rate as
a result thereof, should be seen as a misleading action in accordance with Article 6 or a
misleading omission in accordance with Article 7 of Directive 2005/29/EC. The
Directorate takes the view that price-indexation of consumer credit agreements can as such
not be considered to be misleading. As long as the application of the price-index
mechanism and the fact that it applies to both the interest rate and the principal is clearly
indicated in the credit agreement, it is not likely to deceive the average consumer and to
4
Chapter VI of Act no. 38/2001, and Regulation of the Central Bank of Iceland no. 492/2001.
EFTA SURVEILLANCE
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AUTHORITY
cause him to take a transactional decision that he would not have taken otherwise. It is,
however, for the competent Icelandic authorities and courts to assess, on a case-by-case
basis, whether price indexation clauses applied by the credit providers are misleading and,
thereby, create a significant imbalance between the bank's and consumer's interests,
thereby creating a situation which qualifies as unfair in the sense of the Directive.
Based on the above, the Directorate concludes that the practice of price-indexation of a
consumer credit agreement cannot per se be considered to be in breach of Directive
93/13/EEC on unfair terms in consumer contracts or Directive 2005/29/EC on unfair
commercial practices.
Question 9.2
As calculation offuture inflation and its impact on the total amount of credit and total
cost of credit cannot be disclosed in advance, are creditors who do not disclose the
impact of future inflation giving misleading information to consumers?
Article 19(4) of Directive 2008/48 provides how a variable interest rate or other charge
has to be taken into account in the communication of information to the consumer. The
Commission has further explained in Point 3.4 of its Staff Working Document on the
application of Directive 2004/48/EC that:
In some cases the fact that a charge would be imposed is known but the exact
amount of costs over the period of the agreement is not known.
This situation does not refer to charges whose amount varies over time in a way
which is unquantifiable or cannot be foreseen at the time of calculation of the
APR, because in this case Article 19(4) or Assumption (j) would apply leading to
the determination of such charges in advance.
In case the fact of the price-indexation of the principal is not clearly and explicitly
indicated in the credit agreement, this could possibly amount to a misleading omission in
within the meaning of Article 7 of Directive 2005/29 on unfair commercial practices.
However, again, it is important to state that this is not reflective of the current general
practice in Iceland.
Question 9.3
Does European law allow national legislators to justify abusive clauses through
information and disclosure requirements?
The answer to this question must be negative. Contractual clauses which are abusive in the
sense of Directive 93/13/EEC are, in principle, prohibited. Moreover, a distinction has to
be made between information requirements and requirements concerning the content of
contractual clauses under secondary EEA law.
ANNEXES
to Dr. M. Elvira Mendez Pinedo's
letters to the European Commission
as of 3 and 12 December 2012
rcquestng cfarification of European consumer law as
applicable to the lcelandic CPI-indexation mechanism
THE EXPLOSIVE LOAN MACHINE

A Model of lcelandic Mortgage Loan Structure
Monthly payments
LOAN CRITERIA
Loarn principal
ISK 20,000,000
1.5%
300,000
Stamp duty
Borrowing fee
1.0%
200,000
Paperwork cost
5,900
ISK
Cash disbursment
ISK 19,494,100
Borrowing date
First payment
Loan term
Instalments
Invoice fee
years
#
ISK
Annual interest rate

Inflation forecast
Base CPI
Historical inflation rate
1/7/2001
1/8/2001
40
480
195
4.50%
5.98%
212.6
5.98%
Total nominal repayment 159,127,914

Nominal repayment pcnt.
846%
Annual percentage rate
10.65%
2012 G u m u n d u r s g e i r s s o n
Remaining principal (CPI-indexed)
FACULTY OF LAW
ANNEX 1
On the left column:

Stamp and Identification of House Financing Fund (personal information about debtor deleted
protection legislation)
Original amount borrowed 4.900.000 ISK
Recalculated (with inflation until 15 August 2011) 10.062.500
Loan issued 12 February 1999
Fix interest rates of 5,100% per year
Price indexed loan with "payment" (greislu) linked to the consumer index
Consumer index 184,8 points
Guarantee:
PRINCIPAL
Remaining nominal principal of the loan remaining to be paid before this payment
Nominal payment to the principal
Remaining nominal capital after payment
Due cost of credit (price indexation) after payment (as calculated on the date of 15 July 2011)
Remaining principal to be paid with price-indexed cost of credit after payment
due to data
4.262.734
5.867
4.256.867
4.484.913
8.741.780
FACULTY OF LAW
On the right column: BOND

due date 15 August 2011
Payment 147 of 478
of 15 August 2011
Payment system of annuitets (negative amortisation)
Interest calculated from 15 July 2011 to due date of payment
Interest period 30 days. Interest rate 5,100%
Change of consumer price indexed from 184,8 to 379,5 points
PAYMENT
Payment (of principal) at a nominal price
Payment due to price indexation of capital
6.181
Interest
Payment due to price indexation of interest
19.088
5.867
18.117
Service fee
75
Total to be paid
49.328 ISK
Last day to pay without interest penalty surcharges is 29 August 2011

Last day to pay without extra service fees for non-payment is 14 September 2011
FACULTY OF LAW
ANNEX 2
On the left column:

Stamp and identification of House Financing Fund (personal information about debtor deleted due to
data protection legislation)
Original amount borrowed 2.196.824 ISK
Recalculated (with inflation until 15 August 2011) 3.675.903
Loan issued 16 July 2003
Fix interest rates of 5,100% per year
Price indexed loan with "payment" (greislu) linked to the consumer index
Consumer index 226,8 points
Guarantee:
PRINCIPAL
Remaining nominal principal of the loan remaining to be paid before this payment
1.773.004
Nominal payment to the principal
5.479
Remaining nominal capital after payment
1.767.525
Due cost of credit (price indexation) after payment (as calculated on 15 July 2011)
1.190.040
Remaining principal to be paid with price-indexed cost of credit after payment
2.957.565
FACULTY OF LAW
On the right column: BOND
due date 15 August 2011
Payment 95 of 298
of 15 August 2011
Payment system of annuitets (negative amortisation)

Interest calculated from 15 July 2011 to due date of payment
Interest period 30 days. Interest rate 5,100%
Change of consumer price indexed from 226,8 to 379,5 points
PAYMENT
5.479
Payment at a nominal price

Payment due to price indexation of capital
3.689
535
Interest
Payment due to price indexation of interest
5.073
75
Service fee
21.851 ISK
Total to be paid
Last day to pay without interest penalty surcharges is 29 August 2011
Last day to pay without extra service fees for non-payment is 14 September 2011

2012 12 MEP Letters To EUR COM ESA and Replies

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2012 12 MEP Letters To EUR COM ESA and Replies

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UNIVERSITY OF ICELAND

SCHOOL OF SOCIAL SCIENCES

M. Elvira Mendez Pinedo. Professor of European law.

To the European Commission

Dear Mr. BORG and Mr. FLE,

See proposal in Icelandic at http://www.althingi.is/altext/141/s/0228.html

SCHOOL OF SOCIAL SCIENCES

COM (2011) 142 on p. 16 (recital 11). 52

SCHOOL OF SOCIAL SCIENCES

COM (2011) 142 Recital (23) on p. 19

SCHOOL OF SOCIAL SCIENCES

SCHOOL OF SOCIAL SCIENCES

http://www.ils.is/einstaklingar/kjor-og-kostir/lan-ibudalanasjods/). Financial institutions charge for

inflation after the signature of the loan agreement?

SCHOOL OF SOCIAL SCIENCES

SCHOOL OF SOCIAL SCIENCES

Reykjavk 12 December 2012

To the European Commission, European Parliament and EFTA Surveillance Authority,

See summary from the European Commission at webpage

SCHOOL OF SOCIAL SCIENCES

but recalculated (with inflation until 15 August 2011)

Original amount equals to 61.350 Euros at the date of contracting

SCHOOL OF SOCIAL SCIENCES

but recalculated (with inflation until 15 August 2011)

Original amount equals to 25.236 Euros at the date of contracting

M. Elvira Mendez Pinedo

. This consumer never got a

Ref. Ares(2013)181543 - 12/02/2013

Dear Ms Mendez Pinedo,

Your letter on European consumer credit and mortgage law - registered

Authority that is competent

application of Directive 2008/48/EC into the national legal order of Iceland.

Commission europenne/Europese Commissie, 1049 Bruxelles/Brussel, BELGIQUE/BELGI - Tel. +32 22991111

Technical reply to Ms Mendez Pinedo's questions

not regulate the

As to your specific questions in section 4:

Commission europenne/Europese Commissie, 1049 Bruxelles/Brussel, BELGIQUE/BELGI - Tel. +32 22991111

indexation methods must be explicitly described.

Commission europenne/Europese Commissie, 1049 Bruxelles/Brussel, BELGIQUE/BELGI - Tel. +32 22991111

Art 9(1)d COM proposal

Art 13 COM proposal

Commission europenne/Europese Commissie, 1049 Bruxelles/Brussel, BELGIQUE/BELGI - Tel. +32 22991111

Case handler: Steven Verhulst

Brussels, 25 February 2013

Professor Elvira Mendez Pinedo

Dear Prof. Mendez Pinedo,

Request for opinion on the legality of price-indexation of consumer

Main conclusions of the Directorate on the scope of Directive 2008/48/EC

Further, residential property credit agreements (mortgages) are, in principle, not

lafur Jhannes Einarsson

In the case of credit agreements containing clauses allowing variations in the

Directive 2005/29/EC on unfair commercial practices provides for harmonised secondary

THE EXPLOSIVE LOAN MACHINE

Annual interest rate

Total nominal repayment 159,127,914

Remaining principal (CPI-indexed)

SCHOOL OF SOCIAL SCIENCES

On the left column:

On the right column: BOND

Last day to pay without interest penalty surcharges is 29 August 2011

SCHOOL OF SOCIAL SCIENCES

On the left column:

Nominal payment to the principal