Relevant Legislative Changes. Overview
In a banking sector challenged by a high number of non-performing loans, which exceeds the European Union average, an impressive number of legislative initiatives have been promoted by the Romanian Parliament in recent years, particularly during 2016. The promoters of these initiatives cited the need to adopt these measures in order to protect consumers who had taken out loans for which, for various reasons, they faced difficulties in repaying.
The proposed enactments have been the subject of intense public debate, involving the main actors of the banking system: banks, consumers' associations and the National Bank of Romania (BNR), but also legal practitioners and economists. Legal principles, economics and business rationale have been raised to support conflicting views on the benefits versus the negative effects of these laws on consumers, the banking market and other related sectors, such as the real estate market.
One particular issue has been legislators' intention to apply certain of the new legal provisions also to existing contracts, concluded prior to the entry into force of the new laws. The potential retroactivity is generally seen as weakening legal certainty, an aspect highlighted by the BNR1, the European Central Bank2 and the European Commission3. On top of the costs of implementing these measures, the legal uncertainty is expected to negatively impact the crediting business as state intervention in ongoing contracts is likely to discourage foreign investors or increase the risk attributed to Romanian jurisdiction.
Not all such proposed enactments have been adopted or entered into force: some have been challenged on non-constitutionality grounds, while others are still awaiting Parliament's approval. The summary of these enactments and their legislative status, as well as their impact on the banking market, is presented below. We will then make a more in-depth presentation of the recent changes governing the transfer of consumer loans and their impact on the secondary market of banking assets.
Summary of the Most Important Recent Laws
Law No. 77/2016 on datio in solutum of certain immovable assets for the settlement of obligations undertaken by credit agreements (Law 77/2016). The decision of the Constitutional Court of Romania
Law 77/2006 was adopted by Parliament in the first half of 2016 and entered into force in May 2016. Pursuant to this law, any consumer who took out credit relating to immovable residential property not exceeding EUR 250,000 has the general right to ask the financial creditor to accept the full discharge of such mortgage-backed debt through the transfer of title over one or several mortgaged immovable properties securing the credit contract4 (datio in solutum).
The law stipulates that this procedure is applicable to contracts concluded after its entry into force as well as to ongoing contracts, "with a view to balancing the risks from credit contracts, as well as from the depreciation in value of immovable properties".
The law has been criticised for creating moral hazard and affecting payment discipline, owing to consumers' discretion regarding the application of the procedure, which is generally applicable to all consumers and not targeted at those in need of protection. Subsequently, requests for debt/property swaps were challenged by several Romanian banks, which argued that they breached the Constitution, mainly due to the retrospective application to ongoing contracts.
The Constitutional Court ruled on the issue on 25 October 2016, and the decision was published in Official Gazette No. 53 on 18 January 2017.
The Constitutional Court partially admitted the unconstitutionality argument and ruled that the debt/equity swap procedure set out by Law 77/2016 would be applicable to credit contracts concluded before 1 September 20115 only if a court of law had verified the conditions for the existence of hardship under the former Civil Code. The court further deemed unconstitutional the provisions of Law 77/2016 on real estate depreciation. Particularly relevant are several observations made by the court with respect to hardship, detailed herein below.
The Constitutional Court upheld that Law 77/2016 was intended to ensure that the contractual risk in signing loan agreements is equitably shared between the parties, in the larger context of the economic crisis, which left some debtors unable to meet their repayments. The court ruled that, although not explicitly mentioned, legislators' intention was to apply the hardship theory and to reestablish the contractual balance between parties affected by unforeseen circumstances that occurred with no fault from either party. However, Law 77/2016 imposed the application of hardship by effect of law to all ongoing credit contracts, without requiring courts to confirm the existence of hardship on a case by case basis. For this reason, the Constitutional Court judged the provisions of Law 77/2016 to be constitutional only if a court of law verifies the existence of hardship for ongoing credit contracts.
The Constitutional Court of Romania's decision is relevant also because it includes a detailed analysis of the conditions applicable to hardship cases, although the former Civil Code (which applies to credit contracts concluded before 1 October 2011) did not expressly recognize the concept of hardship. The court defined hardship as an exceptional and external event occurring while the contract is in effect, where the extent and effects of which could not have been reasonably foreseen upon the conclusion of the contract, rendering the obligations excessively burdensome. Hardship should therefore relate only to unforeseen risk, which is on top of the risks assumed by the parties when concluding the contract, and should not entail the automatic restoration of the initial status quo or eliminating foreseen contractual risks.
The valuation of risks should consider the capacity and economic/legal background of the parties, the value of the obligations in the contract, the risks borne during the term of the contract, as well as new economic conditions which alter both the will of the parties and the social utility of the credit agreement. The valuation may lead to either the termination of the contract or to its amendment to adapt it to the new conditions, but the changes should be effective only in the future. The court called to rule upon the hardship will need to assess the existence of the unforeseen event (an objective condition), its effects on the contract, the good faith in exercising the rights and obligations of the parties (as subjective conditions), and judge in equity (which comprises both objective and subjective elements).
It is generally accepted that the negative effects of Law 77/2016 on the banking system have largely been assuaged by the Constitutional Court's ruling. In particular, the Constitutional Court decision has eased the pressure on mortgage portfolios generated during the real estate boom to 2008, for which the debt/equity swap was regarded to be one of the biggest threats. Moreover, the low incidence of uses of the law (only a few thousand consumers requested its application, despite general expectations of a much higher number) also eased the pressure on the banking system.
The initial reaction of banks was to apply more severe lending conditions and in particular a lower loan-to-value ratio. These conditions created pressure on borrowers to find additional sources to finance the acquisition and rendered real estate loans less accessible, which ultimately affected consumers. Lately, the trend has been to restore the initial credit ratings or to apply a more intricate approach, as some banks differentiate between regions when assessing loan-to-value ratio. Nevertheless, the litigation risks for lenders' historical mortgage portfolios have again risen as the Constitutional Court's decision is expected to lead to a new type of litigation based on hardship risks, for cases when an amicable solution is not reached between bank and borrower.
Government Emergency Ordinance No. 52/2016 (GEO 52/2016) on consumer credit granted for the acquisition of immovable assets and for the amendment and update of Government Emergency Ordinance No. 50/2010 (GEO 50/2010) on consumer credit (as amended and supplemented)
The main purpose of GEO 52/2016 was to implement Mortgage Credit Directive 2014/17/EU6 and it entered into force on 30 September 2016. The draft law for its approval was passed by the Senate without amendments on 1 November 2016 and was sent to the Chamber of Deputies for approval.
The Chamber of Deputies' commissions were required to provide amendments and endorsements on the draft law by 15 November 2016. There has been no further update on the procedure and no date has been set for a vote on the draft law in the Chamber of Deputies.
The entry into force of GEO 52/2016 marks the separation between the regulation of consumer credit agreements related to immovable properties (called mortgages)7, which are governed by GEO 52/2016, and the regulation of unsecured and other types of consumer credit agreements not related to immovable properties, which remain governed by GEO 50/2010. However, GEO 50/2010 will continue to regulate mortgage credit agreements concluded prior to 30 September 2016. Pursuant to the new rules set forth by GEO 52/2016, mortgage credit agreements are more strictly regulated both in terms of information provided during the pre-contractual phase, as well as during the term of the agreement, and the rights of the consumer.
In particular, mortgages must comply with the new rules on foreign exchange risk. With loans in foreign currency, consumers must be informed of the related risks both prior to the signing of the agreement and throughout the full term of the credit agreement, such as by receiving warnings in the event of a more than 20% depreciation of the currency. Borrowers have the right to convert the credit into an alternative currency at any time during the loan period, and banks must provide them with their available offers in such currency.
Moreover, borrowers have no restrictions if they decide to repay early or refinance their mortgages and no fees may be charged for early repayment.
For all types of consumer loans (both mortgages and unsecured loans), new supportive measures aimed at borrowers in financial difficulties and payment difficulties have been set, including as prevention measures creditors' obligation to provide adequate information and support to consumers in financial difficulties.
In this area, the provisions of GEO 52/2016 and GEO 50/2010 have been aligned to a great extent, in what concerns default interest, acceleration and enforcement in the event of late repayments. The law has therefore imposed, with respect to all consumer loans, limitations on default interest8 and set forth specific rules on acceleration and enforcement in the event of payment delays.
GEO 52/2016 has also brought novel institutions and introduced specific regulations for the intermediaries of mortgage credit agreements and for receivables collection entities (RCEs), the latter in the case of both mortgages and unsecured consumer loans. The National Authority for Consumer Protection is the designated authority in charge of the supervision of these entities.
The regulation of the activity of RCEs has been done in conjunction with the setting of new rules which govern the transfer of non-performing loans. A more detailed analysis of the impact of the law on these operations is presented in the second part of this analysis.
The Draft Law for the Amendment of Government Emergency Ordinance No. 50/2010 on Consumer Credit9 (the CHF Conversion Law)
The CHF Conversion Law was adopted by the Senate on 18 June 2016 and by the Chamber of Deputies on 18 October 2016, and was due to enter into force within 60 days of publication in the Official Gazette.
The CHF Conversion Law was intended to allow consumers to convert outstanding CHF-denominated credit into RON, at the historical exchange rate published by the BNR on the execution date of the credit agreement. The law was also intended to apply to credit contracts concluded prior to its entry into force, when such contracts are related to immovable properties.
The amendment of ongoing credit contracts was to be made by an addendum agreed with the original creditor. In the case of credit contracts that have been assigned or are under enforcement, the consumer may bring legal proceedings against the current creditor to convert the loan and thereby recalculate his or her debt.
The law has been criticised for its lack of clarity and for differentiating between consumers who contracted CHF loans and those who contracted loans in other currencies. Lawmakers should also have anticipated legal complications resulting from borrowers' court claims related to the conversion.10 In response to these criticisms and the fact that the law was not targeted only at consumers facing payment difficulties, the Government set in motion an ex ante constitutionality challenge on the grounds that the provisions of the CHF Conversion Law breach constitutional norms and principles.
According to the official press release dated 7 February 2017,11 the Constitutional Court judged the CHF Conversion Law to be entirely unconstitutional, as the form of the law adopted by the Chamber of Deputies was completely different from that adopted by the Senate, the Chamber of Deputies having added provisions that were not discussed during the debate conducted by the Senate.12 Also, the CHF Conversion Law regulated hardship as being applicable by effect of law for the conversion obligation and the foreign exchange conversion rate, while according to the Court's prior case law (see above, the decision on Law 77/2016), only courts of law are competent to apply hardship, provided that hardship conditions are met.
Given that the Constitutional Court found the CHF Conversion Law not to be compliant with the Constitution, Parliament must re-examine the law and align it to the decision of the Constitutional Court.
Other Legislative Initiatives
There have been several legislative initiatives aimed at modifying the banking law provisions and taking away the qualification as writ of enforcement for the credit agreements concluded by credit institutions, as well as the ancillary security agreements and guarantees.
In this respect, we note that the draft law for the repeal of Article 120 of GEO 99/2006 was adopted by the Senate on 22 September 2015, while the Government informed the Chamber of Deputies on 8 June 2016 that this draft law did not enjoy the Government's support. The Chamber of Deputies recently rejected the draft law, on 14 February 2017.
It is expected that, if enacted, such laws would create an additional logistical burden and lead to an increase in operating and financing costs for creditors. Of particular note is that these amendments would affect not only retail loans, but also corporate loans, thus having an overall negative impact on the crediting market.
The recent brake to these initiatives, which may be attributed also to the decisions of the Constitutional Court of Romania, could be a signal that legislators are willing to investigate and assess in more depth the required measures that would ultimately protect consumers and their access to a sustainable crediting market.
Impact of the Legislative Changes on the Secondary Market for Banking Assets In Romania, the secondary market of banking assets has become very active in the last couple of years through transactions focusing on sales of non-performing loan (NPL) portfolios and idle immovable assets (acquired in enforcement or similar proceedings) by credit institutions. Banks have been increasingly active in setting up the "NPL market", as the capital adequacy requirements entail the need for such entities to externalise their non-performing assets in order to use their capital more efficiently, to ensure credit and profitability growth and decrease funding costs. The involvement of debt collection companies, as purchasers and/or services providers, was also a relevant feature of such transactions. The "do-it-yourself" approach used by Romanian credit institutions recorded a certain success13, with the NPL ratio (based on EBA definition) declining significantly from 21.5% (September 2014) to 13.5% (March 2016), such success also being recognised at international level.14
This trend and investors' participation in these transactions needed to be supported by the "stability and predictability of the national legal framework in order to align it with the EU regulatory regime"15 .
The recent changes in consumer credit legislation (GEO 50/2010 and GEO 52/2016) have had a significant impact on the retail NPL market, as they introduced a special regime for the assignment of consumer loans to RCEs, as opposed to assignment to traditional financial creditors (banks and non-banking financial institutions).
The revised consumer credit legislation regulates the transfer of non-performing retail loans to RCEs, while introducing certain differences between real estate loans and other consumer loans:
- scope of transfer: only NPLs (both mortgages and unsecured loans) with outstanding payments of principal and/or interest due for at least 90 days and which are accelerated or under enforcement procedures may be transferred to RCEs;
- RCEs (both foreign and Romanian entities) that acquire retail NPLs must be registered with the National Authority for Consumer Protection. It follows that unauthorised entities or individuals may not acquire receivables arising from retail loans, irrespective of whether the transfer concerns a single loan or a single debtor;
- loan agreements governed by GEO 52/2016 (e.g. mortgages) cease to be writ of enforcement after their transfer to an RCE, but no such effect applies to the assignment of the consumer loan agreements governed by GEO 50/2010 (e.g. unsecured loans). The writ of enforcement is a feature provided by law, for loan agreements and related security documents concluded by a credit institution or a non-banking financial institution, which enables the creditor (including its assignee) to enforce its claim directly. This means that in the case of mortgages, unless the enforcement procedure was initiated by the original lenders, RCEs are required first to file the claim against the debtor to secure a court decision (which is a lengthy procedure subject to appeal and second appeal), and then to seek enforcement against the debtor.
- RCEs may charge only legal default interest and enforcement costs (any other fees, interest and default interest provided in the original loan agreement may not be applied after the transfer);
- the debt collection activity has to comply with the rules of conduct set forth by law, aimed at protecting consumers against harassment, oppressive or abusive conduct.
It may be anticipated that the rules applicable to the assignment of retail mortgage NPLs would likely induce RCEs to request that enforcement be initiated by the original lenders prior to assignment, considering that they would not be able to initiate directly such enforcement of NPLs as writs of enforcement. Both the original lenders and the RCEs are thereby stimulated to initiate enforcement relatively shortly after the acceleration of loans, considering the limitations imposed on the calculation of interest as well as in the event of assignment.
The new legal provisions are not applicable to the assignment of corporate NPLs, which continue to be governed by the general provisions of the Romanian Civil Code regulating the assignment of receivables. Currently, there are no restrictions on the assignment of corporate NPLs to financial creditors or to regular entities not subject to a specific authorisation regime (either Romanian or foreign entities).
1 Please see "Romanian financial system – recent developments and perspectives" – L.Voinea, Deputy Governor of the BNR, March 2016 (available online on the BNR's official website at www.bnr.ro/DocumentInformation.aspx?idInfoClass=6896&idDocument=21872&directLink=1).
2 Please see the "Opinion of the European Central Bank of 18 December 2015 on the discharge of mortgagebacked debts through transfer of title over immovable property (CON/2015/56)" (available online on the ECB's official website at https://www.ecb.europa.eu/ecb/legal/pdf/en_con_2015_56_f_sign.pdf).
3 Please see the "Country Report Romania 2016", 26 February 2016 (available online on the European Commission's official website at http://ec.europa.eu/europe2020/pdf/csr2016/cr2016_romania_en.pdf).
4 The law is expected to be applicable only to loans secured with certain immovable properties, irrespective of whether these loans were concluded before or after the entry into force of the law.
5 The entry into force of the new Civil Code.
6 Directive 2014/17/EU of the European Parliament and of
the Council of 4 February 2014 on credit agreements for consumers
relating to residential immovable property and amending Directives
2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010
However, GEO 52/2016 exceeds the scope of Directive 17, i.e. Directive 17 concerns residential immovable properties, while GEO 52/2016 concerns any type of immovable property. This extension seems to be allowed under Directive 17, which in Recital 13 provides that "while this Directive regulates credit agreements which solely or predominantly relate to residential immovable property, it does not prevent Member States from extending the measures taken in accordance with this Directive to protect consumers in relation to credit agreements related to other forms of immovable property, or from otherwise regulating such credit agreements".
Besides, consumer protection standards under GEO 52/2016 are higher than those provided by the European legislature.
7 Directive 17 does not apply to credit agreements already in existence at the time the legal provisions become effective at national level – hence the corresponding wording of GEO 52/2016 being slightly different.
8 Throughout the duration of the credit agreement (before acceleration), the default interest rate is calculated as a fixed percentage, not exceeding 3 p.p., on top of the current interest rate and applied to the due and outstanding principal (with exceptions resulting from the consumer's situation, when the default interest is limited to 2 p.p.); after acceleration, the default interest cannot be higher than 2 p.p. on top of the current interest rate and is applied to the due and outstanding principal; during enforcement, the application of any interest and default interest is specifically prohibited. In all cases, the aggregate default interest is limited to the value of the outstanding principal.
9 We reviewed this draft law in the form sent to the President of Romania for promulgation on 24 October 2016.
10 Please see "Analysis of CHF-denominated loans", February 2015, based on the presentation of M. Isărescu, Governor of the NBR, in a press conference on 30 January 2015 (available online on the BNR's official website at www.bnr.ro/DocumentInformation.aspx?idInfoClass=6897&idDocument=19456&directLink=1).
11 Available online (in Romanian only) on the official website of the Constitutional Court, https://www.ccr.ro/files/statements/COMUNICAT_DE_PRESA_7.02_.2017_.pdf.
12 Such amendments concerned (i) the lack of consent for the conversion; (ii) the foreign exchange rate applicable to the conversion (i.e., that valid at the date of the loan agreement and not at the conversion date).
13 Please see "National Bank of Romania's experience in dealing with the NPLs challenge" – F. Georgescu, First Deputy Governor of the BNR, June 2016 (available online on the BNR's official website at www.bnr.ro/DocumentInformation.aspx?idInfoClass=6896&idDocument=22512&directLink=1).
14 Please see "What lessons from Romania's early success in NPL reduction?" - F. Montes-Negret and Eric Cloutier (EBRD consultants), March 2016 (available online at http://npl.vienna-initiative.com/wpcontent/uploads/sites/2/2016/05/Romania-NPL-resolution.pdf).
15 Idem 12 above.
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