RF Civil Code Amendments on Early Loan Repayments.
Legal Update No. 284.
Goltsblat BLP advises that Federal Law of 19 October 2011 No. 284-FZ “On Amendment of Articles 809 and 810, Part Two, of the Civil Code of the Russian Federation” (the Federal Law) came into affect on 1 November 2011.
It should be noted that the Federal law takes into account certain recommendations made in Information Letters of the Presidium of the Supreme Arbitration Court (SAC) of the Russian Federation dated 13 September 2011 Nos. 146 and 147 (Information Letter No. 146 or No. 147, respectively).
Amendments to art. 809 of the RF Civil Code
The amendments made by the Federal Law to art. 809 of the RF Civil Code stipulate that, in the event of early repayment of a, interest-bearing loan, the lender is only entitled to receive from the borrower interest accrued until the day the loan is repaid in full or in part. The key clarification made, prior to adoption of the new law, in clause 5 of Information Letter No. 147 generalised the position taken by the courts that a bank may not demand reimbursement of interest for the entire proposed term under a loan agreement if the loan is returned early. This conclusion is based on 1) an interpretation of art. 809 of the RF Civil Code, which specifies that interest under a loan agreement may be paid only for use of the borrowed funds, so claims for recovery of interest on the loan for the period followingits repayment contravene the legislation, and 2) the fact that the borrower does not violate its obligations under the agreement by repaying the loan early.
Clause 6 of Information Letter No. 147 goes on to say that the provisions of the RF Civil Code concerning recovery of interest due are, indeed, intended to protect the interests of creditors, specifically by making borrowers liable for reimbursing creditors for lost profit associated with early loan repayment. The Presidium of the SAC draws attention, however, to the fact that, if a bank receives a loan back ahead of time, it has an opportunity to place these funds on market conditions, so it has no lost profit as a consequence, since the funds are provided to a different borrower and bring in an income.
Amendments to art. 810 of the RF Civil Code
Art. 810 has been supplemented with an additional provision permitting an individual who borrows money to pay back early (in full or in part) an interest-bearing loan for personal, family, domestic or other use not associated with doing business, on the condition that thirty days’ notice (or less, if so specified in the agreement) is given to the lender of the intention to repay the loan. This is also the position expressed in clause 12 of Information Letter No. 146, which states that a loan agreement condition precluding early repayment and (or) securing commission to be charged for early repayment infringes on the rights of consumers. It also rejects the banks’ arguments that they would incur any costs in extending the loan, since the commission charged as the actual costs incurred by the bank from early loan repayment was envisaged in advance in the agreement and constitutes, in essence, payment for early loan repayment, which runs counter to the legislation.
Nor does Information Letter No. 147 support the banks’ position that the borrower’s rights are not violated by a condition in the agreement on charging commission for early loan repayment since the borrower is notified of this in advance. The Presidium of the SAC states that the legislation on consumer rights envisages the borrower’s right to withdraw from the agreement by returning everything received under the transaction and reimbursing costs actually incurred (art. 32 of the Law “On Consumer Rights”). This supports the position of Rospotrebnadzor, which has repeatedly asserted the impermissible nature of loan agreement conditions on liability for early fulfilment, arguing that such actions constitute one method for due discharge of the obligation.
The given early repayment right does not apply to any loan agreements with legal entities and individual entrepreneurs, as the legislation provides for the possibility of repaying an interest-bearing loan early only with the consent of the lender (i.e., only on the condition that this right is secured in the relevant agreement).
One major innovation made by the Federal law is that the new provisions of arts. 809 and 810 of the RF Civil Code now also apply to relations deriving from all sorts of loan agreements concluded before the Federal Law came into effect. This means that borrowers who fulfil their obligations early under agreements concluded before 1 November 2011 will be entitled to claim a reduction in the sum of a loan repaid early by the amount of the interest for the period during which the funds were not used. If, moreover, the borrower is a natural person, a reduction may also be claimed by the amount of the commission for early repayment of the loan (if such commission is envisaged by the agreement).
Associate, Banking and Finance Practice,
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