Top bank CEO explains how the new law on mortgage loans will change the lending process in Romania

The new law that defines “giving in payment” (darea in plata in Romanian) will change the local banks’ decision making process when granting mortgage loans. The lenders will no longer decide only based on a borrower’s capacity to repay the loan, but will also have to think about the potential loss of value of the mortgaged property, explains Steven van Groningen, the President and CEO of Raiffeisen Bank Romania. Raiffeisen, which is one of the top five banks in the local market, has decided to ask for a 35% down payment for new mortgage loans in local currency (RON), up from 15% until now, and a 40% advance payment for loans in euro. The lender’s decision came after the new law on giving in payment, which allows mortgage debtors who can’t repay their loans to give the mortgaged assets to the bank and stop paying back the loans. According to the law, which was passed by the Parliament at the end of last year, but was sent back by President Klaus Iohannis for review, the debtor won’t have to pay anything else to the bank, even if the value of the property doesn’t cover the remaining amount to be reimbursed. Steven van Groningen explained in a blog post what will change in the relationship between bank and borrowers in case this law would come into effect. “Until now, a bank granted a loan to a person and that person was obliged to repay the full value of the loan and interest. The borrower was personally liable for this and if he did not pay his creditors could gain access to his assets through legal procedures. Before granting a loan, the bank would analyze the financial situation and history of the borrower and assess the risk of non-payment. On this basis, the bank would be willing to lend a certain amount under certain conditions to the borrower,” according to van Groningen. “Under the proposed Darea in Plata law this all changes. The borrower can at any time repay the loan by transferring the ownership of the house/apartment to the bank. So, when assessing the risk, the bank needs to look at the risk that the borrower will stop repaying and “send the keys to the bank”. This risk depends mainly on the value of the apartment in relationship to the outstanding of the loan and less if the borrower can pay or not,” he pointed out. “Simply put, the bank doesn’t grant a loan to an individual anymore, but finances an asset, and the main risk is not the individual borrower and his or her financial situation, but the value of the asset. This is a totally different risk and it would be naive to think that this would not be expressed in the terms and conditions of mortgage loans. In order to assess this risk, the bank will look especially at the value of the financed apartment/house and make an assessment of the potential fluctuations in value and the discount that needs to be applied if the bank would have to sell the asset, once given in payment,” he explained. “This is the simple reason why we decided to increase the standard down payment for mortgage loans from 15% to 35%. This is a simple matter of cause and effect. If the risk is increased, the prudent thing is to take measures to limit the risk to acceptable levels,” van Groningen concluded.