Hungary Widens Loan Charges Plan, Raising Risks for Banks

Hungary widened the scope of a plan requiring banks to refund mortgage loan charges deemed unfair to all consumer loans, potentially doubling volume affected to as much as $29 billion.

The measure will apply to loans denominated in foreign currency and in forint where banks may have charged either an exchange-rate margin on repayments or unilaterally changed the terms of a contract, according to a draft law submitted to the parliament in Budapest by Justice Minister Laszlo Trocsanyi today and posted on its website.

Prime Minister Viktor Orban, re-elected in April to a second four-year term, has pledged to punish banks for extending foreign-currency loans to households and to phase them out. The forint’s plunge after the 2008 financial crisis led to soaring repayments and defaults on mostly Swiss-franc denominated borrowing, which became widespread last decade as clients sought lower interest rates.

“The fact that forint loans are now also included points to upward risk” for banks, Eszter Gargyan, a Budapest-based economist at Citigroup Inc., said by telephone.

The forint reversed intraday gains after the government submitted the bill, weakening 0.2 percent to 309.46 per euro by 4:45 p.m. in Budapest. It fell 1.2 percent this week, the worst performance among 24 emerging-market currencies tracked by Bloomberg.

OTP Bank Nyrt., Hungary’s largest bank, rose 0.2 percent, paring this week’s decline to 2.8 percent.

Tight Deadlines

Legislators plan to vote on the bill by July 4, ruling party parliament group leader Antal Rogan said this week.

Banks will be given 90 days to calculate refunds on unfairly charged exchange-rate margins and will have 30 days to initiate court proceedings to prove the fairness of unilateral contract changes, according to the draft. The government will present separate legislation detailing how banks should refund borrowers for unfair contract changes.

OTP competes in Hungary mostly with foreign lenders including Erste Group Bank AG, Raiffeisen Bank International AG, UniCredit SpA, Bayerische Landesbank, Intesa SanPaolo SpA and KBC Groep NV.

Hungarian households held about 6.5 trillion forint in loans, or about $29 billion, by the end of March, according to central bank data. Half of them are foreign-currency denominated, predominantly mortgages. Of the forint loans, 837 billion forint were government subsidized mortgages. Changes to subsidized loans may be less likely to be deemed unfair by courts as many were linked to a reference rate, Citigroup’s Gargyan said.

‘High Bar’

Hungary’s supreme court, known as the Kuria, has set a “high bar” for proving that unilateral changes by banks to foreign-currency loan contracts were fair, Justice Gyorgy Wellmann told reporters on June 16 in Budapest. The court also said exchange-rate margins used by banks on the loans were unfair. The decision is also binding for lower courts.

Orban, who has 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 aid program submitted today won’t apply to contracts repaid under the 2011 plan.

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