New Law Criminalizes Usury: Are Banks and their Managers in the Firing Line?

Szerző: András Rácz

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New Law Criminalizes Usury: Are Banks and their Managers in the Firing Line?

Contributed by Gárdos, Füredi, Mosonyi, Tomori

July 31 2009

Given the antagonism between the political parties in Hungary, Parliament's near-unanimous support for a new law on usury is a significant demonstration of its public policy concerns on the issue. The law was passed in December 2008 and since March 1 2009 usury has been a criminal offence.
From 1883 to 1978 usury was an offence under Hungarian criminal law, punishable by up to three years' imprisonment, but it was absent from the Criminal Code for 30 years. The Civil Code has contained provisions against excessive and unfair consideration and usury since 1959. However, Hungary's recent economic and social problems have led to a rise in usurious credit activities and the victimization of financially vulnerable households. The new law aims to enhance the protection available to borrowers under civil and criminal law.
Before the adoption of the new law, the only legal protection against usury was in two civil law provisions.

First, a general provision allowed a contractual party to contest a contract if the difference between the value of a service and the consideration due was grossly unfair.
Second, an express provision against usurious contracts is based on a Calvinist interpretation of usury as profit from a neighbour's loss, rather than profit from a loan. The civil law criterion for usury is that a contracting party gains excessive benefit by exploiting its counterparty's situation, in which case the contract is null and void.
However, these provisions have not proved dissuasive enough. The new law amends both codes by inserting sub-clauses regarding credit contracts. These expressly allow a debtor to declare its loan contract void if the total cost of credit is excessive, and introduce a provision criminalizing usury.

The new law does not set an interest rate ceiling - experts maintain that this would probably increase market interest rates in general. Therefore, it is for the courts to determine the criteria for defining 'excessive interest'. On the basis of court practice, a given consideration is likely to qualify as excessive if it differs from the market value by at least 50%.
The criminalization of usury demonstrates that Parliament recognizes its obvious and imminent danger. The new provision is built on the civil-law understanding of the term, although it requires not only the exploitation of another party's situation and a grossly unfair consideration, but also a regularity of activity and a measure of serious deprivation caused to the debtor.
In the course of the legislative procedure, it was asked whether the new law would apply to managers of authorized financial institutions if the rate of interest on loans provided by such institutions were to be deemed excessive. The question is becoming more pressing in the context of recent demonstrations against an authorized financial institution which is offering personal loans at a cost that many debtors consider unreasonably high. Although the law is unclear, the majority opinion seems to be that the new law could be interpreted as applying to managers of financial institutions.

For further information on this topic please contact András Rácz at Gárdos, Füredi, Mosonyi, Tomori by telephone (+36 1 327 7560), fax (+36 1 327 7561) or email (racz.andras@gfmt.hu).

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