In a blow to banks, the European Court of Justice ruled Wednesday that lenders must be frank with borrowers about the economic consequences of foreign-currency loans.
Ruxandra Paula Andriciuc and 68 other borrowers brought the underlying challenge in the District Court of Bihor, Romania, with regard to loans they obtained in Swiss francs from Banca Romaneasca about a decade ago.
Though the borrowers all received their income in Romanian lei, the terms of the loans they signed required them to make monthly payments on the loans in the same currency they had been concluded, that is Swiss francs.
In the event that the borrowers failed to repay their loans, the contracts allowed Banca Romaneasca to debit their accounts and carry out any currency conversion where necessary, using that day’s exchange rate.
Andriciuc and the other borrowers claim in their lawsuit that the contracts were unfair, saying the Swiss franc fluctuates significantly against the Romanian leu, and that the bank failed to fully explain the exchange risk despite its foresight about the exchange rate.
A Romanian appeals court that the borrowers have asked to revive their case stayed proceedings to invite input from Europe’s highest court.
The Court of Justice ruled Wednesday “that financial institutions must provide borrowers with adequate information to enable them to take well-informed and prudent decisions and should at least encompass the impact on installments of a severe depreciation of the legal tender of the member state in which a borrower is domiciled and of an increase of the foreign interest rate.”
Whether the contract terms at hand were clear is a question that the Romanian court must examine.
“First, the borrower must be clearly informed of that fact that, by concluding a loan agreement denominated in a foreign currency he is exposing himself to a certain foreign exchange risk which will, potentially, be difficult to bear in the event of a fall in the value of the currency in which he receives his income,” the court said in a statement about the ruling. “Second, the financial institution must explain the possible variations in the exchange rate and the risks inherent in taking out a loan in a foreign currency, particularly where the consumer borrower does not receive his income in that currency.”
If the bank has not fulfilled those obligations, the national court must determine whether the bank acted in bad faith and if the parties to the contract are imbalanced.
“That assessment must be made by reference to the time of conclusion of the contract concerned, taking account of the expertise and knowledge of the bank, in the present case the bank, as far as concerns the possible variations in the rate of exchange and the inherent risks in contracting a loan in a foreign currency,” the court’s statement says. “In that connection, the court states that a contractual term may give rise to an imbalance between the parties which only manifests itself during the performance of the contract.”