Notice No. 3/2013 on Information Regarding Interest Rates and Costs of Credit Operations

---

Notice No. 3/2013
On Information Regarding Interest Rates and Costs of Credit Operations With the abolition of interest rate caps and increased competition in the banking sector, market transparency now depends on a set of comparable and standardized information that must be ensured by credit institutions. This Notice establishes the minimum information that credit institutions must provide to enable comparative assessments and strengthen competition and transparency in the credit market. Accordingly, the Bank of Cape Verde, exercising the powers conferred by Article 22(2) of its Organic Law, determines the following:

Article 1
Scope
This Notice establishes the regime applicable to information regarding interest rates and other costs of credit operations that must be provided to clients by credit institutions and parafinancial entities.

Article 2
Definitions
For the purposes of this Notice, the following terms apply:
a) "Credit operations": all credit grant contracts, regardless of their form, including current account overdrafts (negotiated and non-negotiated) or any contract involving deferred payment or similar financing agreement, excluding factoring and the provision of guarantees; b) "Negotiated overdraft": an express contract by which a credit institution allows a client to draw funds exceeding their current account balance; c) "Non-negotiated overdraft": tacit acceptance by the institution, allowing a client to draw funds exceeding their current account balance or negotiated overdraft; d) "Credit institution": an entity whose activity consists of receiving repayable deposits or other funds from the public and granting credit on its own account; e) "NAR - Nominal Annual Rate": interest rate expressed as a fixed or variable percentage applied annually to the amount of credit used, reflecting remuneration for the credit operation and excluding any charges; f) "Fixed interest rate": nominal interest rate expressed as a fixed annual percentage, agreed between the credit institution and the client, to apply for the entire duration of the credit contract or for respective partial periods; g) "Variable interest rate": nominal interest rate expressed as a variable annual percentage, the modification of which has been previously agreed between the credit institution and the client through a pre-established indexing mechanism; h) "Index": a money market reference index, the calculation method of which is previously agreed upon, with its value subject to modification due to changes in the reference index value, at a frequency coinciding with its quotation period; i) "Base spread": margin applied to the index under a variable interest rate regime, assigned to the client after assessing their credit risk and the guarantees of the credit operation; j) "Contracted spread": margin applied to the index under a variable interest rate regime, assigned to the client as a result of optional bundled sales, promotional conditions, or other situations likely to affect loan costs; k) "Preferential interest rate" or prime rate: the interest rate that credit institutions apply at any given time to their lowest-risk clients for short-term credit operations in CVE; l) "EARP - Effective Annual Rate of Total Charges": rate expressed as an annual percentage of the total credit amount, reflecting the total cost of the credit operation to the client, including interest and all charges of any nature linked to the credit contract or accessory in nature necessary for obtaining the credit under established terms and conditions, including required insurance premiums. The EARP is calculated in accordance with Article 3 and the formula in Annex I to this Notice; m) "Fees": monetary payments due to clients by credit institutions as remuneration for services provided or subcontracted to third parties, within the negotiation, execution, and duration of loans; n) "Expenses": other charges borne
by credit institutions, due to them by third parties, and passed on to clients, notably payments to Land Registries, Notarial Offices, or of a fiscal nature, provided they are duly substantiated; o) "Charges": the sum of fees and expenses; p) "Total cost of credit": all costs, including interest, fees, and expenses of any nature linked to the credit contract that the client must pay and which are known to the credit institution, excluding notarial costs. Costs arising from accessory services related to the credit contract, especially insurance premiums, are also included if these services are necessary for obtaining any and all credit or for obtaining credit under market terms and conditions; q) "Durable medium": any instrument that allows the client to store information directed specifically to them, so that in the future they can easily access it for a period adequate to the purposes of the information and allowing unaltered reproduction of stored information.

Article 3
Calculation of the Effective Annual Rate of Total Charges (EARP)

1. The EARP equates, on an annual basis, the present values of the set of payment obligations assumed, considering used credit, capital repayments, remunerative interest, and charges, current or future, agreed between the credit institution and the client.
2. The calculation of the EARP also includes costs arising from accessory services related to the credit contract, namely:
   a) Insurance premiums, when these services are necessary for obtaining the credit or for obtaining it under market terms and conditions; b) Charges related to maintaining a current deposit account that simultaneously records payment operations and credit utilization, where opening such an account is mandatory for credit purposes; c) Other costs related to credit operations.
3. The EARP is calculated by determining the total cost of credit, in accordance with the formula set out in Annex I.
4. The following are excluded from the EARP calculation:
   a) Amounts payable by the client due to non-compliance with obligations under the credit contract; b) Amounts other than the price borne by the client upon acquisition of goods or services, regardless of whether the transaction is cash or credit; c) Notarial costs arising from the execution of the credit contract; d) Taxes, fees, emoluments, and notarial costs associated with the transaction of a financed or pledged asset; e) Fund transfer charges, as well as charges related to maintaining an account designated to receive amounts debited for credit repayment, interest payment, and other charges, except when opening such an account is a condition for granting the credit.
5. The EARP calculation is performed at the start of the credit operation, assuming that the credit contract remains in force for the agreed period and that respective obligations are fulfilled under the stipulated conditions and dates.
6. For credit operations where contracts allow for interest rate or included charge variations according to criteria that do not permit quantification of these modifications at the time of EARP calculation, it will be calculated assuming that the prevailing interest rate and charges remain unchanged until contract maturity.
7. For credit operations where only a maximum credit limit is defined for client use, the EARP will be calculated assuming full utilization of the credit.
8. If no repayment periods are fixed for the credit, a one-year duration is assumed, with a single repayment at the end of the term.

Article 4
Duty to Inform

1. Credit institutions must inform clients, through any means, about the different elements associated with the cost of credit for the operations they market, notably regarding interest rates and various charges borne by clients.
2. Information provided by credit institutions in the context of negotiation, execution, and duration of credit contracts must be complete, true, up-to-date, clear, objective, and presented in a legible manner.

Article 5
Information to be Included in Contracts

1. Whenever contracts evidencing credit operations are in writing, even by simple correspondence exchange, they must contain at minimum information regarding the financing amount, purpose, conditions, and credit repayment method; number and periodicity of installments; term; due dates for installments, and identification of operation guarantees.
2. In addition to the information in the preceding paragraph, the contract must also include the following:
   a) Indication of the NAR and interest rate regime; b) Identification and quantification of applicable fees; c) Indication of the EARP, if applicable, calculated in accordance with Article 3; d) Criterion for determining the applicable interest rate in cases of default, according to current legislation; e) Conditions applicable in case of early credit repayment; f) Express reference if the client wishes to receive information referred to in Article 7 of this Notice; g) Client's indication of the medium ensuring receipt of the information referred to in the preceding subparagraph.
3. For credit operations with variable interest rates, the index used and its relationship with the nominal interest rate to be applied must also appear.
4. In special cases, justified by the particular interests of the contracting parties, they may agree to adopt specific indices, provided that the nature and characteristics of their evolution are known to the client.

Article 6
Advertising

1. Without prejudice to generally applicable advertising regulations, all commercial communications, including advertisements where an economic agent proposes granting credit or acting as an intermediary for executing credit contracts, must always indicate the EARP, if applicable, for each type of credit to which the communication refers.
2. If, based on specific credit conditions, different EARPs apply, all must be indicated.
3. An EARP indication that is not easily legible or perceptible to the client due to its graphic or audio-visual treatment does not comply with the preceding paragraphs.
4. The EARP will be indicated, if no other means is possible, through a representative example.

Article 7
Information to be Provided During Contract Duration

1. During the contract duration, credit institutions must provide clients with a statement preceding the next installment, including at minimum the following elements:
   a) Identification of the loan and the outstanding capital amount as of the statement issuance date; b) Number and due date of the installment subsequent to the statement issuance date; c) Amount of the installment subsequent to the statement issuance date, with breakdown of respective capital and interest components; d) NAR applicable to the installment subsequent to the statement issuance date, with identification of its components; e) Indication of the tier and interest discount amount applicable to the installment subsequent to the statement issuance date, in the case of a housing credit contract under the subsidized credit regime; f) Identification and amount of any fees and expenses payable by the client on the due date of the installment subsequent to the statement issuance date; g) Total amount payable by the client on the due date of the installment subsequent to the statement issuance date, resulting from items c), e), and f) of this paragraph;
2. Whenever the institution, in accordance with current law and regulations, modifies contractual conditions on its own initiative, with or without impact on the installment value, it must communicate the content of these modifications to its clients free of charge, at least thirty (30) days prior to the intended application date, without prejudice to other legally or regulationally fixed deadlines.
3. The information referred to in the preceding paragraph may be provided through the monthly statement mentioned in paragraph 1 of this Article.
4. In communications regarding non-compliance with contractual obligations, credit institutions must inform the client about installments or other amounts due as of the issuance date of that communication, as well as amounts due for default, with identification of the respective rate and calculation basis.

Article 8
Compliance with Information Duties

1. Credit institutions must comply with the information duties set out in this Notice by providing information on paper or another durable medium, unless the client expressly requests paper provision.
2. For existing loans at the time this Notice enters into force, the information provided in the preceding article must be delivered to the client through the contractually agreed medium and communication method, or, in the absence of contractual provision, through the commonly used medium and method, unless the client expressly authorizes a change in the medium and communication method to be used for this purpose.
3. Credit institutions bear the burden of proving that information provided in Articles 4, 5, and 7 of this Notice has been made available to clients.

Article 9
(Calculation Base)
The incidence base for calculating interest for active and passive operations in contracts executed from the entry into force of this Notice is 360 days.

Article 10
Rounding of Indices

1. The rounding of indices must apply, in any credit operation, solely to the interest rate.
2. The rounding referred to in the preceding paragraph must be made to the thousandth.

Article 11
(Instructions)
The Bank of Cape Verde may issue instructions deemed appropriate for compliance with the provisions of this Notice.

Article 12
(Non-Compliance)
Non-compliance with the provisions of this Notice is penalized in accordance with the law.

Article 13
(Entry into Force)
This Notice enters into force the day following its publication.
Office of the Governor and Councils of the Bank of Cape Verde, in Praia, on June 13, 2013.
The Governor,
Carlos Augusto de Burgo

ANNEX I
At the core of the Effective Annual Rate of Total Charges (EARP) equation is the principle of equivalence between credit utilization, on one hand, and repayments and charges, on the other. Accordingly, the EARP equation is defined on an annual basis as the equality between the sum of present values of credit utilizations and the sum of present values of repayment and payment amounts, expressed through the following formula:
∑𝐶𝑗(1 + 𝑥)−𝑡𝑗 (from j=1 to n)
= ∑𝐷𝑙(1 + 𝑥)−𝑠𝑙 (from l=1 to n')
Where,
X – Effective Annual Rate of Total Charges (EARP); n – serial number of the last credit utilization; j – serial number of a credit utilization, such that 1≤j≤n; 𝐶𝑗 - credit utilization amount for j; 𝑡𝑗 - time interval, expressed in years and fractions of years, between the date of first utilization and each successive utilization date, with t1=0; 𝑛′ - serial number of the last repayment or charge payment; l – serial number of repayment or charge payment; 𝐷𝑙 - amount of a repayment or charge payment; 𝑠𝑙 - interval, expressed in years and fractions of a year, between the date of first utilization and each repayment or charge payment date; The above-defined equation can be rewritten using only a simple sum or by referring to the notion of cash flows (𝐴𝑗), whether paid or received in periods 1 to j, expressed in years, as follows:
S = ∑𝐴𝑗(1 + 𝑥)−𝑡𝑗 (from j=1 to n)
Where,
S corresponds to the balance of present cash flows, being zero if flow equivalence is intended.