On 19 September the Hungarian Parliament adopted an amendment to the Hungarian Banking Act (and to several other Acts). This has already caused major turbulence in the banking sectors in both Hungary and Austria. The new law is expected to be promulgated in the coming days, and will enter into force on the 3rd day after promulgation.
Pursuant to the amendment, persons qualifying as consumers (individuals acting outside of their profession or business activities) may fully prepay their FXdenominated loans at a fixed exchange rate (180 HUF/CHF; 250 HUF/EUR; 200 HUF/100JPY) irrespective of the actual exchange rate applicable at the time of prepayment. Banks may not charge any fees or commissions for accepting the prepayment.
Banks will be obliged to accept the prepayment if all of the following conditions are fulfilled:
- the loan is secured by either a mortgage over residential property or a suretyship undertaken by the state;
- the exchange rate at the time of the use of the loan was lower than the fixed exchange rate (see above);
- the financial institution did not terminate the loan agreement by 30 June 2011;
- the consumer applies for the prepayment in writing at the financial institution before 30 December 2011;
- the consumer prepays all other debts from other loans that are directly connected to the loan subject to the prepayment (e.g. bridge loans); and
- the consumer prepays the loan by the 60th day from the application for the prepayment.
The amendment also affects other laws in respect of taxes and duties to ensure that the prepayment will be tax- and duty free for the consumer.
The basis for this amendment is § 226 (2) of the Hungarian Civil Code, which provides that, in exceptional cases, a law may interfere with existing contracts and amend their terms. § 226 (2) allows the "clausula rebus sic stantibus" principle to apply to a wide range of contracts by virtue of a law.
The new law may be challenged before the Constitutional Court. The Court may declare the new law unconstitutional if it considers that, since the conclusion of the loan agreements, there has been no unusual change in circumstances that could not have been reasonably foreseen by the parties. The Court, however, must consider that such loan agreements (usually concluded for five to 20 years) normally involve foreseeable risks (e.g. that the FX-rate may change during the long term of the agreement)
On the other hand, there are also arguments that the change in circumstances was unusual and could not have been reasonably foreseen (i.e. two global economic crises in five years). Moreover, since § 226 (2) was inserted into the Hungarian Civil Code way back in 1990, the parties could have expected such an amendment eventually.
The Constitutional Court will also have to examine whether the method and the extent of interference with private contracts is justified.