June 16th, 2014

Top court rules FX loan exchange rates were unfair as forint, OTP shares rise

The risk that borrowers in foreign currency assumed can only be seen as unfair if they were not put in a position to credibly assess the extent of fluctuations in the exchange rate, the Kuria, Hungary’s supreme court, ruled on Monday.

The court found, however, that the exchange rate spread applied by banks — the difference between the rate when the loan was disbursed and repaid — was unfair.

The uniformity ruling does not apply retroactively but is guidance to courts in future cases.

The use of exchange rate spread in foreign exchange denominated loans is unfair because consumers do not directly receive any services for it and the application of the spread is not transparent or comprehensible to consumers, the spokesperson of the Kuria civic section Katalin Gombos said.

Kuria official Gyorgy Wellmann said the most important aspect of the Kuria’s legal uniformity decisions applied to banks that change contracts unilaterally. This is acceptable only under such strict conditions that very few of the contracts will satisfy under the court’s ruling. The conditions include clear phrasing, the opportunity to cancel the contract and the rights of both contracting parties to make changes.

The Kuria ruled that the contract should be deemed unfair if it does not meet these conditions.

Wellmann warned debtors not to launch further lawsuits against banks, rather, they should wait for the relevant piece of legislation, stemming from the decision, to take effect. “Now the legislative power has the task to resolve the situation”, he added.

Shares of Hungary’s biggest lender, OTP Bank, strengthened on Monday after the Kuria announced its ruling. Shortly before 1pm the shares were trading at 4,440 forints and ten minutes later they stood at 4,540 forints.

The forint firmed, jumping from 307.75 in morning trade to 306.92 just after the announcement.

Analysts said that they could not for the moment estimate the volume of the possible financial burden for the banks that the ruling would entail. Buda-Cash analyst Zoltan Reczey said that the biggest question — the unilateral amendment of contracts — had been left open by the court.

The opposition Socialist Party urged that the government should elaborate a comprehensive package of measures to resolve the problem of troubled forex mortgage holders. Sandor Burany, Socialist head of parliament’s budget committee, told a press conference that a law was needed which would “remove the largest part of the burden off the shoulders of FX debtors”.

The Socialists also call for an economic policy to strengthen the forint, and steps to coordinate government measures with the central bank’s monetary policy. Burany insisted that the Kuria decision will resolve only a minor part of the problems of FX debtors, and blamed Hungary’s weak forint for the majority of those issues.

The radical nationalist Jobbik party called for immediate intervention by the government and parliament in connection with FX loans. Deputy group leader Daniel Karpat told a press conference that FX loans should be converted to forint-based ones at the exchange rate in effect when the loans were taken out. Accordingly, any extra burdens caused by the banks should be borne by the banks and in this way the loan contracts may be viewed as if they had been signed under fair conditions.

Jobbik proposes setting up a compensation fund financed by banks proved to have abused consumers’ trust.

The opposition Democratic Coalition (DK) said that Prime Minister Viktor Orban and the government were now all out of loopholes, following the legal uniformity decision. Spokesman Csaba Molnar said that assisting troubled borrowers was now a political and a fiscal matter. DK expects the Kuria’s decision to have an impact of somewhere between 100 billion and 300 billion forints on borrowers’ contracts.

The opposition E-PM party called on the government to adopt their proposal and apply the central bank’s middle rate retroactively.

Green opposition LMP said it wanted to submit a bill on reimbursing debtors so that exchange rate spreads should to be repaid to them. Party co-head Andras Schiffer called on the government that it should also compensate debtors with already closed loan contracts.

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