FX loans in Hungary – invalidity of FX gap and beyond
01 October 2013
In short, the financial crisis and the resulting change in FX rates have made these loans more expensive than customers originally expected. The Curia (the Hungarian Supreme Court) has passed a landmark interim judgment3 on an FX-linked loan agreement (the OTP Judgment). Many banks are facing similar claims in a number of jurisdictions in the CEE region.
For several years foreign exchange (in this context any currency other than HUF) loans (FX loans) have been popular with customers because the interest rates offered were significantly lower than in the case of HUF loans. FX loan products sold by various banks had different terms: some banks simply referred to the FX as a value reference for calculating the HUF amounts due, other banks sold FX loans structured in a way that the loan amount was fixed in an FX amount, and the bank disbursed the loan in HUF at the FX rate offered by the bank for buying the relevant FX.
Repayment was to be made by the borrower in HUF at the FX rate offered by the bank but this time for selling the relevant FX. The FX rates offered by each bank fluctuated from day to day.
As a result of the financial crisis from 2008, the difference between the sale and buy exchange rates offered by retail banks (or the +/- margin from the bank’s middle exchange rate as interpreted in the OTP Judgment; the FX gap) in relation to FX loans (approximately 90% of which were denominated in CHF, where both payment and reimbursement occurred in HUF) increased. So the customers had to repay considerably more to the banks. Many retail borrowers have challenged the validity of FX-linked loan agreements on a number of grounds.
In this case, a retail consumer of OTP Bank Nyrt (OTP) sued OTP in early 2012, claiming the invalidity of an FX-linked loan agreement made in 2006. The customer invoked the absence of any reference in the loan agreement to the FX gap as an ancillary cost of the loan. Under the Banking Act4 all the costs associated with a loan must be (i) specifically listed in the loan agreement; and (ii) factored in the calculation of the annual percentage rate of charge (APR) which is also a mandatory part of any such loan agreement. Since the difference the consumer had to pay was due to the “hidden FX gap”, the consumer claimed that OTP should refund the amount of this difference.
The Curia held that:
- although the loan agreement specified the APR, it was not clear which costs OTP took into account when it calculated the APR; and
- the FX gap qualifies as a cost element from the point of view of consumers, and so it should have been specifically mentioned in the loan agreement under s213(1)(c) of the Banking Act (effective as at the date of the loan agreement under review).
The Curia found the definition of the “total cost of the credit” as defined in Article 1(2)(d) of the Directive must be interpreted in a very broad way in favour of the consumers. In addition, against the defensible arguments of OTP, the Curia concluded that the conversion was an inevitable mechanism associated with the performance of the loan agreement, and therefore its costs cannot be separated from the costs of the loan.
Although loan agreements which do not list all the possible costs associated with the loan are null and void by the operation of the Banking Act, the Curia “declared the contract valid” by amending it and specifying the FX gap to be 1% (+/- 0.5% to/from the middle exchange rate applied by OTP) in accordance with the information given by the bank to the borrower at the time of entering into, but not in the text of, the contract.
Since OTP changed the sale and buy rates during the term of the loan agreement (which increased the FX gap), the Curia sent the file back to the first instance court to examine whether OTP changed its rates unilaterally without properly notifying its customers of the resulting detrimental effect on the repayment amounts. If the first instance court concludes that OTP did not comply with the strict statutory rules of the Banking Act on unilateral changes of the terms of a loan agreement to the detriment of retail customers, OTP will have to refund the difference based on the grounds of unjustified enrichment.
The Curia made it clear that it could not, in the absence of applications to such effect, examine a number of further issues which may arise in connection with the FX gap or FX-linked consumer loans in general (eg unfair terms). In particular, the Curia did not deal with the question as to whether unilateral changes by the bank may be treated as based on unfair terms in consumer contracts – which is a hot topic in other FX loan litigation.
Although there is no obligation to do so, lower courts are expected to follow the OTP Judgment as a precedent and for authoritative guidance. The bad news for banks is that the FX gap is now classified as a cost. Therefore, banks can only claim amounts resulting from the FX gap if this was clearly indicated in the loan agreement and only to the extent that it was communicated at the time of the contract. The outcome of this (and similar disputes) depends on the interpretation of whether the FX gap is a “cost of the credit to the consumer” (Articles 1(2)(d) and (e) of the Directive).
The good news is that the whole structure of FX loans has now been tacitly approved by the Curia. The Curia accepted FX loans structured by using double currencies, ie one calculation currency in FX and a different payment currency in HUF.
The banks may now wish to consider whether to amend formerly their general terms and conditions and inform existing customers of the application of the current FX gap.