Top Court Rules: Laws Can Override FX Contracts But Must Balance Interests

Budapest, March 17 (MTI) -Existing contracts for foreign-currency mortgages may be modified by legislation, Hungary’s Constitutional Court ruled today.

The ruling came after the government asked the court to weigh the constitutionality of several conditions in the forex loan contracts. The government wanted to know whether existing contracts that burden many Hungarian households could be changed through legislation.

Among the government’s concerns was that borrowers had not been warned of the risks that a falling exchange rate would have on their monthly repayments.

Hungarian banks had feared the court may find the contracts unconstitutional, and this could have led to lenders’ further losses.

The court said the interests of all sides must be fairly taken into consideration.

It added that parliament may only legislate to change forex loan contracts if a lower court finds a clause unlawful. Further, it may do so only if major change in circumstances took place after a contract was signed in a way that harmed the rights of one of the parties involved.

Gergely Gulyas, a lawmaker for the ruling Fidesz party, welcomed the top court’s ruling as “a clear message” to legislators in the next parliamentary cycle. If Fidesz is re-elected, it will completely phase out forex mortgages, he told a press conference. “Fidesz does not want a single forex mortgage contract to stay in place,” he said.

Economy Minister Mihaly Varga said after the decision that the ruling backed the government’s measures. These reflect an effort to make decisions based on constitutionality which balance interests, he said. Accordingly, there are now fewer forex borrowers and the country is less vulnerable, Varga said. After the general election, the next government should continue to phase out FX loans from the market, he added.

The government had asked the top court to consider the constitutional clause that declares: “Hungary shall ensure the conditions for fair economic competition, act against any abuse of a dominant position and shall defend the rights of consumers.”

The government wanted to know whether some terms of the contracts, such as obliging mortgage holders to bear the risk of exchange-rate losses or allowing banks to raise interest rates unilaterally, could be declared unconstitutional accordingly.

Earlier Hungary’s supreme court, the Kuria, ruled that lending in foreign currencies was legal, and the client should bear the risks related to exchange-rate fluctuations. But the Kuria’s ruling was partial, since deferred its opinion on whether it was permissible for contract to be modified by a bank unilaterally and whether banks were legally obliged to have warned about exchange-rate margins.

Gulyas said the Kuria had no reason to delay giving its opinion on those two issues. Its opinion can be expected in May, and the new parliament can then settle the matter within a few weeks, he added.

Monthly mortgage repayments should be set at a fixed amount and forex borrowers should never have more favourable conditions than those for borrowers in forints, the Fidesz politician said, adding that, as a general rule, banks should bear any costs of damages arising from contracts.

Clients and the state should share the costs of schemes to make repayments affordable, he said.

Gulyas noted that the government had so far helped 362,000 families with various measures intended to help forex borrowers, such as the scheme to cap the exchange-rate for repayments, the establishment of a national asset manager to handle properties in default and an early repayment scheme.

Balint Torok, an analyst with Buda-Cash Brokerhaz, said today’s Constitutional Court decision theoretically allowed for the retroactive modification of contracts. At the same time, the banks may challenge the law in the Constitutional Court if the government tries to push the costs on to the banking sector, he added.

Akos Horvath, an analyst with Equilor, said the government was not expected to make a final decision on forex mortgages until after the April general election. The rise in the share price of OTP Bank suggests the market had assumed a much worse scenario, he added. At the Budapest Stock Exchange, OTP Bank shares were up 2.13 percent at 3,700 forints at around noon after closing on Friday at 3,623.

The radical nationalist Jobbik called for parliament to be convened immediately to settle the situation of forex mortgage holders. Deputy parliamentary leader MP Daniel Z Karpat criticised the government for “manoeuvring between the interests of banks and mortgage holders” and “cowardly shifting responsibility” to the next parliamentary cycle.

Green party LMP said the Constitutional Court’s ruling did not give a satisfactory or immediate solution to the problem of forex loans but rather passed on responsibility to parliament. In turn, lawmakers will be forced to pass back responsibility to the courts, the chairman of the opposition party’s advisory board, Peter Rona, told MTI. The ruling does not solve the basic problem that the loan’s principal cannot change. One fact cannot be escaped, namely that the debtor has nothing to do with the means of payment determined by the contract, he said. Based on the law, the lender has an obligation to establish whether or not the loan can be paid back. It is possible to do this if the debt is in forints, but otherwise it is not possible to establish how much the bank is owed if the exchange rate fluctuates. In this case, the lender is not in a position to establish whether or not a client can cover the repayments, he said. This is a problem that the Hungarian legal system has avoided over the past six years, Rona added.

Photo: MTI

Source: http://mtva.hu/hu/hungary-matters