The Unlikely Continuity. The Communist Legacy of Romanian Consumer and Residential Credit Laws

2.1 Historical Origins of Consumer Credit

Graeber traced the origin of credit and debt at least 5000 years back.^[25] Most authors agree that the modern foundations of credit were laid in the Western world and developed alongside the nation-state, for instance, in the Netherlands, the UK, Germany, France and the US. However, it was generally a privilege for the wealthy and powerful.^[26] The democratisation of credit (i.e., granting credit to lower strata of society) began only in the first decades of the 20th century^[27] and rapidly expanded after WWII.^[28]

The above historical overview should not be construed in the sense that poorer categories were deprived entirely of credit until recent years. Alternative banking has been documented to have existed alongside private commercial and merchant banking early in European history.^[29] Charitable organisations such as ‘Monte de Pietà’ (Mount of Piety), which functioned as pawn-credit foundations, extended credit to the poor against security in personal goods,^[30] including in Romania.^[31] Credit cooperatives and saving houses were founded across German and French-speaking areas pooling member resources and facilitating access to cheap credit.^[32] They played an essential role in promoting financial inclusion and increasing the standard of living of the low-income classes.^[33] They were the source of inspiration for the first institutions designed to grant affordable residential credit in Romania,^[34] which, however, did not save them from nationalisation under the communist regime.^[35]

In the US, a substantial transformation of consumer credit occurred at the end of the second decade of the 20th century, when state governments pressured commercial banks to extend credit to the masses to curb predatory lending by loan sharks.^[36] The democratisation of consumer and residential credit drove the consumers’ desire to improve their living standards^[37] by committing their future incomes in exchange for immediate access to durable goods or housing.^[38] Similarly, increasing the citizens’ living standards was the primary motivation for the communist system to provide consumers with credit for residential properties and other durable goods.^[39]

2.2 Ideological Origins of Consumer and Residential Credit

An apparent ideological element is attached to consumer and residential credit and its effects. In the words of one historian, ‘today, the culture of consumption is largely responsible for legitimising capitalism in the eyes of the world.’^[40] Another argued that ‘consumerism’ – and, implicitly, the tools that made it possible, consumer and residential credit – is one of the fundamental traits that made Western civilisation the dominating force in world history.^[41]

Nevertheless, differences exist even within the capitalist system between private and alternative banking models. A broad and heterogenous set of financial institutions (i.e., credit cooperatives, savings banks, credit unions or mutual savings associations) has been less animated by considerations such as profit maximisation for shareholder benefits and risk-taking that generally characterise private commercial banking. On the contrary, their mission was focused on fostering economic and social development and facilitating savings or credit for poorer households via prudent banking and sustainable returns.^[42] Despite their goals and alternative approaches, these institutions were created and active in the credit market.

On their end, communist systems, like the Romanian one, generally viewed credit as a manifestation of the capitalist order, representing an instrument for despoiling the poor and enriching the rich. Communist credit was motivated not by profit but by the fair and equal redistribution of resources^[43] and the desire to instil loyalty to the Party and cohesion in the mass of citizens.^[44] Thus, the position of the socialist economy appears to have embraced some of the alternative banking’s views in its rejection of profit-generating interest rates (which were perceived as neo-usurious) and sustainable, rational use of existing financial resources.^[45]

Romanian communist legal scholars listed four types of credit: (a) banking credit (by which the state extended credit to economic units and the population); (b) public credit (by which the state used the population’s savings to lend to economic units); (c) cooperative credit (used in the cooperative system) and, of relevance to this study, (d) consumption credit (by which the state, through the banking apparatus and commercial units, fosters sale of durable goods to the population through credit repayable in instalments).^[46]

In opposition to capitalist systems, where private commercial banks appear as intermediaries between the Central Bank and the credit beneficiaries, the socialist systems adopted a so-called ‘direct crediting’ policy, by which commercial units and the population could access credit directly from the operational branches of the National (Central) Bank (Table 1 ).^[47]

Nevertheless, ideological considerations fade when one considers access to residential credit. Historians have linked the development of credit markets and products to growing urbanisation and industrialisation,^[48] a trend easily discernible in communist systems. This study shows that as Romania continued industrialisation and urbanisation efforts under the communist regime, the role of residential credit granted to the population grew similarly, peaking at the end of the 1970s. Moreover, residential credit’s constitutive elements and mechanics are the same regardless of the political or economic regime. Ultimately, the evidence will show that the Western and communist types of residential credit are functionally equivalent from a legal perspective and answer the same social needs.

The main differences are the source of credit and the formation of interest. Regarding the source, credit comes mostly from retailers or banking and non-banking financial institutions in capitalist systems. In contrast, in communist systems, credit comes from the state via specialised financial institutions (such as the House for Savings and Consignments in Romania) or non-financial institutions (such as retailers – state-owned enterprises). Regarding interest, while in capitalist systems, it is governed by free-market forces and suffers the vagaries of the market, in communist systems, it is fixed by law and less affected by market changes.

Even so, capitalist systems were not always free from state credit. In the 1930s, the US government subsidised credit in the collapsed residential construction industry. Consequently, ‘state-subsidised credit (…) became an enduring entitlement of US citizenship.’^[49] After WWII, the US Housing Act of 1949 expanded government credit subsidy programmes and established the amortised 30-year home mortgage as the industry standard,^[50] free from purely market-based influences.

The situation was similar in modern Romania. Before and after WWI, the state offered credit to specific categories of consumers to foster access to owned housing. State credit was needed to induce private investment to build and meet the critical demand for housing, which communist governments, including Romania’s, have also confronted and attempted to solve. Thus, state-backed credit for addressing the social need for housing was hardly a communist invention or attribute and cannot count as an argument against the functional equivalence of communist and capitalist consumer and residential credit. On the contrary, it strengthens it.

How interest rates are determined in the two systems could also challenge the idea of functional equivalence from an ideological and economic perspective since communist systems considered interest a means of ‘supplementary exploitation’ of the population.^[51] However, one should remember that capitalist systems initially urged private banks to get involved in crediting the population mainly to combat exorbitant and eventually predatory interest rates.^[52] At the same time, alternative banking models provided customers cheap credit. In addition, communist systems did not entirely stop from charging interest. In communist Romania, interest rates were maintained: a) to cover the administrative costs of banks, b) to curb excessive use of credit, c) to stimulate specific sectors of the economy via differentiated interest rates and d) to punish those who did not repay on time.^[53] However, interest rate levels were significantly decreased by law to deprive them of their exploitative potential. Therefore, by decoupling interest rates from free market mechanisms, the credit products offered by the state or its economic operators tended to be more advantageous to the population.

Societies whose members have recourse to credit need growth and, more importantly, employment prospects. Thus, a deteriorating economic situation negatively affects repayments.^[54] This was evident during the financial crisis of 2007–8 and the COVID-19 pandemic. From this standpoint, consumer debtors in communist economies appear to have been in a better position because unemployment was virtually non-existent (and even criminalised), and the risk of non-payment was minimal. Moreover, in case of default, they had multiple occasions to repay their dues before their property was foreclosed.

2.3 Elements of Consumer and Residential Credit

A reference point is needed to assess the functional equivalence of consumer and residential credit in Romania’s capitalist and communist systems. To that end, I propose juxtaposing and comparing the following building blocks of consumer and residential credit 1) the subject of credit (consumers), 2) responsible lending (assessment of creditworthiness, down payments and risk-mitigating mechanisms), 3) the cost of credit (interest, charges and penalties), 4) the duration of the agreement and 5) the availability of swift enforcement mechanisms for honouring debt payments and obligations. These fundamental elements will be used in sections 4 and 5 to test the functional equivalence of Romania’s communist consumer and residential credit legislation with monarchic or transition counterparts.

Paradoxically, the same building blocks can be identified in the 2008 Consumer Credit Directive (CCD)^[55] and the 2014 Consumer Mortgage Directive (CMD),^[56] which would have suggested a normative continuity after EU accession. However, adopting the EU-driven acquis has discontinued the normative continuity of the monarchic and communist consumer and residential credit laws by promoting asset-based credit and market-based interest rates and limiting consumer protection measures to mandatory disclosures and financial prudential rules.

3.1 Three Stages of Romanian History

Three main stages can be identified in Romanian history. The first covers the modern period, from the 1859 Union until the abolition of the monarchy in 1947. It constituted the country’s foundational period when its institutional and legal framework was created. The second is the communist period, lasting from 1947 until the 1989 Revolution, nowadays commonly regarded as an unwanted intermezzo in the country’s development. The third is the contemporary period, which extends from the fall of communism in 1989 to the present and is generally portrayed as a return to the democratic and capitalist system built during the foundational years. During this period, Romania joined the EU in 2007.

Each stage was marked by efforts to develop, industrialise, and modernise the country and its institutions, even though most contemporary historians and legal scholars deny any merits to the communist period. The continuous transformation is more evident if analysed chronologically, based on these three stages (Figure 1).

Figure 1:

The territorial evolution of Romania from 1856 to the present day. Source: World History at KMLA (https://www.zum.de/whkmla/region/balkans/xromania.html). The figure illustrates the fast pace of Romania’s unification, which also meant territorial and population changes that posed significant challenges to Romanian policymakers and legislators.

3.2 The Emergence of the Consumer and Consumer and Residential Credit in Romanian Law

The common wisdom that Romanian consumption and consumer and residential credit are creations of the transition from communism to capitalism is misleading and incorrect. Before and, especially during communism, efforts were made to increase access to consumer goods, curb unfair trading practices and ensure fair and equitable access to credit. The emergence and expansion of consumer finance accompanied the establishment and development of the Romanian financial system during the foundational years and the improvement of citizens’ living standards during communism via access to housing and durable goods.

3.2.1 Modern Romania

During the modern period (1859–1947), the local economy had a preponderant agricultural character. Thus, most imports concern products for consumption,^[57] which indicates the emergence of a preoccupation with and an inclination toward buying consumer goods, in line with the international trend. Empirical data also reveals a steady increase in consumer goods imports as the country’s financial situation and the population stabilised and improved (Table 2).

Table 2:

The increase of imports of specific consumer items during 1879–1903. Source: Romania’s Statistical Yearbook 1904, p. 315, Table 10.

Years	Rice	Raw coffee	Cacao	Citric, exotic fruits, nuts, etc.
	Kilograms
1879	3.613.076	804.857	1.282	2.211.916
1884	5.156.222	1.272.015	2.419	2.606.802
1889	6.039.195	1.188.576	7.417	3.070.248
1894	6.636.637	1.378.894	23.279	4.913.179
1899	7.369.690	1.826.806	52.574	5.695.392
1903	9.396.457	2.206.416	60.727	7.094.352

As of 1878, the House of Deposits and Consignments, a public financial institution, would also start issuing loans to “particulars”. During 1878 and 1902, these loans totalled Lei 50,007,758, of which only Lei 1,479,350 were still outstanding in 1902.^[58] However, it would not be the sole provider of credit. By 1898, 18 banks were active on the Romanian market; in 1914, there were 215. A rapid expansion could be witnessed in the number of popular (cooperative) banks. In 1914 there were 2935 such institutions.^[59]

The rate of consumer goods imports decreased during the interwar years due to a combination of protective tariffs, import substitution with local products^[60] and a decrease in the population’s purchasing power due to the economic crisis in the 1930s (Table 3).

Table 3:

Romania: commodity composition of exports and imports 1922–1938 (Per cent). Source: Kaser, M.C. and Radice, E.A (eds), The Economic History of Eastern Europe 1919–1975, Volume I, Clarendon Press (Oxford), 1985, 461, Table 7.36, 7.56 and 7.57.

	Average 1922–1924		Average 1928–1929		1932		1935		Average 1937–1938
	Export	Import	Export	Import	Export	Import	Export	Import	Export	Import
Agricultural produce	62.1	11.2	49.6	9.2	46.7	9.0	36.0	8.5	43.9	6.2
Raw materials	35.4	2.3	49.6	4.4	50.7	4.7	61.8	4.3	52.0	7.7
Primary products	97.5	13.5	96.2	13.6	97.4	13.7	97.8	12.8	95.9	13.9
Consumer goods (other than agricultural)	1.1	51.1	2.5	42.0	1.4	46.3	1.6	36.5	3.3	25.0
Machinery and vehicles	0.2	9.5	0.1	18.4	0.3	10.6	–	17.9	–	25.0
Manufactures	2.5	86.5	3.8	86.4	2.6	86.3	2.2	87.2	4.2.	86.1

According to empirical data, consumer credit emerged early in the form of instalment sales of durables and other consumer goods. In 1887, Singer sewing machines were sold in instalments in several Romanian cities^[61] under the influence of economic models imported from the United States. These were later joined by bicycles and musical instruments (1897),^[62] gramophones, furniture, and carrycots (1909), commercialised via specialised shops.^[63] According to the advertisements, all these consumer goods were destined for “industrialists and families of high quality (Figure 2).”^[64]

Figure 2:

Advertisement for instalment sales retail shop destined for “Families of Superior Quality”. Source: Opinia, Year VI, no 831/1909, p. 4. The figure illustrates that instalment purchases were not available for everyone, but for the well-off segments of the population.

Even after WWI, although the territory and population of Romania tripled in size, its economy remained mainly agrarian (employing approximately 80% of the active population).^[65] It depended on exports of commodities such as cereals and oil^[66] and imports of consumer goods, machinery, and other finite products.^[67] The market was only a secondary distribution mechanism. Income inequality was high, with 96% of people struggling to survive from one day to the next.^[68] ‘Credit’ was primarily employed to make ends meet. For instance, in 1931, debts up to Lei 6000 represented 32.9% of the total debts owed to credit cooperatives and 73% of their total number of debtors at a time when the maximum hourly wage for a skilled worker was around Lei 28 and the daily wage for a male working in agriculture ranged between Lei 60 and 90.^[69] At the same time, debts between Lei 6001 and 10,000 represented 19.2% of the total debt owed to credit cooperatives and 14.5% of the total debtors.

On the opposite end of the spectrum, debts between Lei 20,001 and 50,000 and debts over Lei 50,000 amounted to 15.7%, respectively 11.8% of the total debts owed to credit cooperatives, but only 3.3%, respectively 0.7% of their total number of debtors.^[70] Newspapers abounded in advertisements of credit sales for consumer goods (e.g. vacuum cleaners, radio sets), although these were most likely addressed to the top 3–4% of the population.

Urbanisation levels were low before WWI, and efforts were made to facilitate access to credit for constructing new dwellings, with various success rates. For instance, the Urban Credit House (UCH) of Iasi issued 2379 loans during 1881–1903, totalling over Lei 40 million, out of which more than a quarter (Lei 12.7 million) were repaid by 1903.^[71]

Housing availability and quality remained problematic between the two world wars. For instance, 16,400 housing units were built in the capital city of Bucharest during 1918–1938 for 631,000 inhabitants and 158,000 households at the 1930 census. During 1935–1938 only 38,892 constructions were authorised in the entire country.^[72] Voluntary sales of immovables remained somewhat constant, with variations during the economic crisis of the 1930s. However, there is no exact indication of how many were sold and purchased on credit.^[73] Thus, it is unsurprising that the legislature focused on solving the housing crisis, with consumer residential credit laws emerging in 1921.

Consumption suffered during WWII because production was redirected to support the war effort. The quantity and quality of the food supply and other essential goods (i.e., clothing or footwear) became critical.^[74] Nevertheless, most foodstuffs and goods were freely traded on the market, encouraging speculation.^[75] Housing was a significant issue, worsened by the Allied bombardments.

For these reasons, in 1945,^[76] the Parliament adopted one of the first laws considering the interests of consumers as a specific category.^[77] The law did not define consumers but implied that they were natural persons entering commercial agreements for consumption. Professional merchants were obliged to inform consumers of their prices for goods and services and publicly disclose their contact and registration details,^[78] in what appear to be proto-consumer protection rules through mandatory disclosures and transparency.

Additionally, merchants could be liable for fraud if they used smaller measurements or sold underweight, counterfeit, or sub-quality products.^[79] Selling consumer goods at prices either higher than the maximal ones or lower than the minimal ones set by law was also punishable.^[80] In these cases, the consumer could be held liable alongside the merchant unless they reported the latter’s unlawful behaviour to the authorities.^[81]

4.1 The Modern Period (1859–1947)

The issue of housing as purpose-built property has been a concern in the modern period, even before WWI. The state’s intervention and financial support played a tremendous role in slowly improving the housing situation, at least in urban areas.^[116] If in Western Europe, the intervention could be explained by the governmental belief that housing improvement would be a pre-condition for raising the workforce’s physical, educational and cultural level, in Eastern Europe urban dwelling construction was part of the efforts towards industrialisation and economic development.^[117] Romania was no exception from this trend.

In its old form, mortgage credit was extremely disadvantageous due to the high-interest level and short repayment period. Moreover, the local population lacked financial literacy, which made it easy prey to unscrupulous lenders. A new Law concerning mortgage credit^[118] was implemented in 1873^[119] to address these flaws. The law recognised the local economic situation, characterised by a lack of capital and poverty. The authorities employed the experience of other countries, such as Germany, to solve this situation.^[120]

To tackle the usurious loans of the time and encourage building construction in the capital and emerging cities,^[121] in 1874, the first UCH was set up in Bucharest. However, more were to appear during 1875–1881. These institutions did not lend money but issued bonds called ‘letters of credit’ (scrisori de credit). The bonds yielded an interest of 5% (in 1875–1881, the interest was 7%). They were backed by all the real estate mortgaged by the UCH. Although the initiative was advantageous for its customers, due to the low saving power of the population, it was too expensive to be appealing. The value of the loan could only amount to 50% of the total value of the dwelling, while the 5% interest rate meant that in 20 years, the initial value of the loan would double. Thus, this system was partially successful, with only 200 dwellings built in Bucharest in 1911–1930.^[122]

In 1910, Romania adopted the first European law “regulating the construction of cheap and healthy housing.”^[123] The Explanatory Memorandum acknowledged that “private initiative cannot generate the number of housings needed, due to the current state of the economy”, which required the state’s intervention and support.^[124] These came as a series of facilities for builders and new owners, including exemptions from all taxes relating to housing for individuals and companies. The builder paid the city only half of the building work’s value planned for opening new streets, and the material for housing construction was exempt from taxes.^[125] The law also imposed limits on profits for construction companies, capped at 6% of the dwelling’s price.

Among the first applications of the law was the subsequent creation by Bucharest City Hall of the Bucharest Communal Company for Cheap Housing Construction.^[126] The law empowered the company to build cheap housing of a maximum value of Lei 8000 to sell to the inhabitants of Bucharest, who could pay a 10% down payment of the dwelling’s value. Preference was to be given to workers, public and private employees who were in good health, under the age of 50, and whose salary was below or equal to Lei 250. Since the company could not invest its capital during the first 20 years, it was empowered to issue bonds (obligaţiuni) with 5% interest, which were sold on the market.^[127] The company was active until 1945.^[128]

In the early 1920s, the challenge of housing aggravated. Besides the destruction caused by WWI, no new housing was constructed during 1916–1920. Moreover, cities became increasingly overcrowded due to the migration of the peasantry, attracted by the prospects of a better living standard and the emergence of new working places due to industrialisation.^[129]

Thus, measures to encourage housing construction were adopted in 1921.^[130] Cooperative societies were set up to buy and divide the land to construct low-cost housing for members: workers, civil servants, and pensioners, and build on this land. Thus, the envisioned solution for the housing issue began to involve urban owners’ direct, mutual, and solidary association. To this end, in 1926, another law on Urban Credit Houses was passed, authorising the establishment of companies with unlimited duration through direct association and mutual guarantee of urban owners, who could borrow against the mortgage on their properties.^[131]

The 1921 initiative was renewed via Law 80/1927 on the encouragement of housing building^[132] and later provided a series of facilities to specific categories of individuals, such as temporary tax exemptions^[133] and access to cheap credit from the state.^[134] The 1927 law was in force until 1973 when it was repealed as no longer compatible with the socialist legal framework.^[135] Nevertheless, its survival long into the communist period is a compelling argument supporting the idea of continuity in the consumer-credit legislation and functional equivalence, ideology notwithstanding. It also indicates that consumer housing remained a concern for the new regime.

In 1930, a series of institutions with real consequences on credit and the economic orientation of the state appeared, among which the Transitory Mortgage Credit Institute,^[136] the Autonomous House of Building Constructions and the Rural House, which were to make it possible for small farmers with no property, like the rest of the population, to obtain advantageous loans for the rational development of their households, transforming their debts guaranteed by short-term mortgages and exaggerated interest rates (12%) into long-term debts with low-interest rates.^[137]

4.2 The Communist Period (1947–1989)

The state’s financial contribution and involvement in housing construction remained significant. Since WWII devastated a substantial part of the residential buildings in major cities (Ploiesti or Bucharest),^[138] and Eastern countries rejected Western foreign aid, the reconstruction had to rely exclusively on domestic resources. These were affected by the war and the subsequent reparations – USD 1.2 billion – the country had to pay to the USSR for its role in the war. Moreover, Romania was occupied by Soviet troops for a decade (until 1956) and was thoroughly pillaged through the so-called SovRoms, joint-venture companies that had no other purpose but to extract Romanian resources for the benefit of the USSR.^[139] Therefore, the housing situation improved modestly in the first years after the war, with most residences being built in rural areas from the population’s funds.^[140] The explanation for this phenomenon is the population’s purchasing power fluctuation. Those in the rural areas who managed to save up before the war invested their savings in housing construction in the first decade after.

However, the ratio between dwellings constructed from own funds and those constructed from state funds or with state support (residential credit) will reverse in the next two decades. As a result of the massive internal migration caused by resumed efforts for industrialisation (and the implicit development of a numerous and skilled working class),^[141] the communist state began an extensive program of apartment block building, which it supported both technically and financially. The primary purpose was to provide sufficient housing for those who needed it and to distribute it justly to the population. Therefore, the allocation and the sale of apartments did not observe market criteria but the premise that everyone has the right to one house (Figure 3).^[142]

Figure 3:

a)–c). Dwellings brought into use during 1950–1960, 1961–1970, 1971–1980. Source: Romania’s Statistical Yearbook 1990 and 1998. The figures illustrate a steady increase in residential credit granted to the urban citizenry for the purpose of building or purchasing a dwelling, coupled with a steep decline in housing construction from own funds in the countryside, while residential credit for similar purposes in the countryside is virtually non-existent.

The first normative measures by which the state credited the construction of new housing were Decision 4015/1953, corroborated by Decision 980/1954 and Decision 58/1956, whereby the employing enterprise or organisation guaranteed the employee’s loan for constructing new housing.^[143] These enabled ‘workers, technicians, engineers, public employees, young married couples and members of collective agricultural households to access individual credit to build new housing.’^[144] Decision 4015/1953 established a priority order^[145] and a maximum cap for the credited amounts. The financial terms were extremely generous, as the required initial down payment was 10%, while the yearly interest rate was only 0.1%. Moreover, the necessary land for construction was made available by the state (although with retention of ownership), and the owners were exempted from property tax for 10 years.^[146] These privileges, reminiscent of the monarchic legislation for residential constructions, were abrogated in 1977 as deemed no longer compatible with the socialist order.^[147]

As mentioned, the communists maintained and steadily generalised the monarchic law’s incentives (i.e., cheap state credit and tax exemptions). The foundation was Decision 26/1966, by which the state offered the necessary land for construction and granted medium-term credits (15 years) with fixed interest (1% annually).^[148] Newly built personal properties were exempted from taxes for 10 years, while those who made a down payment higher than the required 30% enjoyed more favourable credit terms.^[149] These incentives were maintained by post-communist legislation, given that Decision 26/1966 was abrogated only in 1997.^[150] The longevity of this normative act and its lasting effects are other arguments in favour of continuity and the success of credit activities for the population (Figure 4).

Figure 4:

Legal continuation of Romanian residential credit laws. The figure illustrates the continuity of residential credit legislation throughout the three stages of Romanian history and their coexistence, despite ideological differences.

Subsequent laws expanded residential credit backed by a mortgage to more categories of consumers.^[151] Decision 26/1966 was further implemented by Decree 445/1966 concerning state support for urban citizens in constructing private property dwellings^[152] and Decree 713/1967 on the construction, by citizens, with state support, of vacation homes in touristic locations,^[153] which became Law 19/1967.^[154] Both decrees were replaced by Law 9/1968 for the development and sale of dwellings from the state fund to the population and the construction of personal vacation homes,^[155] which unified and systematised the legal regime for residential credit.

The 1970s saw the peak of housing construction in Romania,^[156] an unmistakable mark of the extent and success of residential credit during communism. Due to the state’s inability to continue building at the same pace and prices, it reverted to a system of housing construction based on the partnership between tenants and the cooperatives that had construction rights, with the aid of state loans, advancing, thus, the development of private property.^[157] This effect was facilitated by the adoption of Law 4/1973 on the construction and sale of housing from the state fund to the population and the construction of personal vacation homes,^[158] which abrogated Law 9/1968 and generalised the credit terms by consolidating all previous legislation into one comprehensive act. The premise of Law 4/1973 was the increased demand for more and better housing.^[159] Construction continued to be financed by the population’s income, with cheap, long-term^[160] state credit,^[161] until the fall of communism.

The comprehensive housing policy of the communists produced spectacular results. Between 1951 and 1989, 5.5 million housing units were built in Romania, 2.98 million by the state, state-owned enterprises, cooperatives and local organisations and 2.54 million through the population’s private funds.^[162] The communist type of residential credit enabled Romania to have one of Europe’s highest ratios of housing ownership.

4.3 The Contemporary Period (1990–Present)

The changes that occurred during the 1990s in the economic and political spheres during the transition from a planned economy to a free market, respectively, from a totalitarian regime to a democratic one, had a tremendously detrimental impact on housing construction and residential credit in Romania leading to the financialisation of housing. Several factors contributed to this: (a) a decrease in construction of new state-financed dwellings due to the economic downturn and shift in funding priorities, (b) a surge in demand for housing caused by a population increase following Ceausescu’s anti-abortion laws, (c) the abrupt liberalisation of prices for construction materials, and (d) the decrease in real earnings coupled with the anti-inflationist policies of the government, which significantly reduced the purchasing power of the population (Figure 5).^[163]

Figure 5:

Indices of real earnings in Romania 1990–1999. Source: Romania’s Statistical Yearbook 1990, 1998 and 2004. The figure illustrates the steep decline in real earnings in Romania during the first decade following the 1989 Revolution, which, coupled with high inflation, significantly affected the purchasing power of the population.

Nevertheless, the most crucial cause of the decline in new housing construction was the disappearance of the state-backed financing system based on fixed and affordable interest rates. Market forces could not react and resolve the disparities between the demand and offer of housing^[164] (and when they did, they behaved in a predatory manner by setting extremely high-interest rates). At the same time, in opposition to the approaches of the monarchic or communist periods, the transition governments were unable and unwilling to intervene and support low-income families to acquire a home.

Law 4/1973 survived the 1989 anti-communist Revolution until 1991 when Law 50/1991 on the authorisation of construction works repealed it^[165] and re-fragmented residential credit legislation. During the transition, the state withdrew from financing new constructions,^[166] and most state-owned dwellings were privatised between 1990 and 1994.^[167] Thus, while Law 50/1991 tackled the construction of new dwellings and vacation homes, Decree 61/1990^[168] and Law 85/1992 addressed the sale of dwellings built from state funds.^[169] The two systems ran parallel until a new residential credit regime was adopted in 1999.

Law 50/1991 initially provided that state banks and the House of Savings and Consignments would grant credits to consumers (referred to as natural persons) to build a dwelling or vacation home.^[170] The tax exemption used during the monarchical and communist construction laws was maintained,^[171] and more incentives to build new dwellings were added. However, Law 50/1991 failed to implement any rules for mortgage-backed credit, and the abrogation of Law 4/1973 generated a legislative gap that endured until the end of the 1990s.

To encourage the construction of new dwellings, Law 114/1996 on housing^[172] restated several incentives such as a reduced tax on profits on investing in the construction of housing, exemption from property tax for 10 years for buyers,^[173] and subsidised credits granted for a maximum period of 20 years by the House of Savings and Consignments, which remained a state-owned financial institution. Concerning the interest rate applicable to the loan, the law initially stated that it could not be higher than the interest practised in the financial-banking market. The interest was subsidised by 85% by the state.^[174] Nevertheless, when the average interest rate amounted to 50% per year, the interest rate paid by the credit beneficiary was 7.5%, which doubled the credit value in 13 years. Thus, in 1997 it was changed to match the interest practised by the House for the population’s saving deposits plus 5%. Even so, the interest rates remained high and unavailable to the largest segment of the population.

Therefore, during 1992–1998, credit for building or acquiring housing (other than those sold by the state) was virtually nonexistent in Romania. According to a study by the Romanian National Bank, several economic, political and legal factors contributed to the complete decline of residential credit: a) the high inflation of 1991–1994 and 1997–1998 (which diminished the value of credits to be repaid and exposed banks to financial losses), b) the volatility of the labour market (which made banks reluctant to lend to natural persons or specific categories of employees), c) the banks’ preference for short-term loans with high interest made to the industry^[175] (which minimised the availability of credit for the population), d) high-interest rates for mortgage credits (which made them unaffordable to most population), e) high costs for housing corroborated with the low income of the population, f) a general legislative and social instability regarding ownership rights, and g) slow judicial mechanisms of enforcing a debt (Figure 6).^[176]

Figure 6:

Average interest rates for non-banking customers including consumers and average annual inflation rates 1991–1998. Source: The Romanian National Bank Annual Reports. The figure illustrates the spikes in inflation that affected the early and late 1990 and the steep annual interest rates practised by the Romanian banks in their relationship with businesses and consumers. These two factors made residential credit granted on market terms unaffordable for most of the population.

The state ultimately intervened to address the situation during the creation of the National Agency for Housing in 1998,^[177] which was enabled to grant credits secured by a mortgage for building, purchasing, rehabilitating, consolidating, or expanding a dwelling. For this purpose, the Agency could conclude special agreements with banking institutions to finance the credits at a lower interest rate than the financial market average.^[178]

The legal framework for mortgages for the construction, purchase, rehabilitation, consolidation, and expansion of dwellings was implemented by Law 190/1999,^[179] coupled with the Methodological Norms 3/2000 issued by the National Bank.^[180] The law was a general instrument covering any mortgage agreement for consumers or professionals.^[181] Other financial institutions could also give mortgage credits besides banks, the House of Savings and Consignments and the National Agency for Housing. The law set mandatory rules for the protection of debtors (prior disclosure of contractual terms, a ban on unilateral modification of terms, right to early repayment and limitation of administrative costs). Nevertheless, it did not solve the issue of variable interest in consumer contracts and left most financial matters at the mercy of contractual negotiation between credit issuers and their clients. This lack of regulation enabled the financial institutions to dictate terms via adhesion contracts. Interest rates remained high, and residential credit remained unaffordable for most of the population.^[182] In 2001, for instance, the interest rate for credits granted to natural persons by the House of Savings and Consignments was 41% per year for housing credit,^[183] which, in 10 years, quadrupled the nominal value of the granted credit. It should be mentioned that if in 2000, the inflation was 40%,^[184] in 2001 it was down to 13.5% in 2001 and 8.6% in 2002^[185] and would continue to decrease and stabilise in the next decade. This suggests that the previously high inflation levels could no longer justify the amount of interest charged.

Later, in 2002, Law 541/2002^[186] on collective savings and loans for housing was passed, based on the German model of houses for savings. It was a short-lived return to the ideas and incentives that funnelled housing construction in the early monarchic years of the late 19th Century as it was abrogated and replaced by GO 99/2006 on credit institutions and capital adequacy.^[187]

Even so, the adoption of a comprehensive regime for residential credits coupled with access to foreign capital banks on the Romanian markets slowly revitalised residential credit, an aspect confirmed by the increase in mortgage payments as a percentage of GDP from almost zero in 2000 to 3.6% at the end of 2007. However, loans for housing purchases were expensive in the private sector, exacerbated by the low availability of cheap state loans. Thus, foreign currency loans (with slightly lower interest rates) – mainly in Euros, but increasingly also in Swiss francs – were the main driver of growth, expanding rapidly (83% year-on-year in 2007) and accounting for almost 90% of total housing loans at the end of 2007. Since interest rates were very high compared to other European markets, it incentivised the banks’ leniency in crediting. The exposure of Romanian consumers to exchange rate risks and high interest were the main drivers of the 2007–8 financial crisis and the subsequent collapse of the residential credit market in Romania.^[188] High interests and inefficient governmental credit support schemes for young couples or those purchasing or building their first housing^[189] continue to plague the Romanian residential credit market (Figure 7).

Figure 7:

a) and b) Internal short-term versus medium- and long-term credit granted to the population in Lei and foreign currency 1990–2004 (Values in Billion Lei. Source: Romanian National Bank, Annual Reports 1999, 2000, 2002, and 2004). The figures illustrate the low level of crediting the population during the first decade following the 1989 Revolution and the steep increase in crediting following the revamping of the legal framework governing residential and consumer credit in 1999. At the same time, the figures reveal the closing gap between medium and long-term credits (generally associated with residential credit) granted in Lei and those granted in foreign currency. As unaffordable interest rates plagued medium and long-term credits in Lei, Romanian consumers had no choice but to pursue credits in foreign currencies, which exposed them to the additional risk of exchange rates.

The above developments did not reverse the high ownership ratio that existed at the fall of communism. The trend continued and was consolidated during the early years of the transition due to the legislation that enabled the population to purchase housing built from state funds with affordable state credit^[190] and at sale prices set at the 01.01.1990 level.^[191] As a result, in 2022, 96.1% of dwellings in Romania are private properties, the highest percentage in the EU (Figure 8).^[192]

Figure 8:

Share of people living in households owning or renting their home, 2020. Source: EUROSTAT. The figure illustrates the high level of housing ownership in Romania, which was reached during the communist years and the early years of transition when the state-owned housing fund was privatised at low nominal prices and with cheap state loans. One should also notice that the first positions in the table belong to former communist states, which had similar approaches to housing and residential credit for the population.

4.4 Categories of Consumers

The banking legislation adopted during the interwar period favoured creating several Houses for Savings, Credit and Mutual Aid of different social categories – most of which were in a difficult economic situation – enabling them to access loans with low interest and favourable repayment terms. This concern is reflected by Law 80/1927, where housing credit was made available to specific categories of natural persons with lower incomes: state employees and retirees, persons with disabilities and war widows.^[193]

The communists maintained a similar approach but, given the population’s increasing income and savings potential, steadily expanded the categories that could access residential credit to the urban citizenry (Decision 26/1966 and Decree 445/1966), followed by extensions via Law 9/1968 and generalised availability under Law 4/1973.

The consumer categories did not change after the 1989 Revolution. Law 50/1991 stated that natural persons (employees, peasants and retirees) benefit from credits and state subventions covering interest to build a dwelling or vacation home.^[194] Moreover, the state incentivised specific categories of vulnerable consumers (married couples under 30 years, persons with disabilities, persons or families relocating from the cities to villages) to build a home with a state subvention of 30% of the construction’s value.^[195]

If the communists restricted home ownership to a single dwelling, Decree 61/1990 adopted a milder stance stating that Romanian consumers^[196] could purchase housing in instalments even if they already had one.^[197] However, Law 85/1992 provided that one could not buy a dwelling built from state funds in instalments if they already owned a home.^[198] Consumers under 30 years old, vulnerable categories (i.e., persons with disabilities)^[199] and repatriated citizens^[200] benefitted from more advantageous terms. Law 85/1992 also enabled ‘other categories of buyers’ than employees and retirees to purchase on credit by repaying directly at the House of Savings and Consignments, thus generalising the availability of residential credit for housing built from state funds.^[201] This also meant the state-backed cheap loans for privatising its dwellings’ fund.

Generalisation and re-consolidation of credit for residential purposes were implemented via Law 190/1999.^[202] However, the new regime opened the door to private creditors (commercial banks) and variable interest rates widespread in some EU countries (Table 5).

4.5 Creditworthiness

Notably, under the monarchy or communism, all categories allowed to access residential credit enjoyed a stable income stream from the state, making them creditworthy. The monarchy favoured public employees and war widows, while the communists favoured employees (workers), the military and retirees. In both cases, a solid social and equitable element was involved. Under the monarchy, the beneficiaries of Law 80/1927 could not have a yearly income over Lei 200,000, could not own another dwelling and had to prove that they did not sell another dwelling in the past. The communists will later impose similar limitations, and these would survive (albeit amended) into the post-communist transition.

During communism, state support was first available through the Investment Bank of Romania for those who could provide evidence of savings of up to 30% of the dwelling’s value as a down payment.^[203] Later, creditworthiness was assessed based on employment or retirement status and the length of savings deposited with the House of Savings and Consignments, which also determined the priority order (Table 6).^[204]

Interestingly, after the fall of communism and the revamping of residential credit, Law 190/1999 contained no provisions for assessing consumers’ creditworthiness. The matter was left entirely to the creditors by the National Bank’s Methodological Norms 3/2000.^[205] The banks had to request proof of stable income; however, the norms allowed the indebtedness level to reach 50% of the consumer’s monthly net income.^[206] This would have catastrophic consequences a decade later during the 2007–8 financial crisis when, the value of monthly instalments doubled or tripled because of changes in currency valuations for foreign denominated loans and increases in interest rates. Due to this phenomenon, coupled with the loss of jobs and decreased income, most consumer debtors could not meet their obligations and defaulted on their loans.^[207]

4.6 Down-Payment Requirements

Anyone interested in accessing residential credit had to advance a down payment under the monarchist and communist regimes. Under the 1927 Construction Law, this varied between 10 and 20%, and the beneficiary had to prove that it had the land needed for construction.

In 1966, the communists solicited 30%,^[208] although the rate lowered over time. From 1968, the down payment varied between 20 and 30% depending on the consumer’s income^[209] and the length of the credit,^[210] a differentiation which reflected the idea of equitable distribution and access to credit based on financial possibilities. From 1973, those needing additional credit to meet the down payment threshold or the remaining purchase price could obtain an unsecured loan from the House of Savings and Consignments for 5 or 10 years, with an 8% annual interest rate.^[211] The minimum advance payment was not only a measure of what nowadays constitutes ‘responsible lending’ but also an indication of the population’s saving potential.

After the fall of communism, Law 50/1991 did not specify any down payment requirements. However, for vulnerable categories, the 30% state subvention was likely deemed as a down payment by banks with state capital and the House of Savings and Consignments.^[212]

Conversely, Decree 61/1990 replicated most provisions of the communist legislation, with better terms for the vulnerable categories. The minimum down payment was 30%, while vulnerable individuals could deposit only 10%.^[213] Moreover, those who could not meet the down payment requirement could obtain a credit from the House of Savings and Consignments for 5 years at a yearly legal interest of 5%. Favoured categories of consumers could get a credit facility for the down payment for 10 years, with an interest rate of only 3%.^[214] Law 85/1992 lowered the down payment to 10%,^[215] probably encouraging purchases and aiding the population, which started to feel the economic downturn. At this point, it is apparent that the legal mechanism of fixed interest was still applicable in the same manner it was employed by the communists, despite the high inflation rate.

Finally, Law 190/1999 and the National Bank’s Methodological Norms 3/2000 did not include any provisions concerning a minimum down payment, leaving the matter to the creditors. Removing the minimum requirements for advance payments implemented by the communists had a devastating effect on the viability of credits a decade later because of the reckless granting and taking of residential credit (Table 7).

4.7 Duration and Cost of Credit

Under the 1927 Construction Law, the remaining credit was released in instalments over 20–30 years^[216] as the dwelling’s construction progressed.^[217] Credit repayment took place in two yearly instalments.^[218] Thus, although income was available, significant discipline was needed to ensure enough was saved for the payments. The annuity bore an interest of 1% over the National Bank’s interest rate for public employees and retirees and 2% for other beneficiaries.

The communists opted for monthly payments. Under Decree 445/1966, the credit had to be repaid in 15 years maximum, in equal monthly instalments, with an annual legal interest of only 1%.^[219] The explanation for the terms’ generosity lies either with the law’s addressees (urban citizenry and, probably, state employees) or the low risk of non-payment. At the time, unemployment was almost non-existent, and incomes steadily grew due to extrinsic (economic recovery) and intrinsic factors (party ideology and planned economy). The ideological positioning towards interest could also be a reason for the low level of interest, although rates will increase in the following years.

In 1973, the repayment period was extended to 15–25 years. However, the extension made credit more expensive. Interest varied between 1.5–3%^[220] and 2–5% per year, depending on the consumer’s monthly salary.^[221] The differentiated interest levels were indexed to wages, meaning those with higher incomes paid higher interest rates. This followed the principles of fairness and stimulation that still justified the use of interest by the communist credit system, thus enabling those with lower income to access credit more easily. It also suggests a concern regarding the indebtedness levels of consumers because a uniform interest rate would have been more cumbersome for lower-income employees and exposed them to a higher risk of non-payment.

After the 1989 Revolution, Decree 61/1990 and Law 85/1992 maintained the 25-year limit for credit repayment and set an annual interest rate of 4%, while favoured categories were expected to pay only 2%.^[222] The nominal interest, however, was almost irrelevant, given the high levels of inflation that followed the fall of communism. If in 1989, average yearly inflation was 1.1%, in 1990, it rose to 5.1%, followed by 170.2% in 1991, 210.4% in 1992 and 256.1% in 1993.^[223]

Law 50/1991 did not mention any duration or interest levels. The regulatory gap is striking, as the law allows state capital banks and the House of Savings and Consignments to set them by contract. Nevertheless, since it granted a subvention equivalent to the credit’s interest, the actual amount had no relevance for the consumer.^[224]

Finally, Law 190/1999 provided only a minimum period for repayment, set at 10 years for consumers.^[225] It also opened the door to variable interest, which commercial lenders would favour due to high inflation rates and the instability of the national currency. Variable interest was a significant novelty for Romanian consumers, who were used to fixed interest rates and transparent terms. Their inability to comprehend the consequences of variable interest and the banks’ failure to explain them adequately led to the consumers’ inability to repay their debts during the 2007–8 financial crisis, which turned into a significant national social issue (Table 8).^[226]

4.8 Risk-Mitigation Mechanisms

During the monarchy, the amounts due under Law 80/1927 were deemed fiscal charges in case of non-payment, and a mortgage over the dwelling backed them.

The communists implemented additional mitigating mechanisms against the risk of non-payment. Based on the provisions of Decree 445/1966, owed amounts were retained at the source (via the employers) from the debtors’ salaries.^[227] A mortgage over the purchased dwelling secured the credit. The debtors were precluded from selling the property before full repayment of the credit without the creditor’s prior approval^[228] and the new owner’s subrogation into the previous one’s contractual obligations.

Decree 61/1990, Law 85/1992, and Law 190/1999 replicated all the above^[229] with the addition that the mortgage had to be recorded in public records to enhance the security of the crediting institution.^[230] Law 190/1999 abolished the withholding of payments by employers. However, a new risk-mitigation mechanism was introduced: the mandatory private insurance of the mortgaged asset, in which the creditor was the beneficiary with the consequence of increasing the consumers’ financial burden.^[231]

Surprisingly, no such risk-mitigation mechanisms are listed in Law 50/1991. There is no limitation on the owner’s rights to sell the newly built dwelling or vacation home before credit repayment. However, if the consumer sold the property within 10 years of construction, the state-paid subventions had to be refunded with interest (Table 9).^[232]

4.9 Enforcement and Cure of Default

According to Law 80/1927, if the debtor defaulted on three consecutive instalments, the crediting state agency could repossess the construction, evacuate the debtor (or tenants) and rent it out to recover the missed payments. Judicial formalities or processes did not condition repossession. Nonetheless, to protect the debtor, the crediting state agency had to send two prior notices within 30 days of each other.^[233]

Similar measures benefitted construction companies that sold buildings on credit to individuals. They were entitled to repossess and sell the property only following a speedy judicial procedure.^[234] The debtor was given several terms to repay and could stop the process until the day before the public auction by paying all arrears (including interest and penalties).^[235]

The monarchic legal framework was thus debtor-friendly, granting numerous opportunities to cure the default and avoid eviction. The explanation may reside with the social character of the law (designed for vulnerable categories) and the fact that the money came from the state, not banks or private investors motivated by profit.^[236]

During communism, starting with Decision 26/1966, the credit contract was deemed an authentic deed and a writ of execution, which simplified and expedited debt recovery.^[237] Delayed instalments carried an annual interest of 6% (in 1968),^[238] which increased to 12% (in 1973).^[239] However, only after the debtor defaulted on six (consecutive) instalments could the Investment Bank foreclose the dwelling and evict the owner.^[240] This suggests not only the continuity of the social character of the legislation, which allowed consumers multiple occasions to cure their default but also that the communists considered the residential character of the private property, for which reason it could not be seized without a serious reason.

To avoid speculation, consumers could not purchase a dwelling to resell it, and those who sold a private property were not allowed credit access.^[241] Given the housing shortage that the legislation aimed to solve, limiting the number of private properties one could own was reasonable. Similar restrictions existed before the communist period in the 1927 construction law. Moreover, the limitation followed the Party’s economic ideology, which encouraged satisfying one’s needs but frowned upon amassing wealth and exploiting fellow comrades. The limitation was eliminated after the fall of communism by Decree 61/1990,^[242] although one could not purchase another dwelling on credit for resale or rental purposes,^[243] further strengthening the idea of legal continuity. This limitation was later repealed by Law 85/1992.^[244]

Decree 61/1990 and Law 85/1992 were heavily influenced by the communist legislation regarding default and enforcement. The credit contract was deemed authentic and continued to be a writ of execution.^[245] Unpaid instalments attracted a penalising interest of 8%, while default on six consecutive instalments allowed the creditor to initiate enforcement proceedings on the mortgaged asset and evacuate the consumer.^[246]

Law 50/1991 was mostly silent on default and enforcement. However, breaches of legislation governing the construction of homes were not without consequence, as the new owners could lose their construction authorisation, or the land granted for construction.^[247] Additional rules were likely set in the credit contracts.

Law 190/1999 maintained most communist provisions facilitating enforcement, such as the ‘writ of execution’ character of the credit contract,^[248] but otherwise worsened consumer protection measures, especially concerning housing. In case of consumer default, the creditor was required to send one written notice and, in the absence of a cure within 30 days, could rescind the contract and enforce the entirety of the credit amount plus interest.^[249] Consumers could be evicted from their homes immediately, even if they did not have another place to live.^[250] Moreover, crediting institutions could use their private or judicial executors to speed up evictions.^[251]

These measures removed the protections that characterised monarchic and communist residential credit laws and exposed consumers to significant risk, as even the slightest delay in payment could leave them homeless and still indebted to credit institutions. The matter became apparent in the aftermath of the 2007–8 financial crisis when consumers unable to repay their loans lost their homes and faced residual payments to the banks.^[252]

Thus, it is safe to conclude that the situation of consumers with residential credit deteriorated with the implementation of Law 190/1999, and the new measures governing mortgages created a severe imbalance in the creditor-debtor relationship (Table 10).

5.1 The Modern Period (1859–1947)

There is evidence that during the modern period, credit was granted to ‘particulars’ – meaning natural persons – as early as 1878 via the House of Deposits and Consignments, some of which were for personal needs and consumption. While prevalence was given to wealthy social categories, poorer categories could access credit to make ends meet^[253] via the pawnshops called “Mount of piety”, whose activity was regulated as of 1906.^[254] Moreover, in the interwar period, several Houses for Savings, Credit and Mutual Aid were set up by various categories of public employees: teachers, accountants, economists, priests, magistrates, railway personnel, and sailors. These issued short and long-term loans with low interest and favourable repayment terms to their members to acquire goods, education, consumption, health care and even for the acquisition of housing.^[255]

Historical data shows retailers and producers sold several consumer goods in instalments, like in Western Europe or the US, as early as 1887 (Figure 9).^[256]

Figure 9:

Advertisement for sales in instalments of gramophones, respectively, radios, 1929. Source: personal archive.

At this time, instalment purchase was likely a privilege of well-off categories of consumers deemed creditworthy, given the risks undertaken by the creditors.^[257] Nevertheless, more categories may have benefitted.

Some consumer durables were more popular than others. Available data shows that radio subscriptions steadily increased from 7871 in 1927 to 274,314 in 1938. Percentagewise, the number of subscriptions per 1000 inhabitants increased from only 0.5% in 1927 to 13.9% in 1938.^[258]

Other consumption items, such as foodstuff, were available to poorer categories via revolving credit in small neighbourhood shops.^[259] The issue was considered ideologically relevant, and the far-right movement tried to curb what it perceived as a risk of communism by creating ‘cooperatives’ where regular consumers could benefit from quality goods at reduced prices and with deferred payments.^[260]

5.2 The Communist Period (1947–1989)

The democratisation of credit for consumption continued in communist Romania once the country began to recover economically after the war but failed to match the rising supply of some industrial consumer goods with the capacity for cash purchases. Thus, an ideological and psychological barrier had to be crossed – reverting to sales on instalment payments – which were previously considered inadmissible in socialist countries.^[261] Romania appears to be the first among the European communist bloc to have introduced it – empirical data shows that furniture shops already used instalment sales in 1954^[262] – followed by Poland and Hungary in 1959.^[263] This positively affected per capita consumption and the standard of living.

Credit for consumer goods was made available to specific consumers (workers) via Decree 63/1955, supplemented by Decree 123/1955. These were repealed by Decree 296/1959 on the sale and purchase of goods and services with payment in instalments.^[264] Application norms were adopted later that year through Decision 1087/1959.^[265]

The above set the foundations for all future legislation by establishing (1) which undertakings were allowed to sell with payment in instalments (state-owned enterprises, consumer cooperative sales units),^[266] (2) which categories of consumers could purchase in instalments (permanent employees of socialist organisations and members of craft cooperatives),^[267] (3) the applicable terms and conditions (down payment, number of instalments)^[268] and (4) risk-mitigation mechanisms.^[269]

The availability of consumer credit continued to expand in the late 1960s, covering more goods (e.g., art objects or musical instruments,^[270] radio and television sets for members of agricultural cooperatives and peasants,^[271] personal vehicles^[272]) and other specific types of consumers, such as retirees.^[273] In the case of art objects, the law merely caught up with a pre-existing commercial practice.^[274] Empirical data shows a significant increase in the sale of consumer durables such as radios, refrigerators, vacuum cleaners, televisions, washing machines or personal vehicles during 1960–1980. Cross-referencing sales data with information regarding the average income and the price of consumer durables, one can safely infer that most sales took place on credit using the instalment payments mechanism. The expansion also enhanced the fragmentation of communist credit laws about acquiring consumer durables (Figure 10, Table 11).

Figure 10:

Yearly sales of consumer durables during 1950–1988 (Thousand Pieces). Source: Romania’s Statistical Yearbook 1968, 1978, 1988, 1990, 1998. The figure illustrates the increase in sales of consumer durables during the communist era, which peaked in 1980 and declined during the last decade of the communist regime due to Ceausescu’s decision to repay the country’s external debt.

Decision 1319/1972 unified and amended the sale of consumer goods and the performance of services on credit to large categories of low-income consumers, including retirees.^[275] All this legislation was abrogated and replaced by Decree 205/1981.^[276]

The large number of normative acts and repeated changes in consumer credit legislation reflects the Party’s constant interest in developing local goods for local consumption and increased concern with designing a functional and comprehensive consumer credit framework.

5.3 The Contemporary Period (1990–Present)

After the fall of communism, the Government extended the existing instalment sales mechanism to several goods and services via Decision 45/1990, which was adopted five days into the new year.^[277] Decree 205/1981 was replaced by Decision 280/1990,^[278] which survived until 2004, when it was abrogated as obsolete and no longer compatible with ‘the new legal order’.^[279] The latest communist Decree and the post-revolutionary Decisions are almost identical. Besides the name of the institutions involved, the core provisions and contractual templates remained unchanged (Figure 11).

Figure 11:

Instalment sale contract of furniture, 1989. As the figure illustrates, the contract used a standard form. The same standard form was used by Decision 280/1990.

Historical data reveals that instalment sales continued to function for many years after the Revolution, without substantive changes and sometimes, outside the banking system, with credit issued straight by the retailers. For instance, in 1995, a local retailer of furniture and home appliances offered credit with a 30% downpayment for eight months, and a fixed interest of 6%,^[280] while, in 1997, another retailer of home appliances was offering credit up to Lei 10 million (at the time), in 24 monthly instalments, against a 15% downpayment.^[281] In 1998, some retailers were advertising instalment sale agreements for home appliances with a 10% advance payment.^[282]

What rendered instalment sale legislation obsolete was the re-fragmentation of credit legislation (e.g. the introduction of vehicle-leasing contracts for consumers and businesses^[283]), followed by the complete revamping of Romania’s legal treatment of security interests in personal property via Law 99/1999^[284] and the subsequent adoption of the EU acquis, coupled with a decline in economic activity and the population’s purchasing power.

Law 99/1999 caused two developments concerning credit for durable consumer goods. First, it re-allowed merchants other than credit institutions to sell on credit in instalments without meeting the requirements for banking activities imposed by Law 58/1998.^[285] Since Decision 280/1990 was still in force and would not be repealed until 2004, Law 99/1999 did not reinvent sale in instalments but only updated and adapted it to the new economic and normative realities.

Second, Law 99/1999 altered the 1864 Civil Code’s restrictions on security interests over movable property and non-possessory security interests but also increased their predictability and enforceability.^[286] This was a significant change, as implementing non-possessory pledges and self-help repossession encouraged the expansion of credit for consumer durables. However, the procedures were deemed too creditor friendly (especially in consumer relationships) and toned down later. The 2011 New Civil Code, which re-unified the provisions applicable to security interests in movable and immovable goods^[287] and reintroduced safeguards for defaulting debtors, including consumers.

Because commercial banks mainly handled consumer credit during the 1990s,^[288] prudential rules had to be enforced by their supervisory authority, the Romanian National Bank.^[289] However, the first norms were implemented only in 2003 and concerned the protection of the financial system, not of consumers.^[290]

5.4 Categories of Consumers

If, during the monarchy, the instalment purchase was a privilege of well-off consumers, during communism, credit for consumer goods was first made available to workers.^[291] Nevertheless, the motivation remained the same: the consumer’s ability to repay.

The availability of consumer credit continued to expand in the late 1960s when it was extended to retirees,^[292] peasants^[293] and low-income workers.^[294] Ultimately, Decree 205/1981 generalised access to credit to all ‘natural persons’ until 1990.

During the transition, Decision 280/1990 further expanded the democratisation of consumer credit by adding natural persons ‘who can prove that they have monthly income and a stable domicile in the same locality as the seller’ (Table 12).^[295]

5.5 Creditworthiness

During communism, to access credit for consumption, one had to prove income. Therefore, instalment sales were first available to workers and retirees only. Although the initial laws are silent on the amount of income, it must have played a part in the decision to grant credit. Those falling under a certain threshold were unable to purchase in instalments. This reality is apparent in the provisions of Decision 1319/1972, which made credit available to workers and retirees with a monthly income below Lei 3600.^[296]

In addition, Decree 65/1955,^[297] Decree 296/1959 and Decree 205/1981 provided that monthly instalments could not be higher than one third of the consumer’s monthly income. This measure was kept after the fall of communism.^[298] While it sought to curb over-indebtedness, this limitation could also thwart attempts to purchase durable goods in instalments.

Creditworthiness assessment remained the same in the early years of the transition. Decision 280/1990 required proof of income in the form of a template statement filled and signed by the consumer’s employer.^[299]

However, the revamped secured credit in personal property relaxed creditworthiness assessment, leaving the matter to the crediting institutions. Thus, the National Bank had to implement prudential rules to limit credit risks, returning to the communist ideas that (1) consumers’ creditworthiness must be assessed regarding their financial capabilities and (2) monthly instalments should not surpass 30% and, later, 40% of the debtor’s monthly net income.^[300] Since the National Bank has no attributions concerning consumer protection,^[301] the listed measures had only an indirect effect on consumer protection. They were meant to safeguard the soundness of financial policies of commercial banks by including an obligation to verify consumers’ creditworthiness.

However, security interests in personal property and partnerships between retailers and commercial banks (which enabled the latter to extend credit to consumers without the supervision of the National Bank) eased consumer loans to the point where a valid ID card sufficed to obtain credit for personal needs, albeit against a hefty interest rate.^[302] For instance, in 2004, one of the foreign banks in the country promoted an ‘express credit’ to consumers, ranging between Lei 6 and 140 million (at the time), for three years, with an interest rate of 32% per year.^[303] This type of credit became very popular^[304] and caused significant losses to retailers after the 2007–8 financial crisis, as many consumers could not repay.

5.6 Down Payment Requirements

Consumers were expected to pay part of the price upfront. During communism, the amount of the down payment varied depending on three factors: (1) the consumer category, (2) the consumer’s income and (3) the goods or services purchased. The expected advance payment was initially relatively high (25–40%).^[305] It was reduced by Decree 269/1959, and all Decisions based on its provisions (1042/1968, 1379/1971^[306] and 1334/1973) oscillated between 15 and 30%.^[307] Decision 1319/1972 introduced slightly higher requirements (20–40%) but only for the purchase of personal vehicles,^[308] which were deemed luxury goods.

Instalment purchases became more expensive as the communist economy experienced a crisis during 1980–1989 due to expensive access to raw materials unavailable in the country and insufficient energy sources for production, coupled with Ceausescu’s decision to repay Romania’s external debt. For example, Decree 205/1981 established a 30% down payment for furniture over Lei 5000 (when the average salary was around Lei 3500) and 50–60% for personal vehicles.^[309]

Decision 45/1990 required a 30–50% down payment. According to Decision 280/1990, consumers still had to provide an advance payment following the list of goods and terms issued by the Ministry of Interior Commerce, which was to be reviewed periodically depending on the changes in consumer demand and the available stocks.^[310]

With the emergence of commercial banks issuing consumer credit, prudential rules were issued by the supervising authority starting only in 2003. The National Bank recommended that besides taking security, creditors take a down payment of 25% of the value of the consumer good, in line with the approach of the previous communist legislation (Table 13).^[311]

5.7 Duration and Cost of Credit

The duration and cost of credit also varied with the nature of the goods, the down payment and the consumer’s income. Decree 63/1955 established that the remainder of the price had to be repaid in 12 equal monthly instalments.^[312] Under Decree 296/1959, the number of instalments expanded to 24 for workers and serving militaries and 12–24 for other categories of consumers.^[313]

As of 1972, low-income consumers could also access instalment sales, although in more restrictive terms. The number of instalments varied from 3 to 12 months.^[314] Purchasers of personal vehicles initially had 36 months to pay,^[315] but this period was reduced to 20 in 1981.^[316]

In 1955, the cost of credit was 6%.^[317] This figure was lowered to 3% from 1959^[318] until 1971, when it increased to 5%.^[319] All subsequent legislation^[320] maintained this interest level until the fall of communism.

If Decision 45/1990 maintained a fixed legal interest, set at 5% per year,^[321] Decision 280/1990 stated that consumers would pay interest consisting of two elements: 1) the legal interest owed to the banking creditor (1% during communism) and 2) 2% charge for covering administrative expenses such as cashing of instalments or debt recovery. The interest was still fixed in each contract; however, variations emerged as the formula for calculating the interest depended on the legal interest rate on the signing day.^[322]

With the appearance of consumer credit issued by commercial banks, interest rates and credit costs became a matter of contract between consumers and banks, in which the latter dictated the terms. The prudential norms issued by the National Bank on limiting consumer credit did not address interest rates or interest caps. Such caps were deemed incompatible with the free market. Thus, instead of fostering competition to benefit the consumers, the free market made consumer credit more expensive and hazardous (Table 14).

5.8 Risk-Mitigation Mechanisms

During communism, instalments were withheld from the debtor’s salary or pension.^[323] The situation did not change immediately after 1989.^[324] Retirees, peasants and members of agricultural cooperatives also had to bring 1–2 solvable guarantors.^[325] Finally, for specific categories of goods with high value (e.g., personal vehicles), the buyer was obliged to maintain insurance against damage for the entirety of the credit contract.^[326]

The insurance requirement was generalised after the 1989 Revolution to cover all goods purchased in instalments.^[327] Although Decision 280/1990 did not speak of guarantors, the template contract mentioned that ‘retirees and persons that cannot prove a monthly income had to bring two guarantors with a secure income.’^[328]

This practice survived even after the emergence of consumer credit issued by commercial banks. However, securing credit with personal property^[329] significantly improved the creditors’ status by providing predictability and enforceability (Table 15).

5.9 Enforcement

Throughout communism, the credit contract was deemed a writ of execution and did not require a priori judicial verification before enforcement.^[330] All enforcement procedures were exempted from judicial fees, facilitating the creditor’s action against bad debtors.^[331] The executory character of the credit agreement and the exemptions from judicial fees were maintained by post-communist legislation such as Decision 280/1990^[332] and Law 99/1999.^[333]

At the inception of communist credit for consumption, Decree 63/1955 stated that in case of consumer default, the seller could seek either repayment of the amounts owed, or the restitution of the goods sold. In the latter case, the sale was deemed invalid ex lege, and the debtor was entitled to the restitution of paid instalments minus the value of the wear and tear and other expenses caused by the sale and repossession of the good.^[334] However, the seller did not have a security right over the personal goods purchased on credit, as these were incompatible with the civil law system. Therefore, the provisions that allowed the seller to pursue the good until complete repayment were difficult (if not impossible) to implement and were not replicated in subsequent legislation.

Even so, goods purchased on credit could only be pursued by other creditors once their price was covered entirely.^[335] Moreover, the creditor had an unsecured claim over the debtor’s assets and income.^[336] Where available, they could pursue the guarantors, who were joint and severally liable for the consumer’s remaining obligations under the contract.^[337] By law, the consumer had full ownership of the goods from the signature of the contract but was forbidden to dispose of them until complete payment.^[338] If the consumer ignored the ban, the subsequent purchasers could be pursued by the creditor for the remaining price.^[339]

After the fall of communism, Decision 280/1990 unsurprisingly maintained all these risk-mitigation mechanisms,^[340] since it mirrored the provisions of communist decrees. However, Law 99/1999 revolutionised the enforcement of consumer credit agreements by granting security over personal property purchased on credit. In case of default, the creditor could choose between private and judicial enforcement,^[341] satisfy their claim from the secured good,^[342] pursue the secured good in the hands of any party^[343] and even dispose of the collateral without having it in their possession.^[344] The 2011 New Civil Code altered the procedure but not the overall substance of secured creditors, who still enjoy significant protection (Table 16).