For Your (Un)Rest

This year started "well" because: (i) the exchange rate is demonstrating an accelerated depreciation of the leu, even though the National Bank has been spending billions to naively fight this trend since October 2008; very many loans were issued in euro, so the RON-equivalent instalment is going to be much higher in nominal terms; (ii) the interest rates charged by banks have gone up by up to 5 points for euro-denominated loans and by as much as 50 points for lei-denominated loans, which means that lei-denominated instalments increased for a second reason, this time in real terms; (iii) salaries will not increase by more than 5% in 2009 (at least this is what the new Government is telling us) and may even decrease as a compromise to keep jobs, therefore the risk of default will increase; (iv) many individual debtors will be fired, as an effect of the crisis or the employer"s bankruptcy. To all this we add the new Government"s naive-populist measures, crowned by the ordinance forcing people who had both a pension and a salary from the State to choose one and give up the other. The ordinance was rapidly declared unconstitutional.

What will happen to those who simply become unable to pay their consumer or even mortgage loans? First of all, they will be added to the debtor blacklist of the Credit Bureau, so no bank will give them a loan, a credit card or a cheque book and no leasing company will accept them as customer in the following five years. Practically, those people will become financially dead for five years. Second of all, the banks will automatically move their ongoing loans to the bad loan portfolio and make provisions for the respective amounts. The next step is foreclosure on the mortgaged house or whatever good was bought with the bank"s money.

The Credit Bureau is a company set up in 2004 by approximately 25 banks. Later on, several leasing companies and even two mobile telephony companies joined the group. All the members feed a common database with information about the history of all the individual debtors and are able to access the database in order to rate any loan applicant. If the loan applicant is blacklisted, the loan application is denied. Importantly, the Credit Bureau is not an institution or authority of the State, does not operate based on a specific regulatory law (but an obscure National Bank regulation) and is not licensed to process personal information. However, with a huge database full of records that often turned out to be wrong, the Credit Bureau can, directly or indirectly, cause a limitation of the citizens" rights or legitimate interests.

Since it is not an institution or an authority of the State administration, but a private company, the documents issued by the Credit Bureau cannot be contested in the administrative courts and there is doubt that they can be contested even in civil courts. Under the current circumstances, considering all the above, the Credit Bureau proves to be an abnormality. Some legal experts have proposed that all participants to the Credit Bureau stop reporting bad debtors for one year, until the crisis is over. The idea is interesting, but it can be hindered by the fact that most loan agreements contain a standard clause which stipulates that the customer allows the bank to report him to the Credit Bureau or the Payment Incident Registry (CIP) in case of default. If a law is passed to suspend the banks" reporting to the Credit Bureau, that could be interpreted as the State"s interference with the contract between two private parties.

So the preferred solution is to go to court. It is true, that any lawsuit costs money, but not all of them will leave debtors penniless. For instance, to apply for "the court"s protection" costs less than 10 euro. Naturally, the best option would be to have a bankruptcy law for largely indebted individuals, but it is also true that a court could rule the bankruptcy of an individual, or something similar, based on existing laws. It only takes one individual with the courage to file for bankruptcy.

In the meantime, let"s see how things could work "by other means:" a) The insolvency law stipulates that an individual merchant (a physical person) may ask for the court"s protection if he or she is insolvent. As soon as the procedure starts, the individual in question (who has to accept, for instance, the transfer of a great deal of his legal capabilities to the liquidator) acquires several key benefits that could help him or her survive the crisis with more ease. Such befits include the freeze of the foreclosure procedures started by creditors and the freeze of the value of the debt at the nominal value on the date when the insolvency procedure starts.

If an individual becomes overindebted (which is, practically, the same as insolvency), that individual is blacklisted in every possible database related to lending and therefore cannot take any kind of loan. Moreover, foreclosure can start immediately, and court protection is no longer possible, unlike the case of the individual merchant. Would that not be a form of discrimination that violates the Constitution? In addition, there is another category of individuals, the freelance practitioners of a liberal profession, who are not merchants, but can become overindebted, too. This is also a form a discrimination, because both the merchants and the freelance practitioners of a liberal profession have a form of small business, which is subject to risk. An overindebted individual can file for insolvency, but will probably be told that the Insolvency Law does not apply to individuals, but only to individual merchants.

The person in question can contest the ruling as unconstitutional arguing that the law which excepts him or her from the application of the insolvency provisions is discriminatory and therefore unconstitutional. If the Constitutional Court finds that Article 1 of the Insolvency Law is discriminatory, the lawmakers will have to amend it so as to remove the discrimination. In any case, Article 1, limiting the scope of insolvency to individual merchants, will not apply.

b) The right to court protection is part of the acquis communautaire and, under Article 148 (2) of the Constitution, the Romanian legal provision which limits the right of individuals to ask for court protection is inapplicable and superseded by the EU law (the same as for the car registration tax). According to an EU regulation from the year 2000 on the matter of cross-border insolvency, an individual non-resident of Romania, who is declared insolvent in his/her country of origin (all EU Members have such procedures in place, except Romania and Bulgaria), the effects of the insolvency are automatically extended to Romania or generate a secondary insolvency procedure in Romania. If a non-resident has taken a loan in Romania or has collateralized a loan in Romania, he/she will benefit from the protection of the court in the home country, with or without a secondary procedure in Romania. This is a yet another example of discrimination, this time between a resident of a country which has regulated individual bankruptcy (it still applies to Romanian citizens who are residents of another EU member) and the Romanian residents. Importantly, the EU regulation issued in the year 2000 became applicable to and mandatory for Romania as of the date of accession, 1 January 2007.

c) The theory of unpredictability, which is increasingly often applied by Romanian courts based on Article 970 (2) of the Civil Code (which says that a contract is binding not only for the explicit provisions it contains, but also for what customs or fairness dictate in terms of consequences), allows courts to rebalance the contract to make it just again. If the individual debtor becomes unable to fulfil his/her payment obligations to the bank because of an unfavourable economic context, and the contract has become unbalanced in the bank"s favour and is therefore no longer a win-win contract, but causes unjustified loss to the debtor, then the individual debtor may ask the bank to renegotiate the contract and, if refused, he can ask the court to rebalance it. In such case, the court can decide new payment deadlines for the debtor, until he/she is employed again or, by whatever means, becomes again able to fulfil their payment obligations. The court may also order that the interest rate and penalties be frozen or rebalanced, too. On the other hand, the court can appoint a third party to manage the debtor"s finances or to represent him in the management of his finances. Such case is actually quite similar to bankruptcy.

d) finally, there is the a procedure for the general insolvency of the debtor, referred to as "deconfiture" in French, which is similar to insolvency and applies only to individual debtors.

The current legal context and the existence of the Credit Bureau as it is now will lead to a serious social problem: banks will foreclose on increasingly more individuals, who will be evicted from their mortgaged home. The social problem will be accompanied by a huge financial problem as no one buys property now and, if they do, the price is similar to what it was in 2003. Banks will become unable to fully recover their receivable, because the value of the collateral is now much smaller than it was when the loan was issued (sometimes, the difference is more than 50%). Financial costs (provisions equal to 100% of the bad loan plus interest) and administrative costs (the cost of foreclosure) will become unbearable.

On the other hand, all those who are subject to foreclosure are automatically added to the blacklist of the Credit Bureau, irrespective whether they are bad debtors or not. After all, insolvency means that they cannot pay a debt because they do not have the liquidity, and not because they do not want to pay it. The consequence would be that they will not be able to take any loan in Romania for five years, so they stop being potential customers to banks.

If we take the 1 million people in Bucharest who have taken a consumer loan in the last 3 years and consider that half of them become unable to pay by the end of 2009, then the 40 banks in Bucharest will have to share "only" 500,000 customers. What will happen then? Many banks cease to exist, through mergers, emergency takeovers or bankruptcy. In May 2008, when I warned about this in "Romania libera" and on my blog, I got replies full of contempt, or at least condescendence. Not to mention our lawmakers, the politicians of Romania, who, in October 2008, still believed that the crisis would go around Romania, as if Romania was some sort of a paradise of economic efficiency. Well, such is life... stupidity has its cost. Unfortunately, it rarely happens that the stupid actually pay. In most cases, it"s the sheep following them that pay.