Mapping the Calculation Regulations of the EU Consumer Credit Directive
The new EU Consumer Credit Directive (2008/48/EG) calls for uniform conditions and regulations for consumer loans throughout Europe and is to be implemented in 2010 across all EU member states. In Germany, it has already been included in national legislation and will come into force in June 2010. Consumer loans and overdraft agreements for private customers will come under the terms of the new directive. The European Union aims to make the terms and conditions for consumer loans more transparent while facilitating the granting of loans to private customers at the transnational level.
The directive will effect:
- Advertising
- Composition of credit agreements
- Pre-contractual information
- Right of withdrawal
- Option of premature repayment
- Calculation of the effective interest rate
- Disclosure of the repayment plan including all costs directly related to the lending process
The regulations not only apply to new agreements but also to current contracts if the disclosure of lending ratios is required.
Implementing the new directive represents a massive undertaking for many banks and includes changes that will greatly effect existing systems. Extensive adjustments are needed throughout the entire lending process, particularly in the areas of compliance, organisation and IT. Given the sheer dimensions of the implementation, banks should start implementing the EU Consumer Credit Directive as soon as possible in order to ensure they have enough time to adjust their existing processes and IT systems and to carry out any necessary tests.
Current Systems Cannot Cope with the New Directive
The new directive focuses on
- Adjusting forms/credit agreements to meet legal requirements
- Adjusting the calculation of the effective interest rate and disclosure of the repayment plan as well as other ratios
The last requirement in particular poses considerable challenges to existing systems that are mostly based on account management. For decades, the account systems were capable of calculating reliable account balances however, they are not capable of drawing up an up-to-date repayment plan that has to be determined up to the termination of the loan on the basis of current account data.
The following payment information has to be presented in detail:
- Complete repayment plan showing interest, repayments and charges, e.g. processing charge
- Net amount of the loan
- Effective annual interest rate
- Total costs
- Number of instalments and the amount
- Different last instalment
- All other costs, e.g. costs of account management or premium for residual debt insurance
- Individual partial payments for deals involving partial payments
FERNBACH has the Solution
There are two options for satisfying these new requirements:
- Either transfer the current account data to an offer process because the quotation calculators use repayment plans to make calculations for private customer business and represent the easiest way to get additional information. In this case however, the problem is that the quotation calculators often do not consider the effect special characteristics of the accounting system, such as weekends and public holidays, have on the interest statement and booking closure.
- Or implement the calculation functionality in the existing system, which means that the calculation process for the repayment plan has to be drawn up again in the existing system, e.g. the agreement on payment holidays in a certain month of each year.
The FlexFinance Calculation Kernel from FERNBACH helps to implement all calculation requirements in line with the individual applications involved in a business operation. This includes:
- Changes in interest rates for interest scaling agreements.
- Repayment structures that go beyond a simple description of instalment or annuity loans (several agreements in succession or any number of individual repayments).
- All charges that are to be paid by a customer. This is based on the generic mapping of charges.
- Calculation of the effective interest rate even for overdrafts.
Moreover, FERNBACH provides other functions that are required as part of the implementation process:
- Checking creditworthiness by referring to information from national credit reference agencies, e.g. Schufa, KSV etc.
- Scoring for the loan application based on budget calculation and other credit standing indicators.
The service-oriented architecture (SOA) facilitates the use of these functions independent of a specific application or existing system.
This new FERNBACH solution to map the calculation requirements of the EU Consumer Credit Directive can be implemented without its own database. The application was developed according to the Java EE standard and can, thus, be integrated into any environment quickly and at low cost. Any technical enhancements that may be needed can be dealt with easily. The user-friendly interfaces were developed using the latest standards in software ergonomics and will impress users while securing their investment.
