Hungary to Force Banks to Repay FX Loan Charges on Ruling

Hungary’s government plans to force banks to repay “unfair” charges on foreign-currency mortgages after the country’s top court said few of the $15 billion in loans meet “stringent” criteria for fairness.

Lawmakers will pass legislation that will cost banks “hundreds of billions of forint” and phase out such loans, ruling party parliamentary leader Antal Rogan told reporters today. The plan must be submitted by “autumn,” he said.

The top court, known as the Kuria, set a “high bar” for proving that unilateral changes by banks to such contracts were fair, Justice Gyorgy Wellmann told reporters earlier today in Budapest. The court also said exchange-rate margins used by lenders on the loans were unfair. The ruling is binding for lower courts.

“The Kuria’s decision empowered Parliament to deliver justice on foreign-currency loans and to return to the people the money that banks unfairly took away from them,” Rogan said.

Prime Minister Viktor Orban, who was re-elected in April to another four-year term, has pledged to phase out household foreign-currency loans once the supreme court hands down its decisions. The forint’s plunge after the 2008 global financial crisis led to soaring repayments and defaults on mostly Swiss-franc denominated loans, which became widespread last decade as borrowers sought lower interest rates.

OTP, Forint

OTP Bank Nyrt., Hungary’s largest lender, rose 0.7 percent to 4,496 forint after the ruling. OTP competes mostly with foreign lenders 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) The forint fell 0.2 percent to 307.3 per euro as of p.m. in Budapest.

While unilateral changes to contracts aren’t automatically unfair, these must meet “stringent” criteria, according to Wellmann. These include the condition that rules for such changes be unambiguous, quantifiable and meet criteria for objectivity, proportionality and be “symmetrical.”

“The Kuria was braver than expected and it essentially empowered politicians to do away with unilateral interest-rate increases on foreign-currency loans,” Attila Gyurcsik, an analyst at Budapest-based brokerage Concorde Securities Zrt., said by phone today. Banks may have to return about 220 billion forint ($1 billion) to borrowers for unilateral contract amendments and as much as 50 billion forint on exchange-rate margins, he said.

Relief Plan

Foreign-currency mortgages amounted to 1.78 trillion forint while home-equity loans totaled 1.64 trillion forint at end-March, according to central bank data. The relief plan will apply to both of these categories, Rogan said.

The ruling party is now dropping a previously held criteria that foreign-currency borrowers can’t be better off than forint borrowers as a result of the relief plan, Rogan said.

Any retroactive change to foreign-currency loan terms must “take into account the interests of both parties as much as possible,” the Constitutional Court ruled March 17.

Orban, who’s sought to force banks to bear more responsibility for the spread of foreign-currency loans, 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.

To contact the reporters on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net; Edith Balazs in Budapest at ebalazs1@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net Paul Abelsky, Zoe Schneeweiss

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