Mortgage borrowers protection standard to become effective from January 2025
The Banking Standards Committee has adopted the Standard for Protecting the Rights and Legitimate Interests of Mortgage Borrowers approved by the Bank of Russia.
The main purpose of the document is to minimise the proliferation of high-risk mortgage lending schemes and to ensure that banks provide borrowers with more detailed information about lending terms and associated risks.
The standard is aimed, in particular, at preventing cases where banks would transfer mortgage funds not to an escrow account but rather to a letter of credit where they would be held for a long time without being used for their intended purpose. The ban on using letters of credit to hold mortgage borrowers’ funds for a long period will reduce households’ risks, since letter of credit funds are not protected by the deposit insurance system, unlike the funds held on escrow accounts.
It will be prohibited to recognise the amount that will be returned to the buyer after the purchase of a flat (cashback) as part of a down payment. These requirements aim to ensure that buyers use their own funds to make a down payment as the lesser is their share in the total down payment, the higher is the risk that buyers would overestimate their financial capacity and eventually lose both the money and the flat.
Banks will not be allowed to receive a fee for setting a reduced mortgage interest rate from the seller (developer) if this leads to an increase in the real estate price.
The mortgage standard sets out the principles for developing mortgage contract terms and conditions and describes the factors to be taken into account by creditors when determining the loan amount, loan term, possible fees, and other loan parameters. The document recommends concluding mortgage contracts for not more than 30 years and for an amount not exceeding 80% of the fair value of the mortgaged property.
It also specifies what data and risks banks must disclose to borrowers in a clear form before signing a mortgage contract. Credit institutions must answer borrowers’ questions about the mortgage loan and related services.
The standard will become mandatory for banks from 1 January 2025 and will apply to the contracts that will be concluded after that date. From 1 January, when receiving a fee for setting a reduced interest rate from borrowers, banks will also be obliged to honestly inform them about the difference it would make to the total cost of credit. This will allow borrowers to assess whether they can benefit from the service before making a decision. In addition, banks will be required to return the unused portion of such fee upon early repayment of the loan.
The Banking Standards Committee was established in May 2024, with two-thirds of its members being representatives of banks and banking associations.