New Requirements for a Legal Moratorium System on Credit Agreements in the Context of the COVID-19 Pandemic

9 April 2020

The Romanian Parliament passed a new piece of legislation on 3 April 2020, introducing a legal moratorium system for borrowers subject to credit agreements (the “Proposed Law”). The Proposed Law has yet to enter into force as it must be approved by the Romanian President who has the right to request the Parliament to re-examine the Proposed Law once before approving it.

Earlier last week the Romanian Government approved governmental emergency ordinance no. 37 dated 30 March 2020 (“GEO 37/2020”) introducing a payment suspension for credit instalments, upon debtor’s request, for a period of up to 9 months.

While the general idea of granting a legal moratorium of up to 9 months due to the new coronavirus (“COVID-19”) pandemic is common for both GEO 37/2020 and the Proposed Law, the latter seems to stipulate more favourable terms for borrowers to access the benefit of a payment suspension, and transfers the burden of a payment incapacity to the financial institutions, rather than fairly dividing it between the lenders and the borrowers.

Should the Proposed Law enter into force, it is unclear at this point how the applicability conflict between the two pieces of legislations shall be settled. This aspect is further complicated by the fact that GEO 37/2020 is subject to Parliament’s approval. The Senate has already approved significant amendments thereto, such as the elimination of the state guarantee regarding interest owed during the suspension period.

As such, members of the Parliament have deferred the Proposed Law to the Romanian Constitutional Court so that the supreme court may state before it enters into force whether it is indeed in line with our constitutional principles, as well as to settle the applicability dispute.

For ease of reference, we have prepared a comparative analysis of the main provisions of GEO 37/2020 as opposed to the ones included in the Proposed Law (Annex 1).

In addition, the European Banking Authority (the “EBA”) issued on 2 April 2020 a Guideline on legislative and non-legislative moratoria on loan repayment applied in the light of the COVID-19 crisis (the “Guideline”). The EBA’s aim was to provide the banking system with several clarifications intended to aid the banking sector in order to properly apply regulatory requirements. Mention should be made that the Guideline provides the general criteria for a payment moratorium to be observed by the banks in order to avoid triggering defaults and provisioning requirements.

While the current payment suspension introduced by GEO 37/2020 system generally complies with the Guideline, the moratorium system included in the Proposed Law might not observe EBA’s criteria. Thus, further inconsistencies regarding the implementation of a payment suspension system might cause some confusion in the banking system.

1. Key aspects of the Proposed Law

1.1. Who must grant the payment suspension?

The payment suspension provided by the Proposed law must be granted by banks, non-banking financial institutions and debt recovery companies.

As opposed to GEO 37/2020, the Proposed Law included debt recovery companies which shall be forced to apply the moratorium for the benefit of their clients.

1.2. Who will benefit from a payment suspension?

The Proposed Law will be applicable, upon request, to individuals, freelancers, companies and small and medium-sized enterprises (“SMEs”).

As per the European Union guidelines, an enterprise means any entity engaged in an economic activity, irrespective of its legal form.

Such entity is qualified as a SME if the following requirements are cumulatively met:

(i) it has an annual average number of less than 250 employees; and

(ii) it has either an annual turnover not exceeding EUR 50 million or an annual balance sheet total not exceeding EUR 43 million.

For calculating the above figures, SMEs must first determine whether they are autonomous, partner or linked enterprises. The computation mechanism depends on the type of SME.

Borrowers of all kind may benefit from the moratorium provided that they do not register payment delays exceeding 90 days, save for the borrowers subject to enforcement proceedings, datio in solutum procedures, reorganisation procedures or any other judicial procedures aimed at suspending the effects of the credit agreements (i.e., composition with the creditors).

Companies may obtain a payment suspension if they submit with the lender an affidavit stating that their income has decreased in the ongoing month with 15% in comparison to the average registered for the previous two months.

One of the main differences from GEO 37/2020 is that the Proposed Law allows for a payment suspension to be granted even if the credit facility had been previously accelerated and the borrower is subject to enforcement and insolvency proceedings.

Moreover, the Proposed Law lowers the threshold for an income decrease in companies from 25% to 15%. Also, the payment suspension shall be granted based on the company’s affidavit and not following the issuance of an emergency status certificate.

1.3. What is the payment suspension period?

Similar to GEO 37/2020, the payment suspension can be granted for a period of up to 9 months, but no later than 31 December 2020.

1.4. How can one obtain a payment suspension?

The payment suspension shall be given upon a request made in writing and submitted with the lender either in original form or via electronic poste and will not require an addendum to the loan agreement to be executed by the parties. However, the lenders are required to inform the borrowers with respect to the implementation of the suspension benefit.

1.5. What type of loans can be suspended?

According to the provisions of the Proposed Law, the payment suspension will be applicable to all types of loans granted by banks and non-banking financial institutions, including leasing agreements.

1.6. How will the payment suspension affect the reimbursement of the loan?

All amounts owed to the lenders based on the credit agreements shall be suspended (i.e., principal, interest and other costs) and the contractual period shall be automatically extended with the duration of the suspension period.

Moreover, all enforcement procedures initiated before the Proposed Law enters into force, including enforcement of movable and immovable assets and garnishments, will be suspended until 31 December 2020.

GEO 37/2020 did not allow for a suspension to be applicable to enforcement proceedings, given that the moratorium did not include accelerated credit facilities.

1.7. What happens to the interest during the suspension period?

The interest and costs associated with the loan owed during the suspension period will not be capitalized to the principal amount and will not be repaid by the borrower after the suspension is lifted.

GEO 37/2020 regulated such aspect in a different manner, given that the moratorium did not prevent banks from calculating interest during the suspension period, while the borrowers were required to pay such interest either by including it in the principal amount or by transforming it into a separate and independent claim to be repaid in 60 monthly instalments in case of mortgage loans.

2. EBA’s requirements regarding moratoria included in the Guideline

The EBA declared its support for the measures and initiatives taken by the Member States and individual banks to address the economic consequences of the COVID-19 pandemic and recognised the payment moratorium as being an effective tool to address short-term liquidity difficulties caused by the limited or suspended operation of many businesses and individuals. However, the EBA also mentioned that banks must continue to ensure that risk is identified and measured in a true and accurate manner in order to identify those situations where short-term payment challenges may transpose into long-term financial difficulties and eventually lead to insolvency.

The Guideline provides the criteria that general payment moratoria have to fulfil in order to not fall within the definition of forbearance. It has to be noted, however that, where exposures have already been subject to forbearance measures before the application of such moratoria, this classification should not be changed.

In the current regulatory framework, “forbearance” means that credit institutions grant a concession (i.e., temporarily postpone capital and/or interest payments of a loan) when they identify that a borrower is experiencing or is likely to experience financial difficulty in repaying a loan. Credit institutions grant measures specific to the financial circumstances of the borrower and the loan agreement, with the aim of helping the borrower who is experiencing temporary difficulties with the repayment obligations.

In order to ensure that the definition of forbearance continues to be applied in an appropriate and consistent manner, the Guideline regulates the conditions that the general legislative and non-legislative moratoria have to fulfil in order not to be considered forbearance. These conditions include, in particular, the following:

(i) The moratorium was initiated as a response to the COVID-19 pandemic

(ii) The moratorium must be broadly applied

This condition aims to ensure that the proposed treatment applies to moratoria that are similar in economic substance, regardless of whether they are legislative or non-legislative. Given that legislative moratoria apply to all banking institutions within a certain jurisdiction, a similarly broad scope of application also must be ensured for the non-legislative moratoria.

The EBA acknowledges that several non-legislative moratoria may exist in a single country and that non-legislative moratoria may exist alongside legislative moratoria. However, in order for a change to the schedule of payment due to the application of a moratorium not to be considered forbearance, the moratorium must be based on a sufficiently broad initiative. This condition is necessary to ensure that amendment to the repayment schedule does not address specific financial difficulties of specific borrowers, as this would meet the definition of forbearance. Therefore, in order to fall under the terms of the Guideline, the moratorium has to be available to a large, predefined group of borrowers, regardless of the assessment of their creditworthiness.

The EBA also mentions that it is possible for the moratorium to be limited to performing borrowers who did not experience any payment difficulties before the application of the moratorium. However, where the moratorium applies to exposures that were already classified as forborne or defaulted when the moratorium was granted, this classification must be maintained.

(iii) The same moratorium offers the same conditions

While the same conditions have to apply or be offered to all clients subject to the moratorium, it is also possible that different moratoria apply to different segments of exposures or borrowers. However, in any case, it has to be ensured that the moratorium applies broadly and to a large number of borrowers.

(iv) The moratorium amends only the schedule of payments

This condition is consistent with the objective of the moratorium to address the short-term liquidity shortages. In order to achieve this objective, the moratoria suspend, postpone or reduce the payments within a limited period of time. Such a measure shall impact the whole schedule of payment and may lead to increased payments after the moratorium is lifted or to an extended duration of the loan. However, the moratorium should not affect other conditions of the loan, in particular the interest rate, unless such amendment only serves for compensation to avoid losses which a bank otherwise would have due to the delayed payment schedule under the moratorium.

(v) The moratorium does not apply to new loans granted after the launch of the moratorium

It has to be ensured that the moratorium addresses a specific issue arising as a result of the COVID-19 pandemic and is not used for new lending granted after the outbreak. In this context, the use of existing credit lines or renewal of revolving loans is not considered a new loan.

In addition to the above, the EBA also mentions that throughout the duration of the moratorium, banks should assess the potential non-performance of the borrowers subject to the moratorium in accordance with their internal policies and practices, including where these are based on automatic checks of indications, such in the case of individuals. Where manual assessments of individual borrowers are performed (i.e., for companies made through financial statements), banks should assets whether borrowers are likely to experience longer-term financial difficulties or insolvency due to the effects of the COVID-19 pandemic.

 

Comparative Analysis of the Main Provisions Included in GEO 37/2020 and the Proposed Law