Private lenders restricted
06 February, 2014
A new regulation introducing new ceiling to the interest rate on mortgage loans issued by private lenders entered into effect on 28 January. The changes are expected to insure better protection of consumers. But financial market analysts find changes of a cosmetic character that cannot solve the tricky mortgage problem.
To alleviate the social problems of evicted people who may lose their single dwelling space due to unpaid mortgages authority decided to restrict private mortgage lenders within certain limits. According
to official statistics, out of 1300 eviction cases only 70 cases or around 5% came upon the banks and the remainder fell upon private lenders, who unlike other financial institutions -including banks, micro-finances and credit unions - are not regulated by the National Bank of Georgia (NBG).
According to the changes made to the Civil Code and the law on Execution Procedures that became effective recently, notary registration of contracts on mortgage loans becomes obligatory. Notaries must explain to the lender the possible outcomes if the contract terms on loans are violated.
Also, ceiling interest rates are introduced: (except for loans below GEL1000) the rate shall be no higher than 12th of 2.5 times the annual average of monthly annual base interest rates set by the NBG for commercial banks. The latter will enter into force from 1 March 2014.
This cumulative rate is published on the official NBG web-page regularly each month. If a client becomes insolvent the real estate put as collateral to the loan can be handed into the ownership of the creditor only if the loan agreement envisages such a circumstance.
The sale of the property under mortgage can be possible through three forced auctions. Initiators of the idea believe this will mitigate the drop of the initial price and it will get closer to the market price. As a matter of fact, real estate was sold through forced auctions much below the market price until this change. However the changes cover only loans issued by private lenders, while bank-issued loans also imply some risks for consumers. Therefore sector pundits think the suggested changes are just a cosmetic touch to the real problem that on the one hand sets out no real restrictions to private lenders – but on the other, financial institutions including banks remain as free-handed as ever.
By these changes the state just removes responsibilities against borrowers who apply to private lenders, analysts said. Lia Eliava, a financial market analyst, believes mortgage is a serious problem to the entire financial sector of Georgia, and government must undertake a more comprehensive approach to the problem than the suggested one.
She finds the cap rate still pretty high as far: based on the current market rate it averages to 4% per month or 48% per year whereas the similar rate stands at 12% as international practice suggests.
Besides, private lenders today offer around 3% - that means now they will go higher. Execution also remains a problem. The changes allow borrowers to go to court if they do not agree with the property seizure but the execution process will not be suspended until the court makes a decision.
The law does not provide details on how to behave if the court (that may last for 2-3 years as civil courts normally do) settles in favor of the borrower whose property has already been sold while the court was on.
The Economic Policy Research Center, in its recent research, fears that the requirement on notary involvement may increase costs to borrowers and it can be done easily and cost-free at a public registry. Some analysts think the cap rates cannot alleviate high costs on loans inasmuch as private lenders may increase the cost via indirect payments to offset the losses.