1. Background

In recent years, bank customers in Hungary have initiated numerous litigations claiming that their loan agreements are illegal, invalid, or null and void for a variety of reasons. Mostly, these reasons centered on the legality of the application of spreads in FX-based loans and on the validity of the unilateral amendments applied by the banks regarding fees and interest rates.

The Hungarian Supreme Court, taking notice of the fact that lower courts are in a grave need of a guideline, issued a ruling on 16 June 2014 on the validity of spreads and unilateral amendment provisions incorporated into loan and leasing agreements entered into between financial institutions and consumers. The Supreme Court ruling, which is binding on lower courts, (i) renders the spreads on such loan and leasing contracts null and void, and (ii) sets forth criteria under which a unilateral amendment of such contracts by the financial institutions (i.e. amendments regarding interest rates and fees) may be permitted.

On 4 July 2014, the Hungarian Parliament adopted an act ("Act") that incorporates the main points of the Supreme Court ruling. The rationale behind this rather unorthodox step was to avoid the country’s court system being overloaded by the lawsuits put forward by borrowers, a development  that may be safely envisaged in light of the Supreme Court ruling’s beneficial nature for the borrowers.

  1. The Act

The Act’s scope covers only those consumer contracts that were concluded after 1 May 2004, including contracts that have been repaid, prepaid, or otherwise terminated.

2.1 Null and void contractual provisions

Under the Act, the mid-market rate published by the Hungarian National Bank applies to both the drawdown and the repayment. The banks, applying the mid-market rate, must recalculate the debt and the instalments the debtors should have paid and settle the difference between the calculated and the actually paid amounts. The Act also presumes that all past unilateral amendments are unfair and thus null and void. The presumption may be contested by the bank at court. So far, no contest has been successful. As a result, any unilateral increase in the interest rate and fees is null and void, and the bank will have to settle the difference of the initial and increased interest and fees with the debtors.

2.2 Settlement

The overpayment of the debtors, either due to the spread or the unilateral amendment, must be set off against the capital of their debts. Because of the reduced historical amount of the capital, the paid interests must be recalculated as well. Overpayment of the interest will also have to be repaid by the banks. In case of ongoing contracts, the settlement may be made by set off. Contracts closed in the past five years are also subject to the settlement, and payment will have to be made, which might cause liquidity hiccups for the banks.