The End of Debt Collection Agencies' Freelancing

Taking out loans is common in society, and much of the financial services market relies on it. If responsible lending principles are followed and the loan amount does not exceed the maximum credit cost rate, the logical end of the process is proper repayment. However, life is unpredictable, and it is not uncommon for loan conditions to be unmet or for personal reasons to arise, resulting in the borrower being unable to repay the loan as agreed. Often, the claims of borrowers struggling with repayment are transferred to companies specializing in debt collection – collection agencies.

The collection of debt claims arising from credit agreements has been a business activity in Estonia since the early years of re-independence. While such firms have their niche and help banks and other lenders, from the borrower's perspective, the situation has often been difficult. Collection agencies have used intimidation tactics and threatening calls and messages to collect money, including for outdated and unfounded claims. Now the state has decided to rein in this wild west-style economic activity.

Control Over Collection Agencies' Activities

In 2014, focus shifted to payday loan companies when only about a quarter of previous service providers obtained licenses following heightened scrutiny by the Financial Supervision Authority. Now, it's the collection agencies' turn. On June 12, 2024, the Parliament passed the Credit Collection and Purchasers Act (KIOS), which the President proclaimed on June 25, 2024. The law came into force on July 14, 2024.

The law aims to align local law with the European Parliament and Council (EU) Directive 2021/2167 on credit servicers and purchasers. Additionally, the legislator decided to address multiple issues simultaneously by adding several amendments, including those to the Consumer Credit Act, to the 94 new sections of the law. This aims to make collection agencies' activities more controlled, protect borrowers, and facilitate the work of lawyers and advisors offering legal consulting services in this field. Thus, ensuring that previously harmful economic activity becomes more favorable for all parties.

Changes in the Legal Framework

To better navigate the legal framework, several seemingly similar but substantively different terms were defined in the new law. The legislator clarified definitions for terms like credit collection agency, credit management activity, credit purchaser, credit institution, creditor, borrower, credit agreement, and usury. For example, a credit collection agency is a company whose main economic activity is credit management, where it manages claims arising from consumer credit issued by a credit institution or creditor on its own behalf or on behalf of a credit purchaser. Credit management activities include collecting claims from credit agreements, collecting payments, negotiating with borrowers, handling complaints related to credit agreements, and informing about changes. The law also clarified terms like home country, target country, foreign country, and third country to understand the scope of the law.

Who the New Law Affects

The Credit Collection and Purchasers Act applies to credit collection agencies and credit purchasers established and operating in Estonia and those residing in Estonia. It also covers the activities of branches of credit collection agencies established in Estonia operating abroad and the activities of foreign-established credit collection agencies and purchasers operating in Estonia. The law's scope also includes credit management activities in European Economic Area (EEA) countries, but credit institutions, creditors, or intermediaries established in these countries are not considered credit collection agencies.

The law only applies to collection agencies that deal with the collection of claims from banks and other creditors. It does not cover parking fines, child support debts, or other such claims. The law also does not apply to notaries, bailiffs, bankruptcy trustees, or lawyers.

Improved Transparency

The new law includes numerous new operational requirements and behavioral norms for credit collection agencies. Similar to payday loan companies, credit collection agencies must apply for an operating license from the Financial Supervision Authority under the new law. To continue current operations, an operating license must be obtained by January 1, 2025. The license application must include, among other things, a reliable business plan, documents reflecting the service provision, a description of the structure, and an extract from the criminal record of the managers. A credit collection agency or creditor's manager must not have engaged in usury. The importance of the Financial Supervision Authority's role is shown not only by oversight but also by the requirement for credit collection agencies to submit reports and notifications to the financial supervisory authority.

The obligation to share information between different institutions characterizes the Credit Collection and Purchasers Act, making this previously somewhat opaque economic sector more transparent. A credit collection agency has the right to obtain information from the creditor about the loan in default to determine already at the outset whether the loan was given responsibly. Conversely, the debtor has the right to obtain information from the credit collection agency about the debt. Violating the new obligations will result in severe penalties: fines can reach up to 1 million euros or 10% of the annual net turnover.

Additional Changes

Further amendments were made to existing laws affecting banks, consumer credit providers, and intermediaries. According to the newly enacted law, before initiating court or enforcement proceedings, alternative options must be offered to the indebted consumer to fulfill the obligation. For example, extending the repayment period, reducing the interest, or restructuring the claim, taking into account the consumer's rights and interests. Provisions regarding restructuring will take effect on January 1, 2025.

The law also includes a regulation on contract amendments, specifying the previously existing situation. From now on, the consumer must be provided with the information required by law concerning, for example, the assignment of the claim, including specifying to whom and when it was made. The consumer has the right to review and request information about the incurred debt, so according to the new law, there is an obligation to inform the consumer about the debt-related information, even if the claim is assigned to a collection agency. Restructuring the debt and initiating court or enforcement proceedings must be regulated in the creditors' internal rules.

As a change affecting collection agencies, the law now stipulates the establishment of a complaints handling procedure. This must be done correctly, be sufficiently justified, and be free of charge. Complaints from consumers must be responded to within 15 days.

In Summary

Considering the current practices and emerging problems, ensuring transparency in the activities of collection agencies and controlling their operations is a significant help to borrowers. It is essential that economic activities, including lending, borrowing, and buying claims, are fair and do not harm anyone's interests. The obligation for credit collection agencies to apply for an operating license and the legalization of their activities could be the measures needed to reduce disputes in the future. To ensure the correctness of their actions, it is useful for both individuals who have come under the scrutiny of a collection agency and credit collection agencies to turn to a law firm or other legal advisor for guidance and assistance.