Opposition MPs from the Left Alliance and Social Democratic Party grilled government ministers on Wednesday over a new provision allowing banks to jack up interest rates on private home loans under certain circumstances. The furore was set off by a report in Wednesday's Turun Sanomat revealing that banks have negotiated with quasi-governmental agencies to create a clause allowing greater flexibility in loan arrangements for private individuals. Banks already have the right to unilaterally raise interest rates on business loans if the bank faces financial ruin. The new clause would allow banks to implement temporary interest rate hikes on private home loans as well. Only in Case of Bankruptcy According to the new clause, a bank would not be able to raise interest rates unless it was on the brink of bankruptcy, explains Erkki Kontkanen, the head of the Finnish Financial Services' department of legal and taxation affairs. Specifically, if a bank fails to meet the degree of solvency required by law in order to operate, it could choose to raise rates. In addition, the rate hike could not be selectively applied to individual housing loans, but to groups of loans. And if the rate hike succeeds in bringing the bank back into solvency, then the bank is required to lower the interest rate again to normal market levels. The clause cannot be applied to existing home loans. In fact, Nordea is the only bank that has begun inserting the clause into new loan contracts this summer. Opposition Blames Government The government came under fire for permitting the provision to be applied to private home loans. They say that this put ordinary citizens at risk for shouldering the burden of market fluctuations. Banks already have the right to raise interest rates on existing business loans, but this would not be applicable to home loans. Rate hikes could only be put in place three years after the signing of new housing loans. The global financial turmoil of recent days has drawn attention here in Finland to this previously little-known measure. However bankers insist that the legal provision is unrelated to the current worldwide credit crunch. Nordea's New Loans Include Clause
So far Nordea, the nation's biggest lender, is the only Finnish bank to include the clause in housing loan contracts. It has been doing so since the beginning of July. However the bank is not allowed to crank up interest rates for at least three years after a loan agreement is signed -- and then only in case of a crisis that threatens the lender's very existence.
The clause does not affect any loans made before July, or by any other lending institution.
The procedure was drawn up by the Federation of Finnish Financial Services. It was approved by the Finnish Financial Supervision Authority and the Consumer Agency. These agencies are affiliated with the Bank of Finland and the Ministry of Employment and the Economy respectively.