The right of unilateral contract amendment in a legal approach
5. Debt relief legislation
5. 1. Bridging loan (Act IV of 2009 on Government Guarantees for Home Loans)
The aim of the Act was to support debtors in need by providing temporary help from the Government in the form of government guarantee to those natural persons, who met the stipulations of the Act. The natural person, as a debtor, could initiate the signing of a bridging loan with the financial institution that provided the housing loan in case an employment relationship was terminated.
The financial institution disbursed the bridging loan by the last day of the 24th month following the signing of the loan agreement in an equal amount of the sum of the due instalments of the housing loan and the instalment rate committed to by the debtor, also equalling the previously due but not yet paid instalment. The bridging loan could only be used for payment of the housing loan. The housing loan was redeemed from the amount paid by the debtor and the bridging loan. Until the last day of the 24th month following
the signing of the loan agreement, the debtor was not bound by a payment obligation, and afterwards he only had an obligation to pay the interest rate on the capital debt. The bridging loan had to be repaid in maximum 10 years, provided that its maturity date did not exceed the maturity date of the housing loan.
If the debtor breached the credit agreement, the government guarantee applied to the amount disbursed until the date of contract breeching. If the financial institution cancelled the housing loan, the bridging loan also had to be terminated. The financial institution could initiate the enforcement of the government guarantee by the 30th day following the date of maturity, or in case of cancellation, the termination date. If during the exercising of the government guarantee or the collection of debt, the tax authority established that the debtor or another member of the household cheated the financial institution, the natural person had to pay 150% of the paid amount upon the exercising of the government guarantee.
Upon the termination of his employment the natural person, as debtor or co-debtor, could not have an over 90-day default debt, which exceeded the amount of the lowest minimum wage or the monthly instalment rate.
The amendment of legal conditions was subsequently necessary to extend the scope of eligible persons, who could overcome their financial difficulties with state support.
The number of loan agreements did not reach 3,000 from the date of effectiveness of the Act up until October 2009, which significantly stayed below real demands. The low number of eligible people is the result of the strict conditions, which excluded part of the interested debtors from applying for the bridging loan. Despite the moderation of the rigour, the construction was still not too popular, it was only utilized by a few hundred people.
5. 2. Legal provision on prudent retail credit lending conditions and creditworthiness assessment
Government Decree 361/2009 (30. XII.) on prudent retail credit lending conditions and creditworthiness assessment came into effect on 1 March 2010. The Decree introduced a new lending-related concept: the lending limit. Based on the internal regulations of the lender, it was an amount defined in forints, reflecting the maximum monthly instalment paying ability.
According to the new regulation, the lender shall not provide a loan by only taking the real estate collateral into account, but with all credit assessment it shall inspect the creditworthiness and creditability. According to the internal regulations of the lender, this inspection should be based on the income situation of the natural person and the household, and the consequently defined lending limit. The regulation sets out detailed requirements regarding the contents of the internal regulation.
Based on the regulation, the monthly instalment rate with EUR and EUR-denominated loans must not be higher than 80% of the lending limit upon disbursal. With our foreign currency loans, the initial instalment rate should not exceed 60% of the lending limit.
The regulation specifies that during the establishment of the lending limit the lender shall consider all known debts of the client that are outstanding with the lender or other lenders.
The lender is obligated to proceed with the caution expected in the scope of lending in order
to explore the client’s financial situation, including the inquiry of all credit information systems to which he or she is a member.
The regulation was amended by Government Decree 152/2010 (30. IV.). The amendment contains technical refinements that simplify application, but it did not solve the fundamental problem of the regulation: the regulation was late and in the absence of a full-list credit registration system, the creditworthiness check is built on non-verifiable information.
The integration of the lending limit also hinders the replacement of the existing credit volume, since with the assessment of the new loan the internal regulation restrictions and the creditability limit for foreign currency loans should be taken into account. In case of loans with real estate collateral, the integration of the loan to value limit (LTV) for real estate purchase or construction substantially increased the own funds, to which the clients were not able to adapt to with the income and financial conditions of the time.17 The late austerity measures held back the demand for loans and indirectly had a negative effect on the construction industry, thereby elevating the negative processes of the economic crisis.
Due to the crisis, the majority of banks voluntarily imposed restrictions regarding loan assessment even before the regulation came into effect, both in the field of creditworthiness and real estate collateral.
Concerning the absence of a positive list debtors’ registry, we already quoted the letter sent to the Parliamentary Commissioner on Citizens Rights by the Banking Association dated May 2010.18 In this letter, the Banking Association implied that – despite good will – the late regulation did not address the root of the problem, only its symptoms:
“If the lending and borrowing of loans was handled responsibly by the contracting parties, there would be no solution even by careful credit assessment for those cases when the client loses his job, or in case of a married couple, both parties become unemployed. We are convinced that the decisive factor from the aspect of default loans by private persons is not the increasing instalments of foreign currency loans, but the labour market situation. The amendment/tightening of execution-related rules in itself does not provide sufficient guarantee for the prevention of default loans by private persons. With cases that are already in the implementation phase, the position of the debtor and the lender are given, the same as the extent of liabilities, and it is impossible to change the value of the collateral. Re-contracting in case of cancelled loan agreements is also primarily a business interest for banks following fair market conduct due to lower collateral values as a consequence of the crisis. Unfortunately, the development of external factors (e.g. size of unemployment) is not a question of the above-mentioned regulation, if the debtor is not able to pay even the minimum amount, this tool cannot be applied.”
17 During the crisis, the value of real estate (consequently of the collateral) declined, therefore one could take a substantially lower loan by the same collateral, with a considerably higher own funds. However, under the domestic income conditions it was not always possible.
18 The letter of the Hungarian Banking Association to the Parliamentary Commissioner on Citizens Rights, 27 May 2010.
5. 3. Amendment of Act LIII of 1994 on court execution (prolongation of the eviction moratorium)
Act LIII of 1994 on court execution (hereinafter referred to as: ExAct.) has prohibited execution regarding residential properties during the winter period since 2003. Based on the legal prohibition, the executor shall postpone the eviction of residential properties from 1 December to the period following 1 March, if the obligor is a private person.
Based on the amendment of the ExAct passed in July 2010, the duration of the prohibition was extended in 2010, so the eviction of the housing unit should be postponed not only from 1 December, but already from the day following the receipt of the court decision ordering the eviction, or the request of the auction customer – earliest from the day following the effective date of the Act – to 15 April of the next year (based on the later amendment passed in March 2011, the eviction moratorium lasted until 1 July 2011).
According to the justification of the Act, the aim of the legislator was to “provide temporary moratorium for the eviction of their flats to those debtors and obligors, who are actually threatened by eviction, who are not able to take care of their housing. The population has accumulated substantial debts in the form of loans, and due to the financial-economic crisis, their other debts have also increased.
A substantial part of debtors were not able to settle their debts, due to which their properties have to be sold…. The Proposal is a temporary regulation: the aim of prolonging the eviction moratorium is a temporary intervention in the order of exercising the claims, which was made necessary by the financial-economic crisis as an extraordinary circumstance. During the moratorium therefore those debt management institutions should be created, which support debtors start a new life, and also serve the enforcement of claims in the long-run, but at the same time also the prevention of becoming homeless.”
Following the adoption of the law, the Banking Association expressed its concerns regarding the constitutional and other legal provisions in conflict with other legislation.
Based on the justification of the Act, the creators of the legal provision thought that forced eviction could only be carried out due to cancelled loan agreements, however, the eviction moratorium was established with full scope (e.g. the needs of private persons based on final judgement also fell under the scope of the amendment). As per the justification, with the moratorium they wished to help those who were not able to take care of their housing, however, by general regulation the Act also extended the moratorium to those who had other housing, or another housing opportunity. Since the ordering of court execution may only take place following the legally binding proceedings by the authorities or the court, the forced suspension of the execution procedure for nearly one year severely violated the rightful interests of parties having adverse interests in the proceedings, furthermore, the constitutional requirement of the rule of law and indirectly legal security. It might lead to legal uncertainty, if the eligible cannot access his claim even despite a legally binding court decision, and also that the reliability of the contractual security system is disrupted.
According to the Credit Act, the subject of the credit risk collateral may be liquid or ‘value certain’
assets. The so-called recognizable credit risk collateral may be such an asset which the lending credit institution is entitled to sell within a reasonable time in or outside court execution. Government Decree 196/2007 (30. VII.) on lending risk management and capital requirement specifies further conditions regarding the recognition of fixed assets as the credit risk collateral encumbering the
property. These rules are based on the decrees of the European Union: Decree 2006/48/EC (Basel II.)19 on commencing and continuing operation of credit institutions disposes of this.
According to the opinion of the Banking Association, the rule of law and legal certainty by the provisions of the Act contradict the requirement of constitutionality, especially the ordering of immediate entry into force upon announcement and prompt application in case of pending cases. Additionally, the organisation believes that the Act breached the constitutional principle of property rights. It also referred to the fact that the submission and approval of the government bill was not preceded by professional reconciliation.
The eviction moratorium is an extremely sensitive point of property credit lending. On one hand, based on legal provisions and banking considerations, the selling of collateral might be necessary for the sake of the money outsourced as credit by the depositors On the other hand, however, it should be appreciated – especially in an emergency situation –, that families are not to be evicted on the streets during winter. This sensitive, balanced situation was thrown off by the legislator with the prolongation of the eviction moratorium.
It would have been a considerable option – based on the practice of other countries – to place the evicted tenants in social rental flats. During the 1990s, in Hungary, however this type of housing was practically eliminated. The idea of creating the National Asset Management arose as another option. This concept was already put to the Government by the Hungarian Banking Association, but the Government did not address it for a long time. The eviction moratorium introduced, instead greatly elevated the moral risk of foreign currency lending, creating the expectation in debtors that a “caring government will anyway save them”.
5. 4. Required law amendment in order to limit mortgage-ensuring foreign currency loans – Act XC of 2010
According to the justification of the law amendment: “The aim of the amendment is to stop the penetration of foreign currency loans, prevent excessive indebtedness of clients so that the number of people in dire straits does not grow.” Due to the financial crisis, the lending of new foreign currency loans has now declined to a negligible extent, so the spectacular measure was basically banging on open doors. In addition, due to the inaccurate wording of the approved text, it could have led to the land registry offices not registering the new mortgage contracts made under the credit replacement. The text of the law incorrectly referred to this procedure as “amendment registration”. In contrast, the Property Registration Act only considers changing property data, or the name, registered seat and address change of the entitled as amendment registration. If the law was not amended, there would have been a risk that the credit replacement by banks shut down, and with this the cancellation would have impacted new non-paying debtors.
19 The regulations of Basel II. strictly define the rules of the credit institutions’ prudential operations, hen-ce the consideration of fixed assets as the credit risk collateral encumbering the property. If the real estate collateral can not be enforced according to the effective rules contained in the ExAct. upon accepting the collateral, it leads to a prudential problem (see Government decree §12. More on this topic: https://www.mnb.
hu/archivum/Felugyelet/root/fooldal/bal_menu/eu/eu_felugyeletek/cebs/bazelII_modszertan/crd_jogsz
The amendment in this form was not suitable to reach the aim of the legislator, since excessive indebtedness could be triggered not only by loans in foreign currency, but also those in HUF.
Moreover, the problem was not caused by the existence of credit insurance (collateral), but the exchange rate fluctuations influencing the instalment rates of foreign currency loans.
Concerning the regulation, the violation of EU law also emerged. One year earlier, the European Court (hereinafter referred to as: EUC) ruled, in an uncannily similar case to the Hungarian regulation,20 that the indexing of mortgage registrations to the national currency breaches the principle of free capital flow, and such limitation might indirectly prevent free capital flow. According to the EUC, lending is one of the main channels of capital flow, and one of the fundamental, inseparable insurances of lending – especially in case of real estate – is mortgage. The decision, on one hand, pinned down that the exclusion of mortgage that can be registered in the currency of another member state violates free capital flow. On the other hand, the court stated that it does not recognize situations that might be considered as exceptional, which would justify the restriction.21
5. 5. Act XCVI of 2010 on the amendment of certain finance-related acts in order to support consumers in a difficult situation due to taking housing loans
The Credit Act amendment restricted unilateral interest rate increase in case of housing loans, and prohibited the increasing of costs and other fees. According to the provision of the Act, the financial institution may amend the housing loan or financial lease contract exclusively regarding the interest rate unfavourably for the client, if the central bank’s base interest rate, the refinancing interest rates, the financial market indexes, the lender’s fixed client deposits’
interest rate changes, the regulatory environment, or the modification of credit risk defined in a government decree justifies it. The Act authorized the Government to establish the cases, conditions and means of unilateral interest rate amendment in a regulation.
The Hungarian Financial Supervisory Authority did not agree with the direct regulation of the Act approved based on the proposal that was submitted as a representatives’ initiative. Based on the opinion of the Supervisory Authority, they should have started from the prohibition of contract amendment by indexing the credit interest rates to the reference interest rate.22 The Act however followed a different regulating direction, based on which the conditions and means of interest rate increase could be determined in a government decree. In its opinion, reflecting on the law amendment proposal, unlike the contents of the proposal, MNB also would have considered a reference-based interest rate and a fixed surcharge as acceptable in case of all loans.
20 Case C-222/97 (Prohibition by a Member State of registration of a mortgage in the currency of another Member State - Not permissible)
21 http://curia.europa.eu/juris/showPdf.jsf;jsessionid=9ea7d2dc30db5ffad902f1d146768c06a87e75a1e7bf.e34K axiLc3qMb40Rch0SaxuLa3b0?text=&docid=101448&pageIndex=0&doclang=en&mode=req&dir=&occ=fir st&part=1&cid=1103421
22 See: Észak Magyarország, Kelet Magyarország, Hajdú-Bihari Napló – 01 July 2010, pages 1- 2, Észak Magyar-ország, Kelet MagyarMagyar-ország, Hajdú-Bihari Napló - 02 July 2010, pages 2-3, 06 July 2010, m1: Híradó délben, Magyar Nemzet - 07 July 2010, pages 1 and 5, Népszabadság - 07 July 2010, pages 1 and 9
The Banking Association – apart from its concerns regarding constitutionality – pointed out that in many banks the client could pay the loans denominated in foreign currency in foreign currency as well, and in such cases the question of exchange rate loss did not directly occur. Other banks also applied their own foreign exchange buying rates for redemption as well, which was by all means lower than their own central rate, and in certain cases even than the central rate of MNB. Again, different banks introduced unilateral moderations based on their own initiative, for example applied their own or MNB’s foreign exchange central rate instead of their own foreign exchange buying rate, until the HUF appreciated over a certain level relative to the CHF. There was also a bank which offset the exchange rate loss suffered by its debtor by reducing the interest rate. Finally, there was also a bank where the client could choose whether they wanted to pay in HUF or foreign exchange. It was a general
The Banking Association – apart from its concerns regarding constitutionality – pointed out that in many banks the client could pay the loans denominated in foreign currency in foreign currency as well, and in such cases the question of exchange rate loss did not directly occur. Other banks also applied their own foreign exchange buying rates for redemption as well, which was by all means lower than their own central rate, and in certain cases even than the central rate of MNB. Again, different banks introduced unilateral moderations based on their own initiative, for example applied their own or MNB’s foreign exchange central rate instead of their own foreign exchange buying rate, until the HUF appreciated over a certain level relative to the CHF. There was also a bank which offset the exchange rate loss suffered by its debtor by reducing the interest rate. Finally, there was also a bank where the client could choose whether they wanted to pay in HUF or foreign exchange. It was a general