Ukraine: banks’ freedom restricted with respect to consumer loans

In its Ruling No. 15-рп/2011 (the “Ruling”), dated 10 November 2011, the Constitutional Court of Ukraine (the “CCU”) ruled that provisions of Article 11 of Law of Ukraine No. 1023-XII “On Consumer Rights Protection”, dated 12 May 1991, as amended (the “Law”) apply to all consumer loan agreements between banks and borrowers not only at the stage of the conclusion of such agreements but also during their performance.

During recent years, Ukrainian court practice has developed in such a way that provisions of the Law were applied to consumer loan agreements only with respect to the manner in which the agreements were negotiated and signed. During the course of their performance, agreements were governed by legislation specifically regulating credit relations.* From now on, regardless of the provisions contained in executed consumer loan agreements, Ukrainian banks will not be able to:

1. charge any fees, interest, charges or other payments not specified in the agreement;
2. set out provisions for interest rate variation that benefit only the bank and/or discriminate against the borrower;
3. reject prepayment of loans or charge additional fees in relation to such prepayment;
4. demand early repayment of a loan in case of non-material** breaches of the agreement by the borrower.

In addition to the above, there are other provisions in the Law that, due to the Ruling, banks must now take into consideration.

Law: Ruling of the Constitutional Court of Ukraine No. 15-рп/2011, dated 10 November 2011.

*Letter of the Supreme Court of Ukraine “Summary of the Court Practice of Considering Civil Cases Arising from Credit Legal Relations”, dated 7 October 2010.

**According to the Article 11 of the Law, the following breaches may be deemed to be material: (i) 1-3 months payment delay (depending on the type of the loan); (ii) indebtedness exceeding the amount of the loan by 10%; (iii) delay of more than one payment exceeding 5% of the loan; etc.