George Psarakis LL.M. (mult.), PgCert
Vassilis Farmakis, LL.M
Summary: The Code of Conduct for Banks has already been in place since the beginning of 2015. The Code was adopted by the Bank of Greece, following the relevant authorization of Law 4224/2013. It applies compulsorily to all loans that were not terminated by 1/1/2015 and, upon request of the borrower, also to those terminated before 1/1/2015. This note provides a first record of the practical consequences of the implementation of the Code after one and a half years of its application.
The Code of Conduct for Banks has already been in place since the beginning of 2015. The Code was adopted by the Bank of Greece, following the relevant authorization of Law 4224/2013. It is mandatory for all loans that were not terminated by 1/1/2015 and, upon request of the borrower, also for those terminated before 1/1/2015. When the Code was first published in the relevant Official Gazette, few understood its importance, and even fewer of the relevant bank officials knew how to apply it properly. Today, already about 1.5 years after its implementation, most of those involved in the area of loan arrears have realised its gravity and the dangers of not applying it correctly.
The object of the Code is to adopt specific rules in the negotiations between the bank and the borrower for the settlement of loan arrears. In particular, the General Principles of the Code provide that "The Code establishes general principles of conduct and adopts best practices aimed at strengthening the climate of trust, mutual commitment and the exchange between the borrower and the institution of the necessary information to enable each party to weigh the benefits or consequences of alternatives for the servicing (settlement solutions) or final settlement (final settlement solutions) of loans in arrears, with the ultimate aim of achieving the best possible outcome in terms of the settlement of the loans in arrears.
The provisions of the Code were introduced for two reasons: a) to speed up the capital strengthening of banks and b) to protect and better inform borrowers. This follows not only from the provisions of the Code itself, but also from Law 4224/2013 on the establishment of the Government Council for Private Debt Management. Specifically, it is provided in Article 1:
"The mission of the Government Council for Private Debt Management, as detailed in the Act of the Council of Ministers, shall be in particular the following:
(i) the formulation of policies on the organization of an integrated mechanism for the effective management of non-performing private loans,
(ii) proposals for substantive and procedural amendments to the existing legal framework to enhance the effectiveness in resolving private debt issues, including the acceleration of procedures regarding arrears and the improvement of the institutional framework governing the real estate market,
(iii) the development of awareness-raising actions to inform and support citizens and stakeholders directly and effectively in decision-making on the above issues,
(iv) the creation of a network of advisory services on debt management issues.
The first two objectives refer to banking supervision issues, while the next two objectives refer to information and protection of borrowers.
With regard to the issues raised in relation to the implementation of the Code, four main points can be made in the context of a briefing note (and on the basis that the text of the Code and the description of its provisions have already been published several times):
1. The termination of loan agreements without prior compliance with the procedure provided for in the Code, where this is mandatory, is highly problematic. The Code states that the credit institution must "Complete the Stages of the Code before initiating enforcement proceedings with a 'cooperative' borrower". Now credit institutions, particularly their legal departments, take the provisions of the Code very seriously in dealing with loans in default and are adopting practices to ensure compliance with the Code for each loan prior to termination. However, at the beginning of 2015, when the importance of the Code was not fully understood, some credit institutions were terminating loans without following the required procedures, apparently in violation of the relevant provisions. In fact, there has been a case of a business loan contract being terminated in early 2015, and since the Code's procedures had not been followed beforehand, as provided for, the institution sent a posteriori (! ) information letters in accordance with the Code's procedure (incomplete, however, even these), apparently without being able to remedy the breach already committed; compliance with the Code is meaningful for the stage before termination and not, of course, after the termination of the loan agreement and the possible issuance of payment orders, etc.
The key question, however, is what is the consequence of the termination of the loan that occurred without following the procedures of the Code. There, since no court decisions have been handed down to date, the issue is controversial. It is certainly possible, however, to challenge the termination or claim compensation in court and, even more so, to invoke the omission in question in the context of an out-of-court settlement with the credit institution in order to strengthen the borrower's position. In addition, it is also possible for the credit institution which has infringed the provisions of the Code to lodge a complaint with the competent department of the Bank of Greece, which may impose the appropriate fines in the event of systematic failure to apply the Code.
2. In the context of the Code, several of the usual practices in the banking industry have changed. For example, it was taken for granted that the bank would hardly make a counter-proposal if it rejected your settlement proposal; or that you would not be given the bank's possible proposal in writing; or that the bank would make a final proposal of its own without accepting any counter-proposal of yours; or that the bank would require partial repayment of the loan or the provision of new collateral in order to proceed with a settlement proposal. Nowadays, these practices have necessarily changed. Thanks to the Code:
(a) the bank is now, after the borrower's counterproposal is submitted, obliged to i) either consent to the counterproposal, ii) either reply in writing that it rejects it and that its original proposal remains active, with the basic relevant documentation, iii) or submit a new proposal, which is the final one (On this point, see. 'The borrower is now given the right to submit a counter-proposal to the institution's proposals. In the original Code, the credit institution was not even obliged to respond to the borrower's counter-proposal for loan restructuring. In the new Code, not only does the credit institution not only respond in writing, obligatorily documenting its response if it is negative, but in addition, as a response, the credit institution may make a new improved proposal. In the light of the above, the new regime provides all the necessary guarantees to foster a spirit of cooperation and consensus between the parties').
(b) The credit institution is required to put any proposal in writing. As the Code states: "Any proposal for debt adjustment or final settlement submitted to the borrower shall be in writing and shall contain at least the terms required to be contained in the proposal submitted at Step 4 of the D.C.C." This means that, on the one hand, the borrower will be free to draft the proposal with the assistance of his advisers and, on the other hand, the bank will not be able to change any terms to which it has already committed itself in its written proposal.
(c) The credit institution can no longer impose conditions prior to the submission of its proposal or its final proposal (i.e. the response to the borrower's counter-proposal). The Code expressly states "The fulfilment of the institution's present obligation may not be conditioned on a requirement of prior repayment of any debts owed by the borrower to other creditors". The same applies, and it follows from the spirit of the legislator, to possible requests for further collateral etc. It was common practice that before any proposal was made by the bank, the latter would request some form of security or the repayment of part of the debt. This was a necessary condition for the negotiations to begin. It is now obliged to comply with the provisions of the Code, to make an initial and final proposal without being entitled to demand any payment or security from the borrower.
In this way, the Bank is also now obliged to submit its proposals and counter-proposals in writing and with supporting documentation, and it will now be easier to obtain judicial review of any abusive behaviour towards the 'cooperative' borrower,
(a) where, for example, the comparison of the proposals shows not only that the borrower refuses to agree to a compromise solution proposed by the borrower, but also that the borrower is unwilling, because of its advantageous position in the negotiations, to deviate from what it had initially proposed without good reason, or
(b) where it may put forward disproportionately burdensome 'solutions' with a view to switching directly to what are essentially proposals for a final settlement rather than to formulating mild proposals for a settlement.
3.Even if the borrower is not in arrears, but suspects that in the near future he will have difficulty in repaying his debts, it is right to contact the credit institution and request that the Code of Conduct procedures be initiated. This is possible if the bank agrees, as the Bank of Greece states in its relevant circular ("It is at the discretion of the institution to include a borrower who requests it, citing financial difficulties, in the Code's Delinquency Resolution Procedure (DRP), despite the fact that he has not yet defaulted on his payments"). With this practice, the borrower is better safeguarded through the possibilities offered by the Code of Conduct (e.g. mediation of the Consumer Ombudsman in the event of failure to reach an agreement, possibility of submitting a counter-proposal, submission of a written proposal and a final proposal by the credit institution, etc.), as opposed to the procedure followed outside the Code where the bank usually proposes orally an arrangement which is not even negotiated.
4. Based on the revised Code of Conduct (August 2016), even loans that were terminated before 1/1/2015 can now be subject to the procedure if the borrower requests it ("The institution is also required to include in Stage 3 of the D.E. K, if the borrower comes and submits on his own initiative the information required under this Code for the assessment of his ability to repay his debts, regardless of whether he falls under the above exempted cases of par. Under the previous Code, this was not mandatory for the bank, it was simply left to its discretion (also on the basis of the CBE's circular). Therefore, it is a valuable opportunity for borrowers of such terminated loans to resort to the procedures of the Code in order to find a compromise solution. It should be noted that once the Code procedure is initiated - and until its conclusion - the credit institution will not be able to accelerate enforcement actions.
To sum up, it is important to stress that the Code provides a framework for a good faith cooperation between the borrower and the credit institution in order to find a viable and, above all, long-term settlement solution. From our experience so far in the respective arrears departments of credit institutions, the proposals given were usually not aimed at a long-term and sustainable arrangement but at providing the credit institution with more complete security, which sometimes also made it a condition that further security be obtained in order to make a proposal for an arrangement. Obviously, the banks had the upper hand in this respect that the traditional contract law gave them, before the legislator of the Code intervened decisively in favour of the borrower on several points (see above). For this reason, the introduction of the Code is ultimately considered to be in the interests of borrowers, since there are now predefined rules in the hitherto unregulated and thus prone to abuse, the field of negotiation with banks.