After controversial debates, Law No. 77/2016 on discharge of mortgage-backed debts through title transfer over an immovable property („Law on Debt Discharge„) was finally published in the Romanian Official Gazette No. 330 dated April 28th, 2016, and entered into force on May 13th, 2016. „Debt discharge” (darea în plată) allows for the full discharge of any loans contracted by a natural person and secured by a mortgage arrangement, including any accessories in connection therewith.
This law exempts the Government-backed programme „Prima Casă” and loans exceeding EUR 250,000 (RON equivalent, calculated at the exchange rate published by the National Bank of Romania on the loan agreement date) („Ceiling„).
The Law on Debt Discharge sets out the following cumulative conditions for the full discharge of debts:
- the debtor is a natural person and the creditor is a credit institution, non-bank financial institution or assignee of receivables against consumers;
- the amount of the loan does not exceed the RON equivalent of the Ceiling at the time of granting the loan;
- the consumer has contracted the loan for the purpose of acquiring, building, extending, modernizing, laying out or rehabilitating an immovable asset having a residential purpose or, irrespective of the purpose for which the loan was contracted, one of the security interests granted in favour of the lender is a mortgage on an immovable asset which has a residential purpose; and
- the consumer was not convicted for any criminal offence in relation to the loan for which debt discharge is requested.
Furthermore, the Law on Debt Discharge applies to both credit agreements which are concluded after its entry into force and credit agreements which are outstanding on such date. Also, given the wide scope of the Law on Debt Discharge, this will apply not only to performing and non-performing loans, but also to commercial loans granted to natural persons. Making debt discharge mandatory for creditors and available to all debtors, irrespective of their financial status and capacity to continue servicing their debt, is likely to increase risks in the banking sector.
It is envisaged that the new law may have a negative impact on financial institutions and change the decision-making process of all financial institutions when granting loans. The down payment for these loans will be increased for all borrowers (by some indications, to no less than 35% of the total purchase price) and banks will most probably add to their risk assessment a new indicator, i.e. the potential depreciation of the encumbered assets, which will eventually impact access to credit for natural persons.
Also, from the European Commission’s standpoint, the implementation of the Law on Debt Discharge represents a major downward risk for macroeconomic developments, the main concerns being its retroactive and wide applicability, as well as the fact that the law applies independently of the debtor’s financial status. This law could have a substantial negative impact on investor confidence and credit outlook on the forecast horizon and beyond, causing uncertainty in the external environment.