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Loans in foreign currency and borrower’s rights.
Many Cypriots in the past decade have made loans in foreign currency especially in Swiss francs. At the time, borrowing money in Swiss francs was cheaper than making a loan in euro.
In the years that followed the currency exchange between the Swiss franc and the Euro changed leading to an increase in installments and in addition the banks increased the interest rates to account for the appreciation of the Swiss franc. Local currencies devalued accordingly.
The question arises whether it is possible to “attack” the legality of such loans by arguing that the banks misled their clients by not making clear in the loan agreements that the variable rate may increase if the Swiss franc appreciated.
There have been judgments in certain jurisdictions like Croatia on this matter in favor of the borrowers.
Very recently however, an Opinion was delivered by Advocate General Wahl, in Case C-26/13, Árpád Kásler and Hajnalka Káslerné Rábai v OTP Jelzálogbank Zrt, which is before the Court of Justice of the European Union (“the Court”), which may open new avenues for borrowers to challenge existing loans.
The opinions of Advocate Generals are advisory to the Court, nevertheless they are often followed. Therefore they deserve careful attention.
The case at hand concerns the applicability of the Unfair Terms in Consumer Contracts Directive (Council Directive 93/13/EEC) which was transcribed to Cyprus law with the Unfair Contract Terms in Consumer Contracts Law of 1996.
In May 2008, Mr Kásler and Mrs Káslerné Rábai concluded a contract for a mortgage loan denominated in foreign currency with a Hungarian bank. The bank granted the borrowers a loan of 14.400.000 Hungarian forints (HUF) (approximately €46 469), the equivalent value of which in Swiss francs (CHF) was fixed at CHF 94 240.84. According to the terms of the contract, Mr and Mrs Kásler took formal note of the fact that, in addition to the loan, the related interest, the administration fees and default interest and other charges would also be determined in CHF.
The contract further stipulated that the amount of the loan in CHF would be determined at the buying rate for that currency, applied by the bank on the date of advancement of the funds.
However, under the contract the amount in HUF of each monthly instalment due was to be determined, on the day preceding the due date, on the basis of the rate of exchange applied by the bank for the sale of CHF.
Mr and Mrs Kásler challenged the term which allowed the bank to calculate the monthly instalments due on the basis of the selling rate for CHF before the Hungarian courts. They claim that this clause is unfair in so far as it provides, for the purposes of repayment of the loan, for the application of a different exchange rate to that used for the advancement of the loan.
Advocate General Wahl took the view that the contractual stipulations relating to the rate of exchange applicable to the advancement and to the repayment of the loan respectively appear to have been set out in plain language and could not be challenged. However he considered that there may be doubts as to whether the consumer was in a position to understand that he would be subject to additional expense stemming from the difference between the selling price for the foreign currency and the buying price for that currency. In that regard, it is, in Mr Wahl’s view, for the Hungarian Kúria to answer that question in the light of the objective information available when the contract was concluded.
Lastly, the Advocate General takes the view that, where the deletion of an unfair term would make performance of the contract impossible, as in the present case, the Directive does not preclude the national court from replacing the term at issue with a supplementary provision of national law, where such a replacement is possible under national law. Such an approach makes it possible to attain the Directive’s objective, which consists, inter alia, in restoring a balance between the parties while preserving, as far as possible, the validity of the contract as a whole.
It is evident that Advocate General Wahl’s view, if adopted by the Court, will open the way for challenging the validity of foreign currency loans before national courts.
There will certainly be cases in Cyprus where many borrowers are still “locked” into such loan agreements without being able to challenge their legality, either in whole or in part, since at the moment there is no case law or precedent that would support such a move before national courts.
To view the press release that was issued by the Court of Justice of the European Union click here.