Topical: Can you secure a consumer loan with a share in a housing cooperative?

Chapters of the article

• What is consumer credit?
• What are the types of consumer credit
• A woman transferred her share in a housing association to secure a consumer loan
• District court ruled against the woman, but everything ended up in the Constitutional Court
• What does the ruling mean?
• What to look out for in a consumer loan?

What is consumer credit?

Consumer credit is a financial product that allows consumers to obtain the necessary funds to purchase goods or services. In simple terms, it is a loan that can be used to buy the things you want or someone else’s service. It includes credit cards, purpose and non-purpose and long and short term loans.

Due to their easy availability and flexible terms, consumer loans are being resorted to by an increasing number of people who do not want to wait until they have saved up for the item in question. But as a recent case in which a woman sued over whether she could secure a consumer loan with a share in a housing association showed, even borrowed money cannot buy everything.

What are the types of consumer loans

Consumer loans are mainly divided by form depending on their purpose and terms. If you want to use the money to finance a specific thing, you take out a purpose-built loan. This can be used for things like buying a car, renovating your home or paying your school fees. The advantage of purpose-built loans is often a lower interest rate.

With a non-purpose loan, on the other hand, you don’t have to show a specific reason why and what you want to use the money for. However, you will pay for this flexibility with a higher interest rate.

A credit card is also a form of consumer credit. This gives you a limit up to which you can repeatedly draw and repay money from the card.

A woman transferred her share in a housing association to secure a consumer loan

Recently, the Czech public learned about an interesting court case concerning a consumer loan secured by a share in a housing cooperative. The case has attracted the attention not only of the professional public but also of ordinary consumers, as it may have a broad impact on the way consumer credit will be secured in the future. The woman wanted to use her share in a housing association to secure the loan.

As stated on the website of the Constitutional Court, “in January 2019, the complainant, her son and the company signed a settlement agreement in which the complainant’s son and the complainant, as debtors, acknowledged the debt of the complainant’s son to the company in the amount of CZK 489 885 arising from the 2017 loan agreement, with the complainant acceding to the debt and becoming a debtor alongside her son.”

This debt was to be repaid by both of them within one year. During that time, the woman continued to reside in the apartment, but transferred her interest in the condominium to the company that provided her with the consumer loan. She remained in the apartment under a subletting agreement. However, as the woman did not repay the debt even during the specified year, the company subsequently transferred the condominium share to someone else.

The district court ruled against the woman, everything ended up at the Constitutional Court

Although securing a loan with real estate or other property is a common practice to secure the creditor against possible insolvency of the debtor, in this case doubts arose as to whether a share in a housing cooperative, which is a specific type of property, could be used to secure a loan at all.

The court had to decide whether this type of security was lawful and whether it respected consumer protection. The legal arguments focused on whether a share in a housing association, which is linked to the right to use the flat but is not traditional immovable property, can serve as security for consumer credit.

The District Court held that the valuation of the cooperative share did not reflect its actual value. In fact, it was higher than the debt itself. However, the sublease expired after one year and the complainant had no legal basis for using the flat. It therefore ordered her to move out.

The District Court emphasized that the transfer of the cooperative share was of a security nature, the complainant and her son had one year to repay the debt, and the complainant did not address the situation.

The woman subsequently appealed to the municipal court, which upheld the original verdict. The Supreme Court then dismissed the appeal as inadmissible. A complaint to the Constitutional Court followed, in which the woman claimed that her fundamental rights to judicial protection and protection of property had been violated.

“The Third Chamber of the Constitutional Court upheld the complainant and annulled the contested decisions. The decisions of the general courts violated the complainant’s right to a fair trial and protection of her property,” the Constitutional Court said. According to the Court, the provisions of Section 113(2) of the Consumer Credit Act also apply to situations where the collateral consists of a share in a housing cooperative.

What does the ruling imply?

If the security for a consumer credit is made by means of real estate or a right to real estate, only a form of pledge may be used. The same rules apply to shares in a housing association. These are legally considered to be an asset similar to real estate. Thus, securing a consumer loan with a share in a housing association is not possible if it could lead to the loss of the consumer’s home in the event of default on the loan.

What is allowed: A mortgage on a housing association share can be used to secure a consumer loan, similar to real estate.

What may not: No form of security other than a mortgage may be used to secure a consumer loan in respect of real estate or condominium units. Any other arrangement relating to the security of consumer credit which circumvents this principle is void and shall be disregarded by the court.

With this decision, the Constitutional Court has confirmed that consumer protection is a priority and that the rules on security for consumer credit also apply to specific cases such as cooperative shares. Financial institutions will therefore have to rethink their practices in securing consumer credit. This ‘precedent’ could lead to a rethink of the rules on securing loans and force lenders to be more careful in their choice of collateral.

What to look out for in consumer credit?

Unfortunately, fast money is still a big lure and temptation for many people. Over-indebtedness is often the biggest risk. The borrower finds himself in a situation where he is no longer able to repay his debts or the loan. This then ends in insolvency, foreclosure or other loss of assets.

Although consumer protection in the negotiation of consumer credit is ensured by law, consumer credit also entails the risk of hidden charges and opaque contractual terms. You could end up paying a lot more than you first thought. Therefore, always read any contract thoroughly before signing it, do not be afraid to ask for clarification if you are unclear and in any case do not hesitate to ask for a lawyer’s review and consultation.