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05 October 2007
Until recently, Portuguese credit institutions obtained significant additional income in the consumer finance sector by using certain inequitable interest rate calculation methods - for example, by always rounding up rates or applying the highest Euro Interbank Offered Rate values in the relevant period. The application of such methods is believed to have earned Portuguese credit institutions total additional profits of approximately €70 million a year.
Following protests by consumer protection associations, the government enacted Decree-Law 240/2006. The decree-law sets forth mandatory rules for the calculation of interest on mortgages, which was one of the sectors in which most abuses were detected, and requires that: (i) the interest rate must be rounded up to the nearest thousandth and may be rounded up only if the last digit is five or greater; and (ii) when an index is used, the interest rate must correspond to the average quoted value of the index for the month preceding the period for which interest is calculated.
The decree-law applies fully to existing mortgages as of the date on which it came into force. Therefore, borrowers may present claims against credit institutions to obtain reimbursement of interest payments which were demanded in breach of the decree-law.
Following the publication of the decree-law, the government, perhaps encouraged by the plaudits it received in the media, further analyzed the issue and decided to extend the scope of the legislation to other banking operations. It achieved this on May 8 2007 by enacting Decree-Law 171/2007, which applies the rules enshrined in the previous decree-law to all financing operations. However, the new decree-law raised a difficult question for credit institutions: should its provisions be applied only to banking operations involving the general public or also to loans made to professional borrowers?
At first glance, it seems reasonable to limit the provision to non-professional customers, as professional borrowers should be better prepared to deal with credit institutions and should not require the same level of protection as ordinary consumers. Furthermore, certain arrangements agreed between financial services professionals (eg, derivatives deals) potentially involve criteria for the determination of interest rates which differ from those foreseen by Decree-Law 240/2006; such alternative criteria, although agreed and desired by both parties, would be rendered null and void if the new regime were applied to them. However, following consultation with the Portuguese Association of Banks, the government has surprisingly decided that Decree-Law 171/2007 applies to financing agreements involving general consumers and professionals alike.
Although the association is still pressuring the government to review its position, it appears that at least four of Portugal's five largest banks have started to apply the provisions of the decree-law in most transactions with professional borrowers, which may give the government some basis for maintaining the regime, at least for now.
For further information on this topic please contact André Fernandes Bento at AM Pereira, Saragga Leal, Oliveira Martins, Judice e Associados - Sociedade De Advogados by telephone (+351 21 319 7300) or by fax (+351 21 319 7400) or by email (firstname.lastname@example.org).
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