The moratorium on the foreclosure of foreign currency mortgage loans is likely to be extended if the President of Ukraine signs the new law. The moratorium was introduced in 2014 after a huge wave of UAH devaluation to protect borrowers from exchange rate volatility. After seven years of uncertainly for investors in non-performing loans (NPLs), extending the moratorium coupled with the mandatory conversion of FX loans into UAH is likely to finally resolve this hurdle for investors and open new market niches in alternative assets in Ukraine.
In April 2021, Ukrainian Parliament Verkhovna Rada adopted the Law on Amendments to Section IV “Final and Transitional Provisions” of the Law of Ukraine “On Consumer Lending” (for loans granted in foreign currencies) No. 4475 (the “Law”). To come into effect, the President must sign the Law, which he is yet to do.
The Law is supposed to restore the solvency of borrowers that received consumer mortgage loans in a foreign currency, but were unable to make timely payments on these loans. Instead, the Law obliges creditors to restructure foreign currency loans on highly unfavourable terms. The Law introduces new rules on mandatory restructuring and extends the moratorium on enforcement of mortgages by three more years.
The moratorium was imposed by Parliament in 2014 with the Law of Ukraine № 1304-VII “On the moratorium on the recovery of property of citizens of Ukraine granted as collateral for loans in foreign currency” in order to preclude borrowers of loans in a foreign currency being deprived of their homes. The moratorium has been in force for more than six year and was expected to be lifted after 21 April 2021.
In fact, the moratorium allows borrowers to ignore the terms of the loan agreements and avoid enforcement. Consequently, this has led to an increase in NPLs, which has had a negative impact on banks’ liquidity and solvency. Hence, the proper functioning of the banking system of Ukraine is challenged, as the funds received from the repayment of loans are a source of fulfilling banks’ obligations to their creditors.
The provisions of the Law require the conversion of foreign currency liabilities into UAH and changes to interest rates and loan repayment terms. Creditors will be provided with 30 days to make all the necessary adjustments. Notably, under the Law every loan in a foreign currency is subject to mandatory restructuring regardless of the date of the loan agreement, if there is an outstanding monetary obligation (including a monetary obligation that is not due). At the same time, the Law does not specify any conditions under which borrowers will be subject to mandatory restructuring.
In addition, the Law stipulates that liabilities subject to mandatory restructuring are deemed to be restructured from the date of entry into force of the relevant provision of the Law. Evidently, any restructuring of the legal content of obligations should involve amendments to the loan agreement. However, the provisions of the Law do not associate restructuring with the need to introduce amendments to the loan agreements.
It is also unclear what the compliance requirements are for the debtors. The only sanction for non-fulfilment of the debtors’ obligations under the Law is the minimum penalty which leaves the creditors with no tools to protect their rights. At the same time, the Law does not regulate the consequences of the debtors’ non-compliance. In fact, because of the moratorium still being in force, there is basically no need for the debtors to continue fulfilling their obligations. Under the Law, within three years after it enters into force, the enforcement of mortgages that secure foreign currency loans (that are restructured according to the Law) will be prohibited. However, the extension of the moratorium will preserve but not solve the problem with foreign currency NPLs. The market assumes that the probability of debtors’ compliance with new restricting requirement will be extremely low. Most debtors have not been paying their obligations for almost seven years, and it will be difficult for them to start fulfilling their obligations now.
Before the adoption of the Law, foreign currency mortgages had already caused significant losses to banks because of the long-term moratorium and lack of motivation for the debtors to repay the loans. As loans have become massively non-performing, the banks had to cover them with their reserves.
Considering the above implications of the Law on practical relations between debtors and creditors, in our view the Law, if signed, needs to be further amended to change the approach to restructuring and provide a clear mechanism. The restructuring of foreign currency loans should be on market conditions that are acceptable to both creditors and borrowers. In the wording as adopted now, the provisions of the Law appear to be inconsistent, unclear and to a great extent contrary to Ukrainian law.