In 2016, primarily to correct the legislative concept in relation to collateral and to ease the financing activity of Hungarian financial institutions, the Hungarian Parliament adopted a significant amendment package to the new Civil Code.
Although forms of fiduciary collateral such as purchase options and assignment of claims had been constant parts of the Hungarian collateral regime under the former Civil Code, the new Code introduced an overall prohibition of fiduciary arrangements as collateral (with some specific exemptions related to the relevant EU Directive on financial collaterals).
Under the Parliament’s new amendments to the Code that became effective on July 1, 2016, however, banks may again create a purchase option as fiduciary collateral. This provides an additional security option for banks, as in case of non-payment the bank may unilaterally acquire the subject asset of the purchase option. Similarly, the assignment of claims or ownership title transfer with collateral purpose may now again be part of the security structure of financing transactions.
Nonetheless, fiduciary collateral remains excluded from the security structure if the borrower qualifies as a consumer.
The amendments also eliminated the requirement of the consent of the debtor as a condition for the assignment of the bank’s claims to third persons.
Because the separated mortgage that had been introduced by the new Civil Code was insufficient in terms of the operation of mortgagee banks, the amendment that became effective on October 1, 2016, reintroduced the independent mortgage with regulations based on market standards.
Only financial institutions may be the beneficiaries of independent mortgages, which may be established over a real property even without an underlying claim. The independent mortgage is not accessory to the underlying claim and may be transferred without the underlying claim in whole or in part. The intention of the legislator with the reinstatement of the independent mortgage was to promote the refinancing of commercial banks through the mortgage bond market in order to enhance the financing activity of the banks.
The existing separated mortgages can be converted to independent mortgages upon the request of the mortgagor under a procedure specified in the amendment act providing such titleholders the opportunity to improve their legal position.
Satisfying the long need of the financial market the legislator acknowledged the security trustee concept in the new Civil Code. Based on practical experience the recent regulation on security trustees was also amended. According to the earlier regulation, a security trustee may only be nominated at or after the conclusion of the mortgage agreement. The new regulation enables the nomination of a security trustee prior to the conclusion of a mortgage agreement as well, which provides the security trustee the right to conclude the mortgage contract in its own name but for the benefit of the other mortgagees.
According to the amendment, a security deposit may be created, not only on payment account balances, but also by expanding the scope of assets serving as collateral on deposited funds available on deposit accounts.
The amendment act has brought changes also with respect to the previously introduced transfer of contract. Previously, the collaterals of the transferred contract terminated without the mortgagor’s approval. Market experience has shown that it is not appropriate to eliminate the collateral related to a contract in the case of a new party’s entering. Due to the amendment, the collaterals related to the rights acquired by the party entering into the contract remain, even without the consent of the collateral provider.
By Zoltan Varga, Partner, Nagy es Trocsanyi
This Article was originally published in Issue 4.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.