Early Repayment of Loans Under EU Law: The Lexitor Judgment

The Italian Law Journal, forthcoming

28 Pages Posted: 20 Jul 2020 Last revised: 26 Apr 2021

See all articles by Enrico Baffi

Enrico Baffi

Università degli Studi Guglielmo Marconi

Francesco Parisi

University of Minnesota - Law School; University of Bologna

Date Written: June 27, 2020

Abstract

Recent changes in EU law provide flexibility and protection to consumers, facilitating early repayment of loans, when the consumer is no longer interested in continuing a credit relationship. From an economic point of view, early repayment of loans should be facilitated, because it allows money that is no longer needed to be put to other desirable uses. Under current EU law, as recently interpreted in the Lexitor judgment by the Court of Justice of the European Union, upon early repayment of a loan, consumers can obtain a pro-rated reimbursement of all the up-front and recurring costs of the loan, including origination fees and ancillary service costs. In this brief article, we take a critical look at the current EU approach to this issue, suggesting that, while the legislature made the pragmatic choice in permitting partial reimbursement of up-front costs, this leads to several economic inefficiencies that can ultimately hurt the consumer. Repayment of up-front costs, and of any other sunk cost associated with the creation of the loan, can lead to a suboptimal mix of lending contracts. Some consumers could, in fact, take out a lower interest rate long-term credit, even though they may only need a short-term loan, and this would create a disadvantage for the overall class of consumers. In order to actually protect the economic interest of consumers and carry out the intent of the legislature, we conclude that the up-front costs for non-mandatory ancillary services (such as brokerage fees, etc.) should not be included in the costs that are eligible for reimbursement in the event of early repayment of the loan. By excluding these costs, consumers will not be incentivized to overconsume such services, minimizing the negative externalities imposed on other consumers.

Keywords: Banking Law; Loan Repayment; Origination Fees; Lexitor Judgment

JEL Classification: G21; K29

Suggested Citation

Baffi, Enrico and Parisi, Francesco, Early Repayment of Loans Under EU Law: The Lexitor Judgment (June 27, 2020). The Italian Law Journal, forthcoming, Available at SSRN: https://ssrn.com/abstract=3636650 or http://dx.doi.org/10.2139/ssrn.3636650

Enrico Baffi

Università degli Studi Guglielmo Marconi ( email )

via Parigi 44
Italy

Francesco Parisi (Contact Author)

University of Minnesota - Law School ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States

University of Bologna ( email )

Piazza Scaravilli 1
40126 Bologna, fc 47100
Italy

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