OTP Bank Nyrt., Hungary’s largest lender, used unfair exchange-rate margins in a foreign-currency mortgage loan, the country’s highest court said in a ruling that may impact $15 billion in such contracts.
The court replaced the bid and ask rates used by OTP in the calculation of the principal and the monthly repayments on a Swiss-franc mortgage, Judge Ursula Vezekenyi said today in Budapest. The lender will need to apply the central bank’s mid-rate and return the difference to the borrower, she said. The court will meet June 16 to issue precedent rulings on the loans. It earlier rejected scrapping the loans altogether.
“While the decision” today on exchange-rate margins “isn’t binding” on other justices debating the precedent-ruling, “there’s a big probability” that the precedent-ruling on this issue “will match” today’s verdict, Supreme Court Judge Gyorgy Wellmann told reporters today.
Foreign-currency loans, which became ubiquitous in Hungary last decade as borrowers sought lower interest rates, led to soaring repayments and defaults as the forint plunged during the global financial crisis. Prime Minister Viktor Orban, re-elected to another four-year term in April, has pledged to phase out the loans after the court decisions.
OTP fell 1.7 percent to 4,794 forint by 3:28 p.m. in Budapest, retreating from a 10-month high. The bank competes mostly with foreign lenders in Hungary including Erste Group Bank AG (EBS), Raiffeisen Bank International AG (RBI), UniCredit SpA (UCG), Bayerische Landesbank, Intesa SanPaolo SpA (ISP) and KBC Groep NV. (KBC)
“There is no precedent law in Hungary, so verdicts in specific cases don’t apply automatically to other verdicts,” OTP said in an e-mailed statement, adding that it accepts the ruling. The bank said the difference to be repaid as a result of the judgment was less than 1 percent of the loan’s value.
An unfavorable court decision today may cost the banking industry about 50 billion forint ($224 million), Akos Kuti, a Budapest-based analyst at Equilor Befektetesi Zrt., said by phone yesterday. A future ruling on unilateral changes to interest rates may be a “potentially explosive issue,” Phoenix Kalen, a London-based strategist at Societe Generale SA (GLE), said in an e-mail today.
Outstanding rulings still to be delivered by the court include exchange-rate margins and unilateral changes to loan interest rates by lenders, which in effect will be precedent verdicts as they will be binding on lower courts, Judge Wellmann said.
Justices will also discuss June 16 whether household foreign-currency loans are unfair because the exchange-rate risk is born solely by the borrower and if they can be voided as a result. Finally, they will examine whether unclear information provided by the lender on the exchange-rate risk can render contract clauses unfair and the entire loan void.
Foreign-currency mortgages and home-equity loans were at $15 billion at the end of March, making up 64 percent of mortgage-related loans, according to a Bloomberg calculation based on central bank data.
Orban’s government has sought to make banks bear responsibility for the spread of foreign-currency loans, which have contributed to a decline in lending and sapped consumer spending, deepening Hungary’s economic slump.
The government has imposed Europe’s highest bank levy and in 2011 forced lenders to swallow $1.7 billion in losses on the early repayment of some mortgages at below-market exchange rates. The cabinet also set up a program allowing to temporarily fix the exchange rates used for installments.
The government has said any intervention should avoid making foreign-currency benefit over forint borrowers. The measures also shouldn’t threaten banking stability, Economy Minister Mihaly Varga said on public radio today.
Any retroactive change to contract terms must “take into account the interests of both parties as much as possible,” the Constitutional Court ruled on March 17.
To contact the editors responsible for this story: Balazs Penz at email@example.com Pawel Kozlowski