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All mortgage contracts may be invalid

Thousands of foreign currency household mortgage contracts may turn out to be invalid following a Budapest Court decision on December 7, 2012 cancelling an OTP Bank contract.

The Budapest Metropolitan Court’s decision pointed out that the bank had taken into account exchange rate spread costs when calculating the APR, but that the value was not reflected in the contract. Therefore, not all the costs are shown.
 The exchange rate spread is the difference between the bid and ask prices for foreign currency. Foreign currency denominated mortgage contracts are lent on bid price, but holders pay back on the asking price.
 In a terse statement issued after the ruling, OTP said the bank does not agree with the judgment and is looking into further legal options. 

 “In recent years, we asked banks several times to explain how the APR was calculated for the contracts. No bank was willing to reveal the calculation method, all the banks were saying was that that their practice was in order and regularly checked by financial watchdog PSzÁF,” said Dénes Lázár, a founder of consumer protection organization PITEE. It released an analysis on mortgage contract irregularities in the fall of 2011. “Since the publication, we have seen approximately 50-100 foreign currency credit agreements. Car loan contracts included the exchange rate spread and mortgage loans didn’t. So probably all the mortgage loans are defective from this point of view,’ Lázár said.

The organization initiated the lawsuit in a case where missing data was found in 2011. According to the analysis of PITEE, financial service providers didn’t follow the rules or take them seriously, feeling they weren’t accountable for violations of the law. “Courts are slow and ineffective and a lot of people think that to seek help in the courts is hopeless,” Lázár added. “PSzÁF and the Financial Mediation Board has tacitly approved these violations for many years.
 First of all, basic information should have been given, based on which the client could summarize in five sentences the risks taken. However, banks were only interested in complying formally with the rules. The lending practices were irregular overall,” he continued.

“Personally, I am convinced that many more irregularities could be found in the credit agreements than just this one the Court just criticized,” said Lázár, pointing out the tons of credit agreements given to people who are unable to repay their bank loans. These banks hadn’t complied with the regulation on checking the credit worthiness of the clients. In PITEE’s opinion, the situation is mostly the responsibility of PSzÁF, because banks – like any profit-oriented enterprise – are always trying to push the limits of a country’s legal framework.

“Each entrepreneur tries to circumvent rules and if the state is stupid enough to allow companies to play with the legal system, then it will results in practices like the banks used in Hungary: giving credit to people who shouldn’t be given it, and under conditions that are not in line with the rules. If PSzÁF had adequate capacity and determination to control the situation, it could have prevented it,” Lázár added.

Also in December, the Kúria, Hungary’s Supreme Court, published guidance on how the courts should handle various nullifying claims. This states that a court cannot make a ruling on the whole credit contract, only points within it that may be unfair. The Hungarian Banking Association has not yet finalized its position on the guidance, but has promised a statement later.