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One of Hungary's most serious economic problems is that approximately 40% of mortgage loans are denominated in a foreign currency. A new law, allowing for debt repayment at far below market rates, has been criticised as a significant threat to the country's financial system. Moreover, the plan's inbuilt limitations mean that it may help only a small proportion of the debtors affected.

The Supreme Court has confirmed a developing judicial practice in connection with early repayment charges in credit agreements. The court held an early repayment charge to be compensation for lost interest income and therefore deemed it to be null and void; however, it noted that creditors may charge debtors for additional costs incurred as a result of early repayment.

Foreign-denominated debt has been called "the biggest ticking bomb in the Hungarian economy". A new plan could offer a lifeline for homeowners who are unable to pay off their mortgages. However, some commentators see it as a flawed stopgap, or even as unethical, while the banking sector is concerned that a cut in the bank levy appears not to be part of the deal.

The National Bank of Hungary has recently amended its Decree on Payment Services Activity in order to expedite the clearing of domestic payment transfers. The adoption of Single European Payment Area standards is expected to bring benefits for financial service providers and their customers. It will also facilitate Hungary's potential future accession to the eurozone.

Parliament has passed an amendment to the Judicial Enforcement Act that extends the moratorium on evictions for defaulters. A number of decrees have suspended the right to evict mortgage defaulters affected by the financial crisis, but this is the first measure to protect all defaulters. Although a temporary respite for individuals in difficulty, it carries several serious risks.

Foreign currency loans, which dominated Hungary's retail banking sector a few years ago, could all but vanish due to a recently adopted law that prohibits pledges of real estate as collateral for foreign currency loans to individuals. However, the new law arguably violates the EU prohibition against restraints on free movement of capital.

A new law that imposes a heavy additional tax on the financial sector may be challenged before the Constitutional Court. The tax has been sharply criticised by some economists, who suggest that it will cut banks' profits by around one-third, curb lending activity and hinder economic growth. Moreover, unlike the proposals being discussed at EU level, the revenue will not be used to support distressed banks in future.

The central credit information system is undergoing reform, with a new credit reference service to be launched in October 2010. The service will contain information on natural persons who have paid their loans in compliance with their terms. It is expected to remedy the existing system's deficiency, whereby credit institutions can obtain only negative information about natural persons.

Following a period in which public confidence in all levels of the banking system was badly shaken, the Financial Supervisory Authority sought to strengthen consumer protection and rebuild trust in financial markets and intermediaries. At the end of 2009 Parliament adopted an act that, among other things, significantly amended the Financial Institutions Act by introducing new regulations for financial agents.

Following an inspection initiated in the second half of 2009, the Financial Supervisory Authority has filed its first class action against a financial enterprise based on the company's use of allegedly unfair standard terms. The authority is expected to initiate as many as eight further actions in the coming weeks. Banks and other financial enterprises must reckon with a more stringent legal environment in future.

Further steps have been taken to reinforce the rights and extend the protection of consumers concluding credit agreements. Parliament has adopted a new act on consumer credit and a decree on prudent retail lending and creditworthiness. However, some measures also restrict certain essential rights enjoyed by financial institutions.

Hungary's main banks have signed a code of conduct on retail lending activities. Among other things, the instrument sets out rules on responsible lending activities and binds the signatories to principles of transparency, rule-based conduct and symmetry. However, a recent ruling supports the position of the one leading bank that has publicly refused to sign the code.

As the credit crisis started to affect banks in Hungary, some began to exploit their right, established in their general terms, to amend certain elements of their agreements more frequently - a practice that prompted severe public criticism. Parliament has adopted a bill that restricts banks' rights unilaterally to amend or modify consumer loan agreements and allows customers to rescind such agreements without charge.

The Arbitration Court attached to the Chamber of Commerce and Industry recently issued an ambiguous decision about the legal nature of comfort letters, which banks often use in the absence of more tangible securities. There are strong grounds to believe that soft comfort letters do not create enforceable obligations and may give rise to tortious liability only in exceptional cases.

Given Hungary's party political divisions, Parliament's near-unanimous support for a law criminalizing usury is a significant demonstration of public concern. A debtor may declare a loan contract void if the total cost of credit is excessive. However, it remains unclear whether the law can be applied to managers of authorized financial institutions if the rate of interest on the institutions' loans is deemed excessive.

Parliament has recently adopted a bill transposing the EU Directive on Payment Services. Among many other things, the comprehensive bill includes provisions on bank account switching. In the case of bank account contracts for an indefinite period or for a set period exceeding one year, the account holder may terminate the contract (and thereby close the account) without charge or cost.

In order better to serve the needs of credit providers and clients in relation to car financing, a new law has been submitted to Parliament that aims to relax the administrative requirements on establishing pledge agreements over cars. Future plans include the abolition of the notarial deed requirement for all movable assets and the provision of free online access to the pledge registry.

A new bill to reform the central credit information system would extend it to include comprehensive information on natural persons. The reform aims to create a safer environment for the provision of consumer credit, as the financial crisis has demonstrated the potential danger of household indebtedness. However, Parliament must weigh this benefit against the resulting restriction of data protection rights.

Despite the Hungarian authorities' confidence that Hungary would not be directly affected by the credit crisis, it was among the first of the emerging-market countries to suffer. Recent government measures and a joint facility established by the International Monetary Fund, the European Union and the World Bank promise some relief for the sector.

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