ECB' opinion on support to mortgage borrowers consistent with Bank of Latvia's position - governor

RIGA - The European Central Bank's (ECB) opinion on the temporary measures planned in Latvia with the aim to protect mortgage borrowers amid soaring interest rates is largely consistent with the Bank of Latvia's position that the draft legislation contains a number of flaws, Bank of Latvia Governor Martins Kazaks told LETA. 

"The Bank of Latvia has been calling for support to mortgage borrowers already since this past summer, stressing that a targeted approach should be one of the main criteria. We proposed a solution that was based in the short-term needs of the borrowers and long-term needs of the state, but sadly, it was not accepted by the Saeima," Kazaks said.

At the same time, the head of the central bank noted that banks, too, had and still have an opportunity to show significant solidarity with their struggling customers, for instance, by cutting commissions, raising deposit rates faster, upgrading their services and stepping up lending to the economy, including businesses. 

Earlier, before the draft law's adoption by the Saeima, the central bank's representatives explained that this is not a matter within the scope of bank supervision and that regardless of the ECB's direct supervision, Latvian laws are and will be binding on all Latvia's credit institutions. 

Notwithstanding the opinion issued by the ECB, the decision on the support to borrowers will be made and legal risks taken by Latvia, the Bank of Latvia said. 

The ECB has released its opinion on the measures Latvia is planning to take to protect mortgage borrowers who are struggling to meet the sharply increased interest payments. The ECB recommends supplementing the amendments to the Consumer Rights Protection Law with a thorough analysis of potential negative consequences the measure might have on the banking sector. 

The ECB published its opinion on December 11, noting that the amendments had already been adopted by the Saeima on December 6, so the ECB was not given the time it needed for consultations. The ECB received the submission from the Saeima Budget and Finance (Taxation) Committee on November 30.

Furthermore "the eligibility criteria laid down in the draft law do not sufficiently limit the scope of borrowers entitled to a reduction in mortgage loan interest payments as the draft law will impact the majority of outstanding mortgages," according to the ECB.

The ECB adds that the draft law can have a number of other unforeseen consequences that can have a negative effect on financial stability, which is why analysis is needed to assess the proposed levy's potential effects on new lending and competition on the market. 

President Edgars Rinkevics, however, has said that he intends to promulgate the amendments to the Consumer Rights Protection Law to support Latvia's homeowners. 

As reported, the Saeima at the beginning of December passed in the final reading amendments enabling the provision of state support to mortgage borrowers in the amount of 30 percent of their interest payments, but not exceeding two percentage points of the interest rate set for the period.

To provide this support, which was proposed by the Budget and Finance (Taxation) Committee, credit institutions will be obliged to pay a levy "in order to protect public welfare, taking into account the burden of payments on households".

Banks as the payers of the levy will have the obligation to calculate a 30 percent compensation on each mortgagor's interest payments for each given quarter, but not exceeding two percentage points of the interest rate set for the period.

Borrowers whose mortgage loans have a fixed interest rate will not be eligible for the compensations.

The State Revenue Service would be tasked with administering the levy.

The levy would be paid by Latvia-registered credit institutions, consumer loan providers, as well as Latvian branches of foreign credit institutions and consumer loan providers.

The compensations would be granted to those mortgage borrowers whose mortgage agreements have been concluded by October 31, 2023 and whose loan balance does not exceed EUR 250,000.

The law would provide that such payment of compensation for interest on loans will be neither an administrative act nor a de facto action and will not be subject to challenge or appeal under the Administrative Procedure Law. Disputes between the consumer and the levy payer in relation to the calculation of the credit interest compensation will be settled in accordance with the Civil Procedure Law.