The situation in Hungary
Non-performing loans (“NPLs”) are on the rise in both the retail and commercial sectors in Hungary, and are causing considerable problems for the Hungarian financial sector, as, without an effective market, NPLs cannot simply be sold to interested investors. In addition, the sale of NPLs is also discouraged by an unfavourable legal climate. Working out of NPLs is considered an unattractive option as effective legal measures are lacking, with existing options favouring debtors. The Hungarian Parliament, recognising that change is needed, has amended the laws to enhance the ability of banks to deal with NPLs. However, certain measures have backfired – or are expected to do so in the future.
Unfavourable legal environment
The sale of NPLs has always posed problems in Hungary, as the purchase of loan receivables is considered as lending activity, and thus prospective buyers are expected to have a valid Hungarian banking licence (or a licence issued by a European Economic Area member state passported into Hungary). The licensing requirement, as the main impediment to the sale of NPLs, was reinforced by the discouraging volatility of Hungarian legislation, ever-changing tax regulations and the lack of effective enforcement measures. The eventual enactment of the new Hungarian Civil Code (which entered into force on 15 March 2014) worsened the problem, as it renders the security interest terminated where contractual positions are transferred, even if the security provider has agreed to the transfer, ie, the prospective buyer cannot assume the loan agreement (and obtain the position of the lender thereunder), without terminating the ancillary security interests; and so only assignment of loan receivables is feasible.
New legislative measures
Loan portfolio transfer
The Hungarian Parliament has amended the Hungarian Banking Act providing for the regulation of loan portfolio transfers. The amendment deviates from the general rule of the Hungarian Civil Code regarding the termination of the security interest in cases of transferred contractual positions. Instead, such transfers must be authorised directly by the Hungarian National Bank, also bypassing the need for the agreement of either the borrower or the security provider.
The Hungarian Banking Act’s exemption covers only those portfolios that consist of at least 20 loan or financial lease agreements, or with values higher than 10 billion forints (approx. EUR 33 million). Thus, even one loan agreement may qualify as a “loan portfolio”, provided that the transaction value reaches that 10 billion forint threshold. The transferring bank must notify each borrower and the security provider of the transfer, and under no circumstances may the interest rate, fees, and costs be modified. Upon receiving this notification, the borrower may terminate the loan agreement by written notice. Should the borrower do so, the borrower’s obligations immediately become due.
The amendment unfortunately does not provide a complete solution to the problems created by the general rule of the Hungarian Civil Code (ie, the termination of all security interests), because it makes the transfer of loan portfolios possible only among financial institutions (ie, the requirement regarding the banking licence remains), and sets forth the authorisation requirement of the transfer itself with the Hungarian National Bank.
The new legal regime setting out debt settlement procedures for private individuals will have a huge impact on the business of banks and financial undertakings in Hungary. The new regime is mainly aimed at non-performing housing loans. However, it does not exclude any kind of debt that is owed by a private individual who is a Hungarian tax resident.
The debtor may initiate debt settlements both outside and within the scope of a court procedure. If a bank has provided a housing loan to the debtor, the debtor must first initiate out of court procedures at (and coordinated by) the bank to reach a debt settlement arrangement. The bank must prepare the draft of the arrangement together with the debtor and other creditors. All creditors must agree on the debt settlement arrangement. During this process, creditors may not terminate their loan agreements –though they need not keep loan facilities available or disburse loans.
If the out of court procedure fails, the debtor may apply for debt settlement at the Family Bankruptcy Service, which will forward the application to the court. The Family Bankruptcy Service will appoint a family administrator to take charge of the procedure and possess certain powers over the assets of the debtor. The family administrator will prepare the debt settlement arrangement (together with the debtor), on which the creditors decide by voting. If no agreement is reached, the family administrator will start to prepare a “debt settlement plan”, which aims at the liquidation of certain assets of the debtor and distribution of the proceeds among the creditors.
The private bankruptcy regulation seems too administrative for a private individual and excludes from its terms a wide range of private individuals who may otherwise be considered for restructuring. Wide criticism has followed the regulation’s obstacles to the enforcement of mortgages, which are so severe that solvency capital issues may arise on the banks’ side as a result.
The licensing requirement as the main impediment to the sale of NPLs was reinforced by the discouraging volatility of Hungarian legislation, ever changing tax regulation, the lack of effective enforcement measures, and later on by the new Hungarian Civil Code (which entered into force on 15 March 2014) which renders security interest terminated in cases of transferred contractual positions even if the security provider has agreed to the transfer.