Giving in Payment law affects enforcement of consumer loans
The controversial Romanian Giving in Payment Law may apply to consumer loan agreements concluded both before and after the entry into force of the law, the Constitutional Court has concluded. This will most likely have an impact on how future sales of loan portfolios will be structured and priced.
The Giving in Payment Law1 allows a borrower, under a consumer loan agreement, to unilaterally terminate the agreement by giving to the lender, as repayment of the loan, the immovable asset(s) securing the repayment of the loan.2 The rationale of the Giving in Payment Law3 was stated to be the equal distribution between the borrower and the lender of the risks regarding the decrease in value of the mortgaged immovable asset(s). However, it was seen by many as a significant deterrent to consumer lending as well as a major risk factor bringing uncertainty in the markets.
The Giving in Payment Law has caused thousands of disputes, as lenders challenge borrowers’ notices of their intention to give in payment the mortgaged immovable asset(s). The Giving in Payment Law provides that once the notice is sent, all pending judicial or enforcement action, as well as repayments, are suspended. Lenders therefore have to factor in reduced cash-flow and delay in enforcement proceedings.
One of the important points of debate around the Giving in Payment Law after its enactment was whether it applies to consumer loan agreements concluded both before and after the date of its entry into force (13 May 2016). On 25 October 2016, the Romanian Constitutional Court issued its first ruling4 (Ruling 623), stating that although the Giving in Payment Law is not retrospective, it may still apply to agreements concluded before its entry into force, where “hardship” can be shown.5 Hardship is where an exceptional external event occurs which could not have been reasonably foreseen when the agreement was concluded and which makes the performance of the agreement excessively burdensome.
It still remains to be seen if the future rulings of the Constitutional Court will bring additional clarity on how the law is to apply, considering that this first ruling of the Court had a limited scope (ie the Court only reviewed the applicability of the law to loan agreements concluded between 2007 and 2009, thus before the entry into force of the new Civil Code).
Assignment of loan portfolios
Over the past few years, a high volume of non-performing consumer loans were assigned by Romanian credit institutions to various other financial institutions or recovery firms. The Giving in Payment Law clearly provides that it will apply also to the assignees of the receivables under such loan agreements. Assignees may want to check the warranties and indemnities clauses under the relevant sale-purchase agreements of loan portfolios and see whether the assignor(s) may be held liable for any losses which the assignees may incur.
Previous experience of rulings or legal reforms that have made it more difficult to enforce a loan suggests that assignees are generally unwilling to take the risk of reform (or clarification) at the contracting stage. For example, last year, several proposals were put forward for parliamentary debate, which, if approved by the Parliament, would have led to (i) a limitation on the proceeds which the lenders (or their assignees) would obtain following the enforcement of (assigned) receivables or (ii) an increased tax of 85% being imposed on income derived from the realisation of assigned receivables. The prospect of such draft laws entering into force either led the potential bidders to withdraw from negotiations or prompted a request for specific indemnities to be included in the agreement.
1 Law No. 77/2016 regarding the giving in payment (in Romanian, darea in plata) of certain immovable assets for extinguishing obligations arising under loan agreements, which entered into force on 13 May 2016.
2 Several objective admissibility criteria have been provided under the law, considering both the parties (ie, the borrower must be a consumer with no criminal convictions relating to the loan agreement, while the lender may be a credit institution, a non-banking financial institution or the assignee of the receivables under the loan agreement) and the scope of the loan agreement (ie, (i) the borrowed amount must be less than the RON equivalent of EUR 250,000 (calculated by reference to the exchange rate available on the date of signing of the loan agreement) and (ii) the purpose of the loan must have been the acquisition, building, expansion, modernisation, equipment, rehabilitation of an immovable residential property or, irrespective of the purpose of the loan, the loan was secured with at least one mortgage created over an immovable residential property).
3 According to the exposure of reasons which was prepared by the members of the Romanian Parliament who drafted and put forward for debate the original draft law.
4 Decision No. 623 of 25 October 2016 of the Constitutional Court of Romania, as published in the Official Gazette of Romania No. 53 of 18 January 2017.
5 Hardship was not expressly regulated under the former Civil Code of Romania, but it benefits from an express legal regime starting with 1 October 2011, when the new Civil Code of Romania entered into force. However, as the Constitutional Court upheld in its Ruling 623, hardship was generally accepted by the scholars and the jurisprudence even under the regime of the former Civil Code of Romania, as deriving from the civil law principles of pacta sunt servanda and that obligations must be performed with good faith and in an equitable manner.
This case summary is part of the Allen & Overy Legal & Regulatory Risk Note, a quarterly publication. For more information please contact Karen Birch – email@example.com, or tel +44 20 3088 3710.