- Chief Justice of Hungarian Supreme Court attacks consumer protection lawyers
(July 14, 2016)
- The lack of effective legal remedies fosters abusive lending practices
(June 7, 2016)
- Budapest Metropolitan Court may stop OTP paying dividends.
(May 31, 2016)
- Court decisions in Hungary are not influenced by objective arguments
(May 23, 2016)
- PITEE filed a claim against OTP Bank asking the courts to annul the approval of the financial results.
(May 11, 2016)
- Constitutional Court is depriving FX loan debtors of their human rights (Court Decision 33/2015)
(February 9, 2016)
- Conversion of FX car loans and FX personal loans
(September 29, 2015)
- Banks lose mortgage cases in illegal tribunals
(February 4, 2015)
- Mortgage debtors are waiting in vain for their cases to be heard by the courts.
(January 28, 2015)
- Complaint about application of Union law by Hungary (FX mortgages)
(January 5, 2015)
- Hungarian government breaches European Convention on Human Rights (ECHR) in order to force consumers to adhere to void mortgage agreements.
(September 18, 2014)
- The Hungarian parliament passes a bill with the aim of providing relief to tens of thousands of consumers who have foreign currency mortgages.
(July 24, 2014)
- The Hungarian OTP Bank Nyrt is hiding a risk of approx. € 10 billion from the eyes of its investors
(January 08, 2014)
- Szász warns of panic if banks lose mortgage lawsuits
(June 18, 2013)
- Political radicalisation is on the rise due to systematic judicial error of the courts
(March 20, 2013)
- All mortgage contracts may be invalid
(January 16, 2013)
- Foreign currency mortgage contract ruled to be invalid by court
(January 3, 2013)
- Court rules against OTP
(December 19, 2012)
- Press release – Hungarian banks originated foreign currency consumer loans illegally for years, regulators failed to discover misconduct
(November 23, 2011)
Press release no. 15
Budapest, July 14, 2016
Chief Justice of Hungarian Supreme Court attacks consumer protection lawyers
Mr György Wellmann, Chief Justice of the Civil Division of the Hungarian Supreme Court (Kúria), made a statement questioning the legal qualifications of consumer protection lawyers. Consumer protection lawyers respond in an open letter expressing their fears that the statement might harm public trust in the court system.
Last week the President of the Kúria, Mr Péter Darák and Mr Wellmann gave a press conference on the courts activities in the first half of 2016. According to the court’s figures, more than 200 foreign exchange (FX) consumer loan cases are pending at the Kúria and several thousand other cases are pending at the lower courts. In June the Kúria released its third, so-called uniformity decision (1/2016 PJE) on FX loan agreements.
A uniformity decision is a special dispute resolution tool under Hungarian law which does not exist in countries where the concept of fair trial is respected. A uniformity decision is adopted by an ad hoc chamber of the Kúria whose members are appointed on a case-by-case basis. The chambers do not hold public hearings, and consumers have no right to speak or appeal. Uniformity decisions are binding on the lower courts. Lower courts judges must refer to the uniformity decisions in their judgements, and this reference replaces the reasoning.
Mr Wellmann has played a major role in developing the decision-making practice in use in the FX consumer loan cases. He was member of the chamber which ruled that the judiciary is not competent to decide FX consumer loan disputes and therefore the consumer debt crisis should be resolved by legislation (see Sec. 7 of Uniformity Decision 6/2013). In this uniformity decision the chamber also explained its view that consumer loan agreements must be kept valid in the interest of the consumers, regardless of the consumers’ objections (see Sec. 4 of Uniformity Decision 6/2013). Additionally, Mr Wellmann has been involved in private correspondence with the Hungarian Banking Association in regard to future court decisions (see “Bepanaszolták Ádernél a Kúria egyik bíróját”, HVG April 19, 2016).
At last week’s press conference Mr Wellmann questioned the legal qualifications of consumer protection lawyers, which is widely understood as a warning to consumers not to start court proceedings against their banks. Mr Wellmann accuses the lawyers of doing a disservice to consumers by dragging them into expensive court proceedings with no prospect of success (see “A Kúria elnöke óvatosságra intett”, Magyar Nemzet July 7, 2016).
The consumer protection lawyers are responding in an open letter expressing their fears that the statement might harm public trust in the court system (www.hitelsikerek.hu). In view of the Kúria’s current decision-making practice, it is clear that consumers have no chance to have their loan agreements declared void. The Kúria’s decision-making practice obviously does not respect the consumers’ right to a fair trial. Consumers are losing the court cases even though their claims are supported by better arguments.
Since the lawyers are confident that the European Court of Human Rights will rule in favour of the consumers, the consumers are advised to use all available domestic remedies against court decisions.
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Press release no. 14
Budapest, June 7, 2016
OTP Bank pays dividend to its shareholders regardless of the court proceeding in which the validity of the payment is being challenged. Budapest Metropolitan Court ignores the applicant’s request to stop OTP from making the payments until a final decision in the case. The action of the Budapest Metropolitan Court demonstrates that Hungarian courts do not provide effective legal remedies against actions of the Government and the oligarchy. Multiparty democracy, pluralism and market economics, however, require independent courts that adhere to and apply the rule of law.
Consumers and OTP have been battling in Hungarian courts for several years now over the validity of FX consumer loans. Today it is a proven fact that between 2002 and 2009 OTP Bank was hiding and manipulating costs in all of its FX consumer loan agreements. Consumers have a number of strong arguments to help them challenge the validity of their loan agreements.
The courts are nevertheless reluctant to rule in favour of the debtors. The Hungarian Supreme Court (Kúria) and the Hungarian Constitutional Court both asked the Government to resolve the disputes by legislation (Sec. 7 Uniformity Decision 6/2013, Constitutional Court Decision 8/2014).
In 2014 the Hungarian Parliament passed several laws with the aim of finally settling these disputes. According to the new laws OTP had to compensate the debtors for both hidden costs and the manipulation of costs. But the laws protect OTP from further losses caused by the foreign currency risk and put the costs caused by this risk on the shoulders of the debtors.
Debtors have asked the European Court of Human Rights (ECHR) to review this legislation due to its draconian nature (case no. 27154/15). The parliaments of the member states of the European Convention of Human Rights are not entitled to exercise the powers of the judiciary.
It is unclear what the financial impact would be if the debtors succeed with their claims against the FX loan legislation at the European Court of Human Rights. OTP’s management has a legal obligation under European law to engage in an open dialogue with the shareholders and explain the probability and the potential impacts of this risk.
Since OTP’s management refused to discuss this risk at the last annual general meeting in April, the decision of the general meeting over the financial results is being challenged. As long as this case is pending at the courts OTP should not be allowed to pay dividends.
The fact that the Budapest Metropolitan Court is ignoring the request of a shareholder shows that there are no effective legal remedies against the actions of OTP’s management. OTP’s management does not need to fear the powers of the courts and therefore does not need to respect the law.
The lack of effective legal remedies fosters abusive lending practices, corruption and the transition to authoritarian governments. The FX mortgage crisis is a chance to bring about fundamental change in Hungarian legal culture.
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Press release no. 13
Budapest, May 31, 2016
Budapest Metropolitan Court may stop OTP paying dividends. The payment is scheduled for June 6. PITEE, an independent consumer protection association and an OTP shareholder, filed a claim against the bank asking the court to annul the approval of the financial results. PITEE extended its claim with a request for suspensive effect. The court must respond to this request within the coming days. If the court approves the request, then OTP will have to refrain from paying dividends until a final decision has been taken on the claim.
In the annual general meeting OTP’s management refused to answer questions about the risks arising from foreign exchange (FX) consumer loan agreements. These loan agreements were converted into Hungarian forints by legislative acts in 2014, but this legislation fundamentally violates the concept of fair trial. The Hungarian Parliament is not entitled to amend private law contracts with legislative measures and, by doing so, determine civil rights and obligations. The European Court of Human Rights is going to rule on the legislation (case no. 27514/15).
According to Art. 9 of Directive 2007/36/EC (on the exercise of certain rights of shareholders in listed companies) a company must answer the questions put to it by shareholders. PITEE exercised this right at the annual general meeting in April and asked the management several questions. The management, however, refused to provide any answers. This is clearly evidenced by the transcript of the annual meeting.
The legal consequence for violating the law is that the approval of financial results is void. The shareholders did not receive all the information that is required to make an informed decision. It is unclear what the financial impact would be if the debtors succeed with their claims against the FX loan legislation at the European Court of Human Rights.
The violation of the law is obvious. The risks in question are significant. From a purely logical point of view, OTP should be stopped from paying dividends until a new informed decision is adopted by the shareholders.
It is now in the hands of the Hungarian courts to enforce the law. Rule of law means that even the largest bank has to respect the rights of a single shareholder.
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Press release no. 12
Budapest, May 23, 2016
The Hungarian Constitutional Court delivered its decision in relation to the law that ordered the obligatory conversion of foreign exchange (FX) consumer car loans and personal loans (case no. IV/227/2016.). The law (Act CXLV of 2015), which Parliament adopted in September, puts the brunt of past FX volatility on the shoulders of the debtors. The debtors asked the court to annul the entire law on the grounds that its provisions are in conflict with the right to a fair trial. The Parliament is not entitled to amend private law contracts with legislative measures and, by doing so, determine civil rights and obligations. This is outside the scope of their powers.
The Constitutional Court upheld the validity of the law by arguing that Parliament did not violate the right to a fair trial because the law does not directly amend the FX loan agreements. The law was designed in a way that conceals Parliament’s real intervention and pretends that the banks and debtors have freely chosen to convert their FX loan agreements.
To achieve this effect, the law obliges banks to provide their debtors with a written offer, whose content is clearly specified by the law. The debtors’ “consent” to these offers is created by mandatory application of the legal principle of implied contract. This means that according to the law the amendment of the contract becomes effective if the debtors fail to respond to the offer within thirty days of receiving it. The debtors can only avoid the amendment of their contracts if they serve a notice of refusal to their banks.
This legal concept shows how far Hungarian legal culture is behind that of Western Europe. In countries where the separation of powers is respected there is no room for a mandatory application of the legal principle of implied contract. It is in the sole competence of the courts to ascertain whether a legally enforceable agreement arises from the conduct of the parties.
The Hungarian Constitutional Court has so far delivered more than 20 decisions in relation to the FX loan legislation. All of them support the Government’s efforts to solve the legal disputes between debtors and banks by legislation and in contrast to the applicable legal framework.
The recent ruling of the Constitutional Court is a huge disappointment because debtors had asked the Secretary General of the European Council, Mr Thorbjørn Jagland, to help convince the court that Parliament’s involvement in private law matters is not compliant with the values of the European Convention on Human Rights.
The reluctance of the judges to rule in favour of the debtors demonstrates that court decisions in Hungary are not influenced by objective arguments. The judiciary is still functioning the way it did before the political changes in 1989. Ten out of eleven current judges on the Constitutional Court received their legal education during the communist regime. The Hungarian Supreme Court (Kúria) and the Public Prosecution Service are also fully controlled by lawyers whose education was shaped by communist ideology.
Consumers will turn again to the European Court of Human Rights to receive protection from the legal measures of the Hungarian Parliament.
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OTP Bank held its annual shareholders meeting four weeks ago, where the financial results of 2015 were approved. OTP’s management refused to answer questions about the risks arising from foreign exchange (FX) consumer loan agreements. PITEE, an independent consumer protection association and an OTP shareholder, filed a claim against the bank asking the courts to annul the approval of the financial results. PITEE argues that FX consumer loan agreements are still causing substantial risks for the bank and the management is obliged to give shareholders a clear explanation of the potential impact of these risks.
OTP Bank has a large portfolio of FX consumer loan agreements on its balance sheets. The Hungarian Parliament adopted several laws in 2014 and 2015 that converted these FX loan agreements into Hungarian forints and modified the conditions of the loans, such as interest and fees. The conversion was made under market conditions so that debtors are obliged to bear the exchange rate risks for the past.
This legislation violates the concept of fair trial in the most fundamental way. The Hungarian Parliament is not entitled to amend private-law contracts with legislative measures and, by doing so, determine civil rights and obligations. The European Commission is investigating Hungary’s breach of Union law (6874/14/JUST). The European Court of Human Rights has so far received more than 60 applications from Hungarian consumers (case no. 27514/15).
Consumers argue that if they had been granted fair trials in ordinary courts, they would have been able to put the costs related to exchange rate risks back on the shoulders of the banks.
The Hungarian Supreme Court (Kúria) delivered a decision on 4 July 2013 (Gfv.VII.30.078/2013/14.) in which it held one of OTP’s FX consumer loan contracts void because OTP had attached a hidden cost element to it (in that particular case the Bid/Ask Spread). If an FX loan agreement is void, then the provisions of the agreement are also void, which puts the exchange rate risks on the shoulders of the debtors.
There is a risk that all of OTP’s FX loan agreements are affected by the decision of the “Kúria” because the bank was hiding different cost elements in its FX loan agreements.
OTP’s risk is mitigated by the Hungarian FX loan legislation. The laws contain provisions to protect banks from losses related to exchange rate risks. This protection is achieved by prohibiting courts from ruling in favour of consumers.
On the basis of these facts it is obvious that the outcome of the European Commission’s investigations and the decision of the European Court of Human Rights will have a substantial effect on OTP’s financial standing.
OTP’s management has a legal obligation to engage in an open dialogue with the shareholders and explain the probability and the potential impacts of these risks.
PITEE is asking the Hungarian Courts to annul the approval of the financial results and, by doing so, put pressure on OTP’s management to provide clarity in relation to these risks.
Download related documents from scribd.com:
- PITEE vs. OTP claim letter (5.5.2016) (in Hungarian)
- PITEE’s questions to the management of OTP (29.3.2016)
(in Hungarian and English)
- OTP’s Defence Statement (Claim Value 10bn EUR) (22.11.2013)
The Hungarian Constitutional Court developed its own legal concept to allow the Government to exercise the powers of the judiciary. This concept is called “amending private-law contracts by legislative measures”. The concept is founded on legal arguments which fundamentally violate the right to a fair trial. The court applied this concept in many of its recent judgements and, by doing so, deprived hundreds of thousands of debtors of their human rights. The court’s concept shows that an illiberal state can be built without a 2/3 majority in parliament. Mr Orban is starting to benefit from electing loyal justices to the constitutional court. He has now gained full control over the interpretation of the laws.
The Hungarian Parliament enacted laws providing for the mandatory conversion of foreign currency (FX) consumer debts into Hungarian forints. The debts were converted at current market exchange rates so as to avoid imposing the costs related to exchange rate risks on the banking sector. This financial aspect was agreed between the Hungarian Government and the European Bank for Reconstruction and Development in their Memorandum of Understanding dated 9 February 2015.
Hundreds of Hungarian debtors filed complaints with the Constitutional Court against this legislation, asking the court to declare the laws unconstitutional. Consumers argue that if they had been granted fair trails at ordinary courts, they would have been able to put the costs related to exchange rate risks back on the shoulders of the banks. The right to a fair trial is a human right which is protected by the Hungarian Constitution and by international conventions.
The Hungarian Constitutional Court rejected these complaints on the grounds of its own concept of “amending private-law contracts by legislative measures”. This concept allows the Government to impose new rules on existing FX consumer loan contracts regardless of the existing legal framework.
The concept has a number of advantages for the Government. In particular, the Government does not need to bother with the debtor’s legal arguments because the legislative process does not afford debtors the right to speak or appeal.
The Constitutional Court delivered its decision in Hungarian. Approximately 2% of the European Union’s population speaks Hungarian (s. Wikipedia). Additionally Hungary is one of the EU member states where people are least likely to be able to speak a foreign language (see the Europeans and their Languages Report, 2012). This language barrier isolates Hungary from the rest of the EU and provides a safe harbour for the Hungarian Constitutional Court to develop legal concepts which fundamentally contradict European human rights standards.
The consumer protection association PITEE has prepared an English translation of the court’s reasoning. PITEE’s mission is to bring about a fundamental change in Hungarian legal culture by promoting and defending European values. Please download the English translation from PITEE’s website and get your own impression of Hungarian legal culture.
Download the decision from scribd.com:
Hungary Parliament adopted a new law on foreign exchange (FX) consumer loans. The Government aims to convert all FX car loans and FX personal loans into Hungarian forints at market or close to market exchange rates. According to the Government, the law allows voluntary conversion for consumers. In fact, however, the bill obliges consumers to pay for unlawful consumer loan agreements. This is the fourth law in Hungary, which overrides consumer contracts to maintain their validity. Consumers will take their cases to the European Court of Human Rights because of the violation of their rights under the Convention.
Consumers and banks have been battling in Hungarian courts for several years now over the validity of FX consumer loans. Today it is a proven fact that between 2002 and 2009 Hungarian banks violated important consumer protection regulations. More specifically, the banks were hiding and manipulating costs in thousands of consumer loan agreements. The banks’ conduct provides consumers with solid grounds for contesting the basic validity of loan agreements. If FX consumer loans are null and void, it is the banks that have to bear the foreign exchange risk.
In 2014 the Hungarian Parliament passed several laws with the aim of protecting banks from bearing the foreign exchange risk and in order to prevent consumers from suing banks over FX loan agreements. As a result of these laws, consumers received compensation for the hidden and manipulated costs, but consumers were also obliged to bear the losses resulting from the foreign exchange risk.
This legislation fundamentally violates the doctrines of fair trial and the separation of powers. According to Art. 47 of the EU Charter, parliaments may not interfere with private law matters.
The European Commission is investigating a breach of Union law by Hungary (CHAP(2015)00353). The European Court of Human Rights has received the first applications of Hungarian consumers (6614/15, 27514/15).
The bill introduced by Hungary’s Minister for National Economy is based on the same principle as the previous laws, and consumers will be obliged to bear the losses resulting from the foreign exchange risk. “Voluntary” conversion means that consumers may either accept the statutory conversion of their loans under current market conditions or terminate their loans and immediately repay the outstanding amount under current market conditions. The law does not provide an option for consumers to challenge the validity of their loans and to put the exchange rate risks on the shoulders of the banks.
In stable democratic countries, where the independence of the judiciary is respected and court decisions are based on the rule of law, there is no room for the Government to intervene in private law matters with legislation. The question of whether the banks or the consumers should bear the costs related to exchange rate risks is a matter of private law. Therefore, this question belongs to the competence of the courts. This is clearly stipulated in Art. 6 of the European Convention on Human Rights and in Art. 47 of the Charter of Fundamental Rights of the European Union.
Application of the law will be yet another serious breach of the rule of law, which is one of the fundamental values of the European Union. We call upon the European decision makers to stop the Hungarian Government from interfering with private law matters
The Hungarian Constitutional Court delivered its second ruling on the laws recently passed by the Hungarian Parliament with the aim of providing financial relief to FX mortgage debtors. In both rulings the Constitutional Court upheld rules for a newly established court procedure that obliges banks to file legal actions against the state if they want to protect the validity of their general terms and conditions. The reasoning of the Constitutional Court shows that the current judges do not share the values of the European Convention on Human Rights.
In early July 2014 the Hungarian Parliament adopted a new law on FX mortgage agreements (Act XXXVIII of 2014). This law, among other things, enacted a statutory presumption that all provisions that entitle banks to unilaterally modify costs in consumer mortgage agreements are unfair. This statutory presumption was extended to all general terms and conditions (GTC) used by banks between 2004 and 2014. Banks were given the option, if they wanted to protect the validity of their current or previous general terms and conditions, to file a legal action against the state. In this newly established court procedure the banks bear the burden of proving that their GTC provisions are not unfair.
Approximately 60 financial institutions filed such legal actions against the state. The ordinary courts are currently delivering the final judgements, and the banks are losing in these procedures.
The ordinary court judges expressed their concerns that the newly enacted procedural rules violate the fair trial doctrine stipulated in Article XXVIII of the Hungarian Constitution and Article 6(1) of the European Convention on Human Rights (ECHR). They therefore submitted a number of questions to the Constitutional Court asking for an opinion, and the Constitutional Court delivered its two rulings in answer to these questions.
According to Article 6(1) of the ECHR, the member states of the Convention must ensure that civil rights and obligations are determined by tribunals “established by law”.
The purpose of the term “established by law” in Article 6(1) is to ensure that the organization of the judicial system is regulated by law emanating from Parliament and does not depend on the discretion of the executive. According to the principle of the rule of law, however, the organization of the judicial system may not depend on the arbitrariness
of Parliament either, which means that the law that regulates the judicial system may not be arbitrarily modified by Parliament once a conflict has arisen between the parties.
This requirement is not clearly defined in Article 6(1), but it is expressed by the word “previously” in Article 47 of the Charter of Fundamental Rights of the European Union. There are no reasons for a different interpretation of Article 6(1) of the Convention and Article 47 of the Charter of Fundamental Rights.
On the basis of the above consideration, the Hungarian Parliament violated the Convention by enacting a statutory presumption in relation to the unfairness of certain GTC provisions and by obliging the banks to be petitioners in newly established court proceedings.
The rulings of the Constitutional Court are a huge disappointment because all of these arguments were presented to the Court by the independent consumer protection organization PITEE on 18 September 2014. The rulings, however, make no reference to these arguments. The rulings of the Constitutional Court show that the current judges are
not willing to engage in open dialogue about the interpretation of the law. They seem to believe that they are not constitutionally obliged to discuss their views on basic legal principles and that they are allowed to impose irrational rulings on society.
However, a democratic judicial system cannot exist without open dialogue, exchange of arguments and rulings based on convincing considerations. Hungary is failing to maintain democracy because the
judicial system is not prepared to support it.
Mortgage debtors are waiting in vain for their cases to be heard by the courts. Approximately 12,000 lawsuits have been stopped by laws recently passed the Hungarian Parliament. Hundreds of debtors have approached the Hungarian Constitutional Court seeking an interim measure against the suspension of their court proceedings. The Constitutional Court is ignoring the consumers’ requests.
In early July 2014 the Hungarian Parliament adopted a new law on FX mortgage agreements. According to this act, all court proceedings had to be suspended until 31 December 2014.
During September and October 2014 hundreds of debtors filed complaints to the Hungarian Constitutional Court claiming that the suspension of their court proceedings by an act of legislation violates their right to a fair trial as stipulated in Article 6 of the European Convention on Human Rights. They asked the Constitutional Court to declare the act void and to protect their interests through an interim measure by ordering the competent courts to continue the proceedings.
On 29 September 2014 the Hungarian Parliament adopted another law in relation to the FX mortgage agreements. This act extends the suspension of court proceedings to 31 December 2015.
The mortgage debtors are currently facing a legislative suspension of their trials for more than one and a half years, and the Constitutional Court is not responding to their requests for interim measures.
Since the Hungarian Constitutional Court is refusing to restore the proper administration of justice, mortgage debtors have begun to file applications to the European Court of Human Rights.
The member states of the Council of Europe must organize their legal systems in such a way that their courts can guarantee everyone’s right to obtain a final decision on disputes concerning civil rights and obligations within a reasonable time.
Suspending court proceedings by acts of legislation violates the “reasonable time” requirement. Any State action that delays or obstructs court proceedings is therefore a violation of the convention.
The convention is also being violated by the Constitutional Court’s neglect of the applicants’ requests for an interim measure.
Since requests for interim measures are of utmost importance for applicants, effective court organization must ensure that their requests are responded to within a “reasonable time”. Setting aside a request for an interim measure and allowing it to lose effect with the passage of time jeopardizes the effectiveness and credibility of the judicial system.
Independent consumer protection organisation PITEE has filed a complaint to the European Commission based on Art 258 of the Treaty on the Functioning of the European Union. The subject matter of the complaint is the recently passed laws of the Hungarian Parliament which, among other things, require banks to compensate foreign-currency loan holders. These new Hungarian laws interfere with private law matters and deny consumers legal recourse to the courts. PITEE is therefore asking the European Commission to open an infringement proceeding against Hungary if the laws remain in force.
Approximately 500,000 consumers have foreign-currency loan agreements with banks. The banks did not observe the minimum consumer protection standards either when the foreign-currency loans were concluded or when their costs were unilaterally modified. Consumers have a number of strong arguments to help them challenge the validity of their loan agreements.
According to the statement of the Hungarian Minister of Justice dated 10 September 2014, approximately 12,000 consumers had filed court proceedings against their banks by August 2014 requesting their foreign-currency loan agreements be declared void. Consumers are claiming, among other things, that the banks were hiding and manipulating costs in their loan agreements.
For example, the banks applied an additional cost element to the loan agreements by charging an exchange rate, when converting repayments into foreign currency, that is higher than the exchange rate they applied when disbursing the loan in Hungarian currency (the currency spread) but failed to inform the consumers of these costs. Additionally, the banks manipulated these costs during the lifetime of the contracts without notifying the consumers.
PITEE uncovered evidence in 2011 that all of the major banks had secretly applied and raised this cost element between 2005 and 2010.
Furthermore, there is evidence that the Hungarian regulator, PSZÁF knew about the banks’ wrongdoings but never objected.
Hiding and manipulating costs in consumer loan agreements are serious violations of European consumer protection standards. In a decision of the Hungarian Supreme Court (Kúria) dated 4 July 2013, the court admitted that a loan agreement is void if the bank did not inform the consumer of all of the cost elements attached to the loan agreement.
These and other wrongdoings of the banks provide sufficient grounds for consumers to challenge the validity of their loan agreements.
The laws recently passed by the Hungarian Parliament provide financial relief for consumers, but these laws also contain various measures to deny consumers court trials should they want to challenge the validity of the agreements.
On the basis of the above, PITEE concludes that Act XXXVIII of 2014 and Act XL of 2014 of the Hungarian Parliament are in breach of Article 2 of the Treaty on European Union, Article 169 (ex Article 153 TEC) of the Treaty on the Functioning of the European Union and Article 47 of the Charter of Fundamental Rights of the European Union.
PITEE is therefore asking the European Commission to open an infringement proceeding against Hungary if the laws remain in force.
Hungarian government breaches European Convention on Human Rights (ECHR) in order to force consumers to adhere to void mortgage agreements. Bill on FX mortgages, passed by parliament in early July, overrides mortgage agreements in order to maintain their validity and denies consumers legal recourse to the courts should they want to challenge the validity of such agreements. Both of these actions are a violation of the fair trial doctrine of the European Convention. The government claims that the bill protects the interest of the consumers because the bill solves all the disputes in relation to the mortgage agreements and, by doing so, avoids lengthy and expensive individual court trials. Furthermore the bill provides financial relief to all consumers.
PITEE, an independent consumer protection organisation, filed a complaint to the Hungarian Constitutional Court requesting the FX mortgage bill be declared void. Article XXVIII of the Hungarian Constitution protects the right to a fair trial, as does Article 6 of the ECHR. The government and the parliament may not interfere with private law matters. It is not in the interest of the consumers to have a trade-off between their fundamental human rights and financial relief for unlawful mortgage agreements.
Hungarian banks originated FX mortgages on a large scale until 2009. Due to the lack of proper supervision, however, the banks did not observe the minimum consumer protection standards either when the mortgage agreements were concluded or when their costs were unilaterally modified. After three years of court battles and under the pressure of more than ten thousand individual claims, the Hungarian Supreme Court for private matters, the Kúria, issued a general statement in June (2/2014 PJE) which admits that the FX mortgage agreements are affected by a number of irregularities.
Many of these irregularities would make the FX mortgages void. The Kúria, however, is reluctant to apply this legal consequence. The Kúria claims that it would not be fair to consumers if the courts would declare the FX mortgage agreements void, because the consumers would be obliged to repay the mortgage at once and this would exceed their financial capabilities. The Kúria holds on to this view even in cases when the plaintiffs explicitly ask the court to declare the FX agreement void.
The judges of the Kúria openly called on the parliament to adopt a new law in order to restore the validity of the FX mortgage agreements and stop consumers filing new claims against banks. The judges say that the high number of consumer claims is obstructing the work of the judiciary. This approach of the Hungarian judges shows that the Hungarian legal system is still struggling to support democracy and ensure the rule of law.
PITEE is aware of the fact that the judges of the Hungarian Constitutional Court are also supporting the FX mortgage bill. The Constitutional Court issued a ruling in March which entitled the parliament to interfere with private law matters (Decision 8/2014. (III. 20)). In the opinion of the judges, parliament may interfere with a private law matter if a large number of agreements become inapplicable because of a fundamental change in circumstances. According to the judges, parliament has the sole discretion to assess “the large number” requirement (see excerpt of the decision below).
In that ruling the judges of the Constitutional Court forgot to mention the existence of Article XXVIII of the Hungarian Constitution and Article 6 of the ECHR. The ruling therefore lacks any consideration of the institutional and procedural requirements of tribunals.
PITEE’s application draws the Constitutional Court’s attention to the fair trial doctrine and asks the court to reconsider its earlier ruling in order to bring the Hungarian legal culture into line with the European human rights tradition.
On the basis of a new verdict of the Constitutional Court, we hope that the Hungarian legal culture will change and consumer rights will prevail over the financial interests of the banks and the government. Hungarian consumers need the support of European institutions in order to regain confidence in democracy and the rule of law.
EXCERPT from Decision 8/2014. (III. 20.) of the Hungarian Constitutional Court:
 “On the basis of the above, the legislature – as well as the court – is entitled to amend existing long-term [private law] agreements if the agreement becomes inapplicable because a fundamental change in circumstances has occurred after the conclusion of the agreement and adhering to the agreement would violate the substantial legal interest of any party and, moreover, if the change in circumstances was not reasonably foreseeable and it goes beyond the ordinary risk of such change. An additional condition for intervention by an act of legislation is that the fundamental change in circumstances must affect the entire society, which means that a large number of agreements must be affected. Parliament has the sole discretion and at the same time obligation to assess when the entire society is affected and, therefore, when an intervention by an act of legislation is required.”
The Hungarian parliament passes a bill with the aim of providing relief to tens of thousands of consumers who have foreign currency mortgages. The bill overrides the conditions of the mortgage agreements with retroactive effect. Banks have nine days to calculate all of the amounts collected unlawfully in the past. The reimbursement of consumers has not been regulated. The Government’s intention is to convert all FX mortgages into Hungarian forints by the end of the year with further legislation.
The bill changes two conditions of the mortgage agreements. Firstly, it declares the costs caused by the currency spread – applied by the banks when disbursing the loan amount and when collecting repayments – to be illegal. Additionally, it declares all modifications of any costs made unilaterally by the banks null and void unless the banks can prove the lawfulness of these modifications in a newly implemented court procedure.
The Government claims that the bill has become inevitable due to the pressure on the courts. The Kúria, the Hungarian supreme court in all matters of private law, has handed down various rulings in recent months in FX mortgage cases. All of these rulings have shown that the banks did not observe the minimum consumer protection standards either when the mortgage agreements were concluded or when their costs were unilaterally modified. The Government argues that a new law is required in order to enforce these court rulings for all consumer contracts, including those which are not currently the subject of court proceedings.
According to Hungarian law, banks must disclose all costs and fees related to consumer loans in each individual consumer loan agreement. PITEE found that one cost element, the currency spread, was not disclosed by any of the major banks in 2011 (see PITEE Press Release of 23 November 2011). This violation of the law voids all of the FX mortgage agreements of the major banks. There are currently thousands of pending lawsuits using this argument to have consumer contracts nullified.
Due to this and owing to a number of other irregularities in the mortgage agreements, FX mortgages have become a substantial risk for Hungary’s financial stability. This risk was acknowledged by Mr Károly Szász, the former head of Hungary’s financial supervisory agency, in a letter sent to the judges of the Kúria in June 2013 (see PITEE Press Release of 18 June 2013).
According to the new bill, the currency spread has become illegal. As a consequence, consumers can no longer claim that their FX mortgage agreements should be null and void due to the non-disclosure of this cost element. The Government argues that there is no need to disclose a cost element which is illegal, and, so, the FX mortgage agreements can remain in force. The banks only need to reimburse the amounts collected unlawfully.
The Government’s action to override certain conditions of the agreements is clearly due to its fear of financial instability. The bill is being used to restrict the rights of consumers.
Parliament’s interference in private law matters is not common practice in the states of the European Union. The rule-of-law doctrine prohibits parliament from amending private law agreements by legislation. Nevertheless, at the request of the Government, the Hungarian Constitutional Court issued a ruling in March which allows parliament to do just this.
The recent developments show that Hungary is suffering from the absence of democratic traditions, a stable and broadly acknowledged constitutional culture and the rule of law. The Government is overriding consumer mortgage contracts en masse because in the past banks failed to observe European consumer protection standards and the regulator failed to discover their misconduct.
Budapest, January 08, 2014
The Hungarian OTP Bank Nyrt is hiding a risk of approx. € 10 billion from the eyes of its investors.
The risk is caused by a provision in the bank’s general terms and conditions which enables the unilateral modification of consumer loan agreements. OTP is involved in a court case, in form of a summary procedure, which may lead to the removal of the respective provision. The claim value has been disclosed to the public by OTP’s legal representative.
PITEE – an independent consumer protection association – has started a summary procedure against OTP Bank Nyrt and its mortgage bank subsidiary, OTP Jelzálogbank Zrt in 2011. The summary procedure is based on Directive 2009/22/EC of the European Parliament and of the Council of 23 April 2009 on injunctions for the protection of consumers’ interests. Injunctions aim at terminating infringements which are contrary to the collective interests of consumers.
PITEE claims that the provision applied by OTP is intransparent because it gives OTP practically unlimited power to raise costs for consumers. Since consumers have no contractual defences for challenging unilateral modifications, the application of the provision is an unfair commercial practice.
OTP’s provision has been in the focus of public interest since 2006, and various government reports have questioned the fairness of the provisions over the past few years (e.g., Report of the Commissioner for Fundamental Rights (OBH 2958/2006) and the 2008 and 2009 annual reports of the Hungarian Competition Authority (GVH)).
OTP neglected the concerns which were raised and argued that only a court decision can force it to change its contractual practice. PITEE took on the challenge and started the summary proceeding on the basis of the arguments provided by the government agencies.
If PITEE’s claim succeeds, then all previous unilateral modifications of consumer loan agreements will be void. OTP will be forced to indemnify the consumers for unlawful cost increases and to reduce the costs for consumers in the future.
OTP’s risk amounts to 3,178,448,302,574 Hungarian forints (approx. €10 billion).
OTP is being represented in the court case by Dr Péter Nagy, senior partner in the law firm of Nagy & Trócsányi. The claim value was disclosed by Dr Nagy in the defence statement, dated 22 November 2013.
Download the translation of the defence statement of OTP:
Download this press release:
Szász warns of panic if banks lose mortgage lawsuits
Budapest, June 18, 2013
Financial supervisory chief Károly Szász has written to the head of the Kúria warning of potential disaster if courts rule in favour of foreign-currency mortgage debtors against banks.
Borrowers have sued the banks, claiming in part that the contracts are invalid because the loans were denominated in foreign currency but issued in forints.
Szász argued that the foreign-currency mortgage contracts were not illegal, adding that borrowers had hoped to gain financial advantage through them.
What is at stake, he wrote, is not banks’ profits, nor aid for foreign-currency debtors, but the potential of a bank panic, which in an extreme scenario might lead to the state defaulting.
Voiding the contracts would lead to massive losses for banks which might imperil the entire banking system, Szász said.
Hungary: Political radicalisation is on the rise due to systematic judicial error of the courts
Hungarian courts are intentionally misconstruing the law, leaving consumers at the mercy of the banks. Thousands of loans are invalid due to formal irregularities in the contracts, yet the courts are sentencing to the detriment of the consumers in order to protect the banking system.
Prime Minister Orbán’s government is reckoning with €1.2 billion income in special taxes from the banks this year, meaning that a spate of successful cases against the banks is not desired politically. In their desperation, consumers are turning to the radical opposition.
Between 2005 and 2008, hundreds of thousands of Hungarians took out mortgage loans repayable in Swiss francs (see the article “Der Aufstieg des Schweizer Franken ruiniert Familien in Ungarn” (The rise of the Swiss franc is ruining Hungarian families), DIE ZEIT, 13 June 2012). Despite clear warnings from the European Union about the risks of such financial products, the Hungarian governments allowed families, in the middle and lower income segments, to fall into debt over loans denominated in this currency. Today most of these families find themselves close to financial collapse.
In 2012, under the pressure of constantly rising exchange rates, many consumers brought cases against the banks at the PBT, the Hungarian Financial Arbitration Board, and at various other courts. Almost without exception the decisions passed down were to the detriment of the consumers, generally on rationally incomprehensible grounds.
An example of such misjudgements
Foreign currency mortgage loans involve in addition to the usual costs of a loan also the costs of currency conversion. Costs relating to the currency conversion arise due to the difference between the bid and ask price for the foreign currency, known as the exchange rate spread. The exchange rate spread is incurred in the monthly repayment rates and is set according to the bank’s own exchange rates ranging between 1% and 5% of the monthly instalments, or several thousand euros per loan agreement in actual terms.
According to the EU Consumer Credit Directive as adopted into Hungarian law, loan contracts with consumers must state all the costs of the loan. The legal consequence if the costs are not disclosed is, under Hungarian law, that such contracts are invalid. In the past, most Hungarian banks failed to state the costs incurred by the exchange rate spread in foreign currency loan contracts.
Mr Ádám Farkas, one of the former directors of PSZÁF (Hungarian Financial Supervisory Authority), has not acknowledged any irregularity of foreign currency consumer loan contracts under his directorship of the organisation. Nevertheless Mr Farkas is today the Executive Director of the European Banking Authority.
The argument of a legal irregularity failed to convince the courts, with many of the judges taking the view that it is generally not possible for costs to arise through the exchange rate spread, and therefore disclosure of such information in the contracts is not required. Judges did not accept mathematical and economical evidence showing the impact of exchange rate spreads causing significant costs, and thus having an impact on the effective annual percentage rate on loan contracts.
A trial case of a plaintiff, who won in the court of second instance, is due to be brought forward to the Kúria, the Hungarian Supreme Court, following an appeal in February by the bank concerned, arguing that “as generally known”, exchange rate spread does not incur costs, as repeatedly affirmed by various courts (“established case law.
The argumentation lacks all economic sense, and questions the basic principle of foreign currency trading as well as the requirement of currency hedging on the world economic markets. It is even more absurd when a commercial bank uses such reasoning in court. A financial bomb would finally be if the Hungarian Supreme Court would pass judgement in favour of the bank and contrary to one of the most basic economic principles.
The forces of democracy in Hungary need Europe’s attention. The whole of the country’s loan business suffers from considerable irregularities in rule of law terms, but the courts, presumably under the pressure of political influence, are not prepared to accept either legal or economic arguments.
In Hungary, more and more people are fleeing to the radical opposition because they are disappointed with the governments and feel let down by the judiciary. Without Europe’s support, Hungary will not manage to retain its democracy.
All mortgage contracts may be invalid
Budapest, January 16, 2013
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.
Foreign currency mortgage contract ruled to be invalid by court
Budapest, January 3, 2013
Thousands of foreign currency household mortgage contracts may turn out to be invalid following a Budapest Court decision (Hungarian, pdf) that cancelled an OTP Bank contract on December 7, 2012. Dénes Lázár, a founder of PITEE, a consumer protection organisation in Hungary told Atlatszo.hu in an interview that the Court’s decision is setting a precedent, admitting the flaws of the Hungarian financial sector’s application of the law. Mr. Lázár complained about the often irresponsible lending practices of Hungarian banks; he said if the Hungarian Financial Supervisory Authority (PSZÁF) had operated properly, it would have been able to stop massive amounts of citizens taking out foreign currency loans.
Court rules against OTP
Budapest, December 19, 2012
A Budapest court has cancelled an OTP bank foreign-currency mortgage contract that a client challenged over hidden costs, pressure group PITEE revealed this week. A client had challenged the bank because it did not state in the contract whether repayments would be based on the ask and bid prices for currency exchange, claiming that this pushed up interest costs by one per cent, news website origo.hu reported on Monday. Although the ruling was binding, the case will continue because the verdict did not indicate how the transaction between the borrower and Hungary’s biggest bank should proceed.
Source: The Budapest Times
Hungarian banks originated foreign currency denominated consumer loans illegally between 2000 and 2009, says PITEE, a consumer protection organisation in Hungary. According to Hungarian law, originators must disclose all costs and fees related to consumer loans in their general terms and conditions, as well as in each individual consumer loan agreement. PITEE found that one cost element, the currency spread, which is applied by banks when disbursing the loan amount or when collecting repayments in local currency while the loan is denominated in a foreign currency, was not disclosed by any of the banks subject to the research. This violation of the law results in all foreign currency denominated consumer loan agreements of the reviewed banks to be void.
Hungarian banks have also violated the relevant law by applying their own foreign currency exchange rates without duly disclosing their calculation methodologies.
Finally, banks have failed to comply with the statutory provisions for unilateral modification of consumer loan agreements that require banks to announce any unilateral modifications 15 days in advance. PITEE found that most banks had raised their currency spreads between 2005-2008 without giving any notice to consumers, a violation of applicable law.
The Hungarian financial supervisory authority, PSZÁF, failed to uncover any irregularities during their 2009 review of the operations of the largest banks and issued statements expressing that banks have complied with Hungarian rules and regulations at all times.
PITEE performed an independent review of banks’ practices related to non-disclosure and unilateral modifications. The research focused on Budapest Bank, CIB Bank, Erste Bank, MKB Bank, OTP Bank and Raiffeisen Bank. Based on the findings a court proceeding has been initiated against OTP Bank in order to declare their unilateral modifications illegal and void.
PITEE’s full report is available under www.pitee.org (in Hungarian).