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Interest rate increase of Slovakia's mortgages declared invalid - Announcements
Recent decisions and consultations in Slovakia mean that it is likely that there will be more restrictions on how a bank can make one-sided changes to mortgages (e.g. to increase an interest rate for a variable rate loan). Slovakia and Pfandbrief holders who hold mortgages from Slovakia must be conscious of the changes and know how to mitigate the risks of invalidity of mortgages (Slovak District Court in Zilina, 10 February 2016).
An innovation of the Act is a legal upper limit for charges that Slovak commercial bankers can levy on customers for relocating their mortgages between them, i.e. early redemption of a mortgages by re-financing through another commercial institution. Competitive conditions in the markets led to a sharp fall in interest prices.
Consequently, interest on mortgages is currently at historically low levels. In reducing their interest rate levels, many institutions seemed to expect that, should the economic realities of low ECB interest and persistent de-flation changes, they would be able to raise interest rate levels one-sidedly on current mortgages portfolio (most Slovak mortgages are three- or five-year variable rate loans).
Recent rulings by the Zilina Regional Court in a case concerning consumers have shown that this is not always the case. By judgement of 10 February 2016, Case 7Co/563/2015, the Slovak Regional Court in Zilina annulled 24 clauses used by Prima bankka (a Slovak bank) in its default mortgages contracts.
The majority of the invalid clauses refer to a number of aggresive contract terms and cases of delay. It appears that the judgment limits the bank's capacity to speed up the lending and impose the mortgages in a number of "soft" defaults. The main invalid clause, however, should allow the institution to'reasonably modify the interest rate (...) if the customer's exposure changes'.
According to the CFI, the clause was therefore an unlawful clause in a customer agreement and was null and void. The CFI therefore held that the clause was null and void. 1. In an indirect manner, the EIB acknowledged that it would try to reverse the ruling by lodging an exceptional complaint with the Supreme Tribunal of Slovakia. It is an important example and symbol of the increasing pro-consumer legal activity in the Slovak judiciary.
It is the first case that a Slovak tribunal has declared such a rule invalid. This does not necessarily mean, however, that the one-sided amending rules used by Slovak banking institutions are generally in line with EU law on consumption protections. It should be noted that Slovakians have so far hardly ever taken legal action against Slovak depositors and that interest payments are currently falling (not rising) in view of the current situation on the markets.
Indeed, on the basis of dominant Slovak banking practices, Slovak institutions often use problem clauses that allow them to modify their interest rate, e.g. due to'changes in the bank's commercial strategy' or'changes in the general economy'. Further hikes in the rate of interest and ECB interest may lead to one-sided interest rate hikes by Slovakia' banking sector.
Those rises may be contested by customers who claim that the amending terms of their one-sided agreement are null and void. Since 1 July 2016, the Slovak National Bank (NBS) and user associations have been able to bring an action in their own judgement and on their own behalf against an unfair clause in a concluded agreement with a customer, even if the customer concerned remains silent, thus aggravating the threat.
There is also increasing downside regulation pressures on the banking sector. The NBS launched a public hearing on 8 October 2015 on one-sided amendments to existing agreements on the provision of finance related to the provision of bankingervices. Comments have been sought from banking and other interested parties. According to the consultative paper, the NBS has a very narrow approach to one-sided changes in contract terms.
Banking and other markets need to adapt their practice accordingly. NBS uses these principles as an instruments for supervising the markets and is de facto obligatory for them. The NBS is therefore expected to begin to impose in the near term regulative penalties on those banking institutions that apply unethical one-sided amending regulations.
So, when can a Slovak institution modify its interest rate one-sidedly? On the basis of the current state of play of open consultation, it appears that the terms and reasons for one-sided amendments should be as specified as possible in order to reduce the risks of appeal before the Slovak judicial authorities.
It could, for example, be stipulated in the agreement that the interest rate may be increased by the banks in proportion to the rise in a certain benchmark interest rate. Furthermore, in certain cases (e.g. where the costs of the customer's loan are significantly increased by the one-sided change) the customer should be able to cancel the agreement free of charging.
In the event of such a retreat, the institution should provide the customer with an appropriate reimbursement plan. In contrast to some other CEE countries, the Slovak housing credit markets have so far not seen any significant systematic problems, such as the huge build-up of exchange rate risk associated with mortgages. Slovak mortgages interest is currently at historically low levels, while the overall level of mortgages (and consumer lending in general) is soaring.
The majority of mortgages are extended over a number of years, and interest rate levels and headline inflation will rise at some point during this time. When it comes to portfolio management and refinancing, bankers are relying on their capacity to raise interest levels in the event of a shift in wider finance markets.
However, it can have significant implications for the entire financial industry if this capacity is restricted by the jurisdictions, which delete the clauses in the agreements that give them the right to raise interest on mortgages or other credits. This may be exacerbated by the huge and increasing volume of private customer indebtedness and by the fact that borrower may have difficulty to pay higher interest charges in the near-term.
Mortgages are also used as collateral for Pfandbriefe of Slovak bank. Even though the income from the collateral values is not directly tied to the Pfandbrief payment, the questions of law relating to the mortgages on which the collateral is based have an impact on the collateral provided and may therefore also have a direct impact on Pfandbrief holders.