István Gárdos Gabriela Gubik October 16 2009 Leading banks sign retail lending code Gárdos Füredi Mosonyi Tomori | Banking & Financial Services - Hungary István Gárdos, Gabriela Gubik Banking & Financial Services IntroductionKey ProvisionsCommentIntroductionOn September 16 2009 Hungary's leading banks signed a code of conduct on retail lending activities. The burden on borrowers in Hungary has increased sharply in recent months. This is largely because many borrowers took out consumer loans in a foreign currency (generally the Swiss franc or the euro) in order to avoid the high interest rates on forint loans. However, they failed to anticipate the significant fall in the value of the forint in Autumn 2008, which effectively resulted in a rise in the cost of repayments. In addition, the recent increase in unemployment has put many borrowers in a difficult financial position. When the banks tried to pass on the financial effects of the credit crisis to their borrowers, Parliament passed an act to restrict the banks' right to amend the terms of consumer loans unilaterally (for further details please see "Act Restricts Unilateral Amendments by Banks").(1) However, the prime minister considered that the act did not go far enough. He initiated the drafting of a code to set further regulations for consumer lending. The code was prepared by the Financial Supervisory Authority (FSA), the Hungarian Banking Association, the Competition Authority and the government. Key ProvisionsAim and scope The main aim of the code is to restore the confidence of consumers, who were forced to bear the consequences of the credit crisis, by further regulating the conduct of financial institutions. The code covers all types of consumer loan; therefore, it applies to all financial institutions in the retail lending market. However, micro-enterprises have been excluded from the code's safeguards at the banks' insistence. Binding forceThe code is a self-regulatory instrument - a form of agreement not previously used in Hungary. The signatories will be bound to apply the code in the course of their activities and to incorporate it into their general terms and conditions. The FSA will have the power to monitor the signatories and fine them if they do not act in accordance with the code. Principles The code is based on the three principles of transparency, rule-based conduct and symmetry, which require signatories to: make all relevant information readily accessible to their customers; ensure that their lending practices are formalized in regulations; and alter interest rates in their customers' favour if the underlying factors become more advantageous to the bank.The banks reportedly resisted the general application of a fourth principle of fairness. Rules of responsible lending activityGreat emphasis is placed on a bank's obligation to provide its customers with proper information. The signatories undertake promptly to implement the European Commission's recommendation of March 2001, which sets out the pre-contractual information to be provided to consumers by lenders offering home loans. In addition, financial institutions must thoroughly evaluate a customer's financial situation so that the most appropriate products can be offered and appropriate contractual terms can be applied. Unilateral amendments to loan agreementsThe guidelines on unilateral changes to loan agreements are among the code's most significant provisions. The code indicates the precise circumstances in which financial institutions may alter interest rates and other fees. The signatories must prepare a list of potential reasons for interest rate amendments and must make the list available to customers. Problem loans: management and enforcementThe code governs the appropriate conduct for lenders in cases where a customer fails to settle a debt. The creditor must first seek to contact the debtor in order to reach an out-of-court agreement and offer options for settling the debt. One of the most popular rules in the code relates to the creation of a right to purchase the collateral for the purpose of security. The code provides that the creditor must give the debtor at least 90 days to sell the property before exercising its call option. CommentThe code was signed by 13 initial signatories on September 16 2009 - it already has 74 signatories. It thus covers more than 90% of the related market and several more financial institutions are expected to agree to the code before it takes effect, as market participants refusing to sign the code will be posted on the website of the FSA. Only one bank has publicly refused to sign the code. It considers that the regulatory framework is adequate and simply needs to be applied and enforced consistently. A recent judgment seems to support this opinion - the court found a consumer loan contract null and void because the bank had acted unfairly in passing on to the debtor the financial consequences of the forint's fall in value relative to other currencies. This judgment suggests that existing sector legislation is adequate to protect borrowers' interests.For further information on this topic please contact István Gárdos or Gabriella Gubik at Gárdos, Füredi, Mosonyi, Tomori by telephone (+36 1 327 7560), fax (+36 1 327 7561) or email ([email protected] or [email protected]).Endnotes(1) The Act on the Amendment of Certain Issues Regarding the Supervision of the Financial Intermediary System (13/2009).