Payment moratorium, practical issues
Payment moratorium, practical issues
The new act on transitional measures to stabilize the situation of certain key social groups and enterprises in financial difficulties will be issued nowadays (already approved by the Parliament). The law will extend by June 30, 2021, the payment moratorium to those raising children, pensioners, unemployed, public employees (special part of state related employees) and businesses in financial difficulty. In addition, the law prohibits termination of all credit and loan agreements and financial leasing agreements until the aforementioned date.
In order to mitigate the economic impact of the epidemic, credit and loan agreements and financial lease agreements (credit agreements) contain two main measures:
- Credit repayment moratorium
- Prohibition of termination of credit contracts
An exception to the scope of the measures are products provided to the state, the local government and to companies subject to the legislation specified in Section 39 of the Act CXXXIX of 2013 on the Hungarian National Bank (basically institutions supervised by MNB, such as credit institutions, insurance companies, investment fund managers), so neither moratorium nor prohibition on termination can apply in their case as debtors.
Prohibition of termination of credit
Credit agreements existing on 18 March 2020 may not be terminated by creditors until 30 June 2021 due to non-fulfillment of the debtor's obligation to pay principal, interest or fees. This prohibition on termination automatically applies to all credit agreements not covered by the payment moratorium, with the general exceptions described above.
The legislature expects the parties to agree to renegotiate the terms of the contract throughout the end of the prohibition of termination to restore the debtor's solvency. The parties shall amend the loan agreement in accordance with the conditions laid down by mutual agreement, in particular the amount of the principal, interest and fee obligations and the due date for their performance. The amended contract does not have to be notarized, the previous notarial deed is valid within the framework of the amended content of the contract. The change in the deadline for performance of the contract also modifies the additional and non-additional ancillary obligations securing the contract.
Credit repayment moratorium
The moratorium on payments, announced in spring, on 18 March 2020 will be automatically extended for four groups. This group includes those who are, on 1 January 2021 or between 1 January 2021 and 30 June 2021 (in the case of debtors, it is sufficient if one meets):
- raising a child (generally a dependent child under the age of 25 or with a disability above it) or are expecting a child (in the case of a fetus over the 12th week of pregnancy),
- public employees (special part of state related employees),
Unless the parties provide otherwise, the payment of interest, fees and principal will also be suspended, however, the law also confirms that it is still possible to repay under the original contract. The contractual term will be extended by the duration of the moratorium, while the expiration date of contracts expiring during the payment moratorium will be changed to June 30, 2021. The change in the deadline for performance of the contract also modifies the additional and non-additional ancillary obligations securing the contract.
Unless the debtor provides otherwise (i.e. wishes to exercise the option of a payment moratorium), the repayment procedure is modified as follows:
- The amount of interest and fees accrued during the moratorium on payments cannot be increased during the moratorium or after the expiry of the moratorium on payment, i.e. they cannot be capitalized. Interest and fees accrued during the moratorium on payment, together with the installments due for the remaining term, shall be paid in equal annual installments after the expiration of the moratorium.
- After the expiry of the payment moratorium, the term is extended so that the sum of the installment due and the interest payable in installments under the payment moratorium does not exceed the amount of the installments under the original contract (i.e. the final maturity of the loan increases by more than length of the moratorium).
The provisions on the payment moratorium shall also apply to employer loans disbursed through a financial institution.
Credit repayment moratorium for businesses
The payment moratorium is not automatic (they must ask the creditors in writing), but it also applies to companies that qualify under the government decree defining a company in financial difficulty, which will be issued later.
According to the law, the application must contain the information necessary to identify the contract, as well as the data on the basis of which it can be established that the debtor is entitled to a moratorium on loan repayment under the Government Decree on the definition of firms in financial difficulty.
The mentioned above raises a number of practical issues that require further interpretation or additional work for stakeholders, such as:
- For the four social groups concerned, credit institutions often do not have precise information on whether the debtor or especially the co-debtor falls into one of the groups. To decide this, the law basically proposes reconciliation between the parties electronically, but if this has to be reconciled at the customer level for credit institutions, it will place a significant burden on customer services in the coming period. If the state cannot help financial institutions with the required data, it is worth considering the task on the basis of the current available data, and comply with the regulations in the most automated way possible.
- The concept of raising children is not fully included in the law, so for example in the case of divorced or mosaic families, it will be an important issue to decide as soon as possible.
- The law does not contain any details on the indicator for determining financial difficulty, but previous government communications included a 25% drop in revenue. An important practical question is how this decrease in turnover, if it will indeed be the final indicator, should be calculated, given that exact figures are not yet available for most companies at the beginning of January. Another important question will be the content and level of detail of the documentation to be provided to support the financial difficulty.
- It is worthwhile for financial institutions to properly inform customers about the extension of the payment moratorium so that they can decide in the light of this information whether they may wish to pay their outstanding debt.
- With the selective continuation / termination of the payment moratorium, it is important for financial institutions to pay special attention to their calculations and models measuring the risk of default of debtors. Payment / non-payment information will already be available for some customers, however, significant changes in circumstances may require a review of models and methods.
- In the case of the current moratorium, there are groups (e.g. unemployed) for which the risk of non-payment increases. It is a question of how this can / should be taken into account before the end of the moratorium when calculating the impairment and in case of the capital calculation. Previously, the approach of the Supervisory Authority was that a higher impairment should not / cannot be accounted for simply because of the moratorium, but this time the financial institutions will also have additional information (i.e. unemployment).
- During the period of the moratorium on the termination of credit contracts, it is an important task to agree with the debtors on the possible transformation of the payments, which also requires the development of new products and constructions.
Unfortunately, the end of the coronavirus epidemic is not yet in tangible proximity, but an extension of the payment moratorium could help mitigate the negative economic effects. However, as can be seen, this can be a significant task both for all debtors, but especially for financial institutions.
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