What expenses are reasonably incurred when mortgage loans are repaid prematurely?
In early March, the Czech National Bank published its opinion on expenses that can be regarded as reasonably incurred in connection with the early repayment of a consumer loan for residential purposes. What are the CNB’s views on this? Shall we expect any significant changes to their calculation?
In its opinion, the CNB decided to harmonise the practice in the mortgage loan market, as individual providers have been requesting various types of expenses associated with the premature repayment of loans from their customers upon early repayments.
According to the CNB, reasonably incurred expenses are expenses that in their substance are necessary and whose amount can be justified for each particular case. Unjustified travel expenses or expenses for redundant meetings with customers therefore do not meet the above criterion.
The CNB also believes that expenses not affected by whether (and when) a customer decides to repay a loan prematurely do not meet the criterion of expenses associated with premature repayment. This primarily involves expenses relating to commissions paid by the loan provider to the mortgage loan intermediary, which used to be quite common. Such commissions represent expenses that have been incurred to conclude a loan contract but are not associated with premature repayment. The same applies to expenses incurred in connection with a decrease in the creditor’s interest revenue or interest expense arising from the creditor’s debt.
The CNB specifies that only expenses that have been provably recorded in the creditor’s accounting books will meet the applicable criteria. This excludes intercompany expenses incurred, for example, by one department in favour of another department of the creditor or expenses arising from internal interest rate swaps. On the other hand, eligible expenses will primarily be expenses for a proportionate part of the salary of the employee handling the application for the premature prepayment, or fees paid to the Real Estate Cadastre.
The CNB concludes that other expenses may also be charged to the customer but must have been incurred reasonably and with due managerial care, as a due manager should take into account that customers may exercise their right of premature repayment.
Entities providing consumer loans for residential purposes should therefore evaluate the manner in which fees for premature repayments are calculated and adjust them appropriately where necessary. It should also be assessed whether it is necessary to adjust related contracts with intermediaries.