Borrower protection in times of COVID-19
The restriction of public life and economic activity to combat COVID-19 is increasingly impacting borrowers, mainly due to the fact that many borrowers generally repay their financial obligations from current or earned income. As the economy is confronted with widespread to complete loss of revenue however, individuals are now being faced with the loss of income, and hence being in a situation of not possessing sufficient liquidity to fulfil their loan obligations.
Up until now, borrowers have been dependent on the goodwill of the lending banks in such situations. However, this may change in the near future. The Austrian government is currently working on a statutory deferral (moratorium) of loans for small businesses and private individuals. The aim of the planned regulations is to ensure that borrowers who fail to make repayments on time, due to a crisis situation, are not confronted with the lending bank demanding full repayment of the obligations.
The following is a brief overview of the planned measures of the government:
What is a deferral?
In the case of a deferral, the due date or the actual payment date of a payment obligation is postponed. Subsequently, during this deferral period, borrowers would not be considered as being in default and hence the lender has no reason to demand full repayment of the obligations. Normally, individual agreements between the lender and the borrow form the basis for such measures. However, due to the fact that a legal basis that will soon be available, such agreements will no longer be deemed necessary.
General conditions of the deferral
According to the planned measures, both private individuals and small businesses are to benefit from statutory deferrals during the Corona crisis. Accordingly, a deferral can initially be granted for a period of three months, with the possibility of further extension for another three months if necessary. The interest rate for the loan deferral will most probably be the same, as the interest rate applicable to the original loan.
Whilst the planned measures will in any event apply to private individuals, discussions are currently ongoing about extending the scheme to small businesses, which are facing the loss of almost all their sales. Small businesses within the meaning of this draft legislation should, at this present time, mean businesses which have with the following key figures: turnover limit of 2 million euros or a staff of 10 employees.
It is envisaged that the deferrals will take effect automatically; with borrowers who do not wish to utilize these measures having to opt out. Delays were feared with regard to the opt-in solution advocated by some banks in the voting process, whereby borrowers would have had to apply to their bank for the deferral.
Further details, such as the exact conditions which must be fulfilled in order to fall within the scope of the measures, are currently not available. Orientation however can be gained from Germany, where a similar regulation was adopted a few days ago. According to those measures, the conditions for deferral depends upon the borrower suffering a loss of income due to extraordinary circumstances, caused by the occurrence of COVID-19. Additionally, the loss of income must mean that the borrower cannot reasonably be expected to fulfil his obligations. This is particularly the case if it becomes unreasonable to expect the borrower to perform his obligations without endangering his livelihood or that of his dependants. The threshold of the relevant reduction in income is therefore not fixed as a lump sum, but however will be judged on a case by case basis.
The statutory deferral of loans is not only intended to be borrower friendly. Credit institutions are also viewing the measures in part positively, as they are able to economically justify the reduction of income before their – often foreign – group headquarters.
Do you have any questions? We are glad to assist you!
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Irene Eckart, B.A.
PwC Legal | Director | Lawyer, Financial Services
Office: +43 1 384 05 50 | Mobile: +43 664 88639005
Dr. Dominik Kurzmann
PwC Legal | Senior Manager | Lawyer, Financial Services
Office: +43 1 384 05 50 | Mobile: +43 664 88639006