When Can a Bank Terminate a Loan Agreement?
April 9, 2019
Banking law specifies when a bank can terminate a loan agreement with the borrower. Circumstances in which the bank entitles the bank to terminate the loan agreement with the client is specified in art. 75 of this Act. When deciding to take out a loan, it’s important to know these regulations. Today I would like to bring them to you.
The borrower fails to meet the terms of granting the loan.
First of all, the bank has the right to terminate the loan agreement if the borrower did not meet the conditions for granting the loan. The occurrence of such an event is the basis for termination of the loan by the bank or reduction of its amount.
By borrowing from the bank as a borrower, we undertake to use it under the terms of the loan agreement. During the term of this agreement, the bank has the right to control compliance with these conditions on the borrower’s side. Failure to meet any conditions (clauses) included in the loan agreement by the borrower will not meet the conditions for granting the loan. Therefore, the infringement does not have to concern only the essential or most important provisions of this agreement. It is also irrelevant whether the borrower is to blame for failing to meet the terms of the loan agreement. Remember that the bank has the right to terminate the loan agreement in case of violation of any terms of granting the loan, unless it is otherwise written in favor of the borrower in the loan agreement.
What is also important, the bank is not obliged to call on the borrower to stop breaching the terms of the loan agreement before terminating the loan. This contract may, however, impose such an obligation on the bank.
Loss of creditworthiness.
Another circumstance that the borrower is entitled to give the bank the right to terminate the loan or reduce its amount is the borrower ‘s loss of creditworthiness.
Creditworthiness is the ability to repay the loan taken together with interest on the dates specified in the contract with the bank. So the loss of creditworthiness is a condition in which the borrower has lost such financial possibilities. Creditworthiness is tested by the bank before granting the loan. For the purposes of this study, the borrower is required to submit documents and information necessary to assess creditworthiness on the bank’s request.
The bank also has the right to periodically review creditworthiness after granting the loan. According to art. 74 of the Banking Law during the term of the loan agreement, the borrower is obliged to present – at the bank’s request – information and documents necessary to assess its financial and economic condition and enable control over the use and repayment of the loan. If during the term of the loan agreement the borrower would not be obliged to submit the above-mentioned information and documents to the bank, this could be an argument for the bank that this is because he lost his creditworthiness and therefore does not want to be verified.
Loss of creditworthiness may be caused by the causes of the borrower’s fault as well as independent of him (eg dismissal from work, decrease in orders for borrower’s services, etc.).
Threat of bankruptcy.
Another circumstance entitling the bank to terminate the loan agreement is the risk of the borrower’s bankruptcy. As a rule, it applies to entrepreneurs and such entities in relation to which bankruptcy can be announced at all. The risk of bankruptcy is enough, it is not necessary for the bankruptcy to take place. However, this premise may in practice cause interpretation problems. In principle, the basis for the declaration of the entrepreneur’s bankruptcy is its insolvency. Helpful in determining whether there is a risk of bankruptcy can be art. 492 par. 2 of the Bankruptcy and Reorganization Law. It states that the entrepreneur is threatened with insolvency if, despite the performance of his obligations, according to a reasonable assessment of his economic situation, it is obvious that he will soon become insolvent.
However, the bank can not terminate the loan agreement due to the borrower’s loss of creditworthiness or the risk of bankruptcy if he agreed to implement the repair program by the borrower. He can not do this for the duration of the repair program, unless he determines that the program is not being properly implemented by the borrower. The recovery plan will be an action plan agreed with the bank which the borrower should implement to improve his financial situation and prevent insolvency that threatens him.
Other circumstances as a basis for terminating the loan agreement.
Apart from the above-discussed circumstances, the basis for termination of the loan by the bank may also be other than the circumstances stipulated in the Banking Law contained in the loan agreement. At the same time, these circumstances may also be included in the content of the regulations or general terms and conditions applicable to the loan agreement. Therefore, before signing it is always worth reading the contract and its accompanying documents carefully. Circumstances which give rise to the termination of the loan agreement by the bank, other than those specified in the Banking Law, can not be contrary to the provisions of this Act.
Circumstances on which the loan is based are assessed by the bank.
The assessment and determination of whether there were circumstances that give rise to the termination of the contract are the responsibility of the bank. However, this assessment should be based on objective grounds. If the borrower believes the termination of the loan agreement by the bank was unfounded, he may bring a civil case against the bank in court.
Lowering the loan amount.
The amount of the loan granted may be reduced in relation to such a loan that has not yet been fully utilized, i.e. part of the loan granted should remain to be paid to the borrower. Lowering the loan amount in practice means that the borrower loses the right to demand the withdrawal of the unused part of the loan from the bank.
What is the effect of terminating the contract?
The termination of the loan agreement by the bank has the effect that upon the end of the notice period, the bank’s claim for the repayment of the loan together with interest due becomes payable. This means that upon expiration of this period the borrower should return to the bank the entire amount of the loan together with interest for the time of using the loan.
If the loan was not used by the borrower, i.e. no money was made available by the bank, the termination of the loan agreement has the effect that the borrower’s claim for payment of the loan expires. In this situation, the interest is not due to the bank, because the borrower did not use the bank’s funds from the loan.
In what period can the loan agreement be terminated?
The deadline for terminating the loan agreement in accordance with the Banking Law is 30 days, and in the case of a bankruptcy risk for the borrower – 7 days. The provisions of the loan agreement can only extend this period, they can not shorten it. Possible contractual provisions authorizing the bank to terminate the contract in shorter or immediate terms would be invalid.
The deadline for terminating the loan agreement begins to run from the moment when the borrower’s termination took place in such a way that he could become familiar with its content. The loan is terminated by submitting a declaration to the borrower on behalf of the bank. This should be done in writing.
Termination of the consumer credit agreement.
The provisions of the Banking Law regarding the termination of the loan agreement also apply to loan and money loan agreements concluded by the bank in accordance with the provisions of the Act of 12 May 2011 on consumer credit, in the scope not regulated in this act. This Act stipulates that the content of the consumer credit agreement should contain the conditions for termination of the contract. So in the case of consumer credit, these conditions can not be recorded in the bank’s regulations.
The act on consumer credit regulates only termination of a renewable credit agreement. The revolving loan agreement ( creditor ) has the right to terminate if the consumer fails to meet obligations regarding the terms of granting the credit specified in the contract and a negative credit risk assessment of the consumer. They are therefore similar to those discussed above, defined by the Banking Act
Termination of the contract to the consumer should be made on a durable medium. The answer to the question of what is a durable medium can be found here: “Consumer’s rights before entering into a consumer credit agreement.” The time limit for terminating a renewable credit agreement by a bank specified in the credit agreement can not be shorter than 2 months. The bank is obliged to inform the consumer about the reasons for termination not later than before the end of the notice period.
Can the death of the borrower cause the termination of the loan agreement?
The bank can not terminate the loan agreement due to non-payment of the loan after the borrower’s death until the deceased borrower’s heirs were established. The heirs may be responsible for paying back the loan in a limited or unlimited manner, depending on whether they have accepted a fall with the benefit of the inventory or simply. You can read more about this topic here: ” Credit and the death of the borrower”. After determining the heirs, the bank should call them to repay the loan in place of the borrower who died. If the heirs, despite the call, do not pay the loan, the bank may terminate the loan agreement with them.
If, on the other hand, the borrower died before the bank pays him the loan, the claim for the loan payment is not inherited. In this situation, the loan agreement expires.