Romanian president promulgates mortgage debt discharge bill

Romanian president promulgates mortgage debt discharge bill
Banks can still challenge, in a trial, the law's compliance with the constitution at the time when debtors attempt to make use of it.
By bne IntelliNews April 28, 2016

Romania’s President Klaus Iohannis announced on April 28 that he had promulgated the controversial debt discharge law for mortgage loans, also known as the datio in solutum law.

The president had the option to challenge the bill by referring it to the constitutional court, as strongly suggested by bankers. Previously, the government refused to ask the court’s view on the bill. However, banks can still challenge, in a trial, the law's compliance with the constitution at the time when debtors attempt to make use of it.

“I appreciate that the parliament has considered my objections and I believe that the law [under the revised form] is good”, President Iohannis commented. President Iohannis had returned the bill to lawmakers last autumn, after the central bank, European Commission and the European Central Bank warned on the side effects of the bill. However, the key concerns expressed on the first draft of the bill were not fully addressed.

Romania’s Chamber of Deputies endorsed the revised form of the controversial debt discharge bill almost unanimously, by 207 votes to one, with one abstention, on April 13.

Under the law, mortgage holders will be able to give collateralised property back to banks in exchange for final termination of their contracts with no further penalty. The law applies to past and future contracts, even to contracts where foreclosure took place.

Compared to the text of the law endorsed last autumn, lawmakers also clearly specified that only individuals who live (or whose relatives or guarantors live) in the property used as collateral for the loan can benefit from the new law. However, the loan would not have to have been used to buy the property. Subjects of the bill will be only the recipients of loans under €250,000, compared to no cap specified in the initial form of the bill.

Regarding the government-guaranteed Prima Casa programme, under which young persons can take out mortgage loans under favourable terms (including a deposit of just 5%) due to state guarantees for 50% of the loan, the law specifies nothing in particular. The interpretation of the law is that the state will service the guarantee to the bank, in case of a default, and will issue a claim against the recipient of the loan. These situations should be addressed by another law, the initiator of the datio in solutum bill, MP Daniel Catalin Zamfir, has said.

He added that it is good that the banks will extend loans more responsible, implying that this would be one of the law’s effects.

Banks have already increased to 30%-40% the front payment asked in mortgage loan contracts – or, in other terms, they decreased to 60%-70% the value of a property financed under mortgage contracts. This is likely to severely reduce the volume of new mortgage loans, banks warned.

Other effects of the bill are related to past contracts, for which banks have to increase their collaterals or even accept properties instead of payments, possibly at a loss.

The bill has been a hot topic in Romania in recent months. The central bank has warned that real estate prices could fall by 10%, at least for a short period of time, as a result of the bill.

Romania’s government has said that the bill potentially breaches the constitution, infringes ownership rights, could bring credit institutions to bankruptcy and would generate macroeconomic imbalances, reported last month, quoting a position document sent by the executive to lawmakers.