New legislation was put into force in May regarding the granting of housing loans to consumers, bringing Cyprus in line with an EU Directive, introducing a number of regulations and obligations upon credit institutions for the protection of borrowers. The law governs loan agreements to consumers, that are secured with a mortgage or another similar security and relate to immovable properties which will be used for housing purposes.
It includes an obligation on banking institutions to evaluate the creditworthiness of the borrower before granting the loan. The legal framework requires the borrower be a consumer acting outside of his commercial, business or work activities. Apart from the provisions regarding unfair practices, banking institutions are obliged to inform borrowers and implement practices which must be followed prior to the signing of the loan agreement to ensure that the borrower is in a position to evaluate whether the proposed loan agreement and any other supplementary services are in line with his needs and his financial status.
The banking institutions are obliged to inform borrowers on the total annual percentage charge and how it is assessed, on the total credit cost and the total amount payable, as well as interest rate.
When examining a housing loan application, the banking institution must follow the prescribed procedures and carry out a thorough evaluation of the borrower’s creditworthiness, taking into account all the relevant factors to establish whether the consumer is in position to meet his obligations under the loan agreement.
After signing the loan agreement, the banking institution cannot cancel or amend it to the detriment of the consumer with the reasoning the evaluation was not carried out properly. The loan is granted only when the outcome of such an evaluation shows that the obligations deriving from the loan agreement can be fulfilled in accordance with the agreement.
The banking institution must ensure that its internal and external valuers who carry out the property valuations are professionally qualified and independent and that they are in a position to prepare an unbiased and objective valuation of the property in question.
The value of the property, even if it is higher than the amount of the loan, cannot be the main factor upon which the evaluation of the borrower’s creditworthiness is based; the banking institution must carry out an evaluation based on the borrower’s income and expenditure. In this respect, the banking institution ensures the consumer is aware he has to submit correct and complete information to properly establish his creditworthiness.
In respect of a loan in a foreign currency, the banking institution needs to obtain adequate information regarding the knowledge and experience of the borrower relating to the exchange rate risk. The banking institution must execute the agreement correctly and if the borrower repays the loan earlier, the management fees to be imposed should not be more than 1.25% of the reduction or the amount of €100, whichever is lower.
The law regulates the consumer’s default in the payment of his instalments and the settlement procedure for the amounts due, requiring the banking institution to grant a reasonable tolerance period before taking the settlement process and the forced sale procedure to collect the debt. It also includes provisions and the way of calculating the charges imposed when obligations are not met by the borrower.
If after the settlement procedure or the forced sale of the property there remains a balance of the debt payable, the repayment terms imposed should not provide for payments which will not allow the borrower to have income to cover his living and family expenses.
George Coucounis is a lawyer specialising in the Immovable Property Law, based in Larnaca, Tel: 24 818288, [email protected], www.coucounislaw.com