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. Last Updated: 07/27/2016

Borrowers Get a Break From Fees

Borrowers will now have more legal protection against hidden fees -- a widespread practice that has plunged many thousands of consumers into the nightmare of unexpected debt.

Under new Central Bank rules that came into effect Sunday, banks must disclose the effective interest rates on their loans, and some banks have been scrambling to change deceptive pamphlets and forms before the regulations came into force.

But as they stand, the rules leave at least one crucial loophole: Banks can still offer loans that require borrowers to open special accounts that often come with heavy charges.

Consumer rights activists were hoping the State Duma would deliver a parallel blow against this kind of deception by making it punishable under federal law. But as the spring session of the Duma wound down last week, deputies said it was too late to pass the legislation because the country's powerful banking lobby had succeeded in stalling the vote.

"As it stands, the [proposed] legislation gives the priority to borrowers and does not look out for the creditors' interests," said Anatoly Aksakov, president of the Association of Regional Banks, the banking industry's main lobby.

Banks are pushing for a key amendment that would allow them to force nonpaying borrowers into bankruptcy, a common recourse for banks in the West. They are also calling for mortgages to be kept legally distinct from consumer loans, Aksakov said, and for a centralized database of credit histories that would allow them to better assess a client's likelihood of defaulting.

"The balance of interests still needs to be adjusted in favor of the creditors," said Aksakov, who is also deputy head of the Duma's Committee on Credit Organizations and Financial Markets.

Activists for consumer rights were outraged by this approach to legislation. "In legal relationships between banks and citizens, the law must work toward the defending of the economically weaker side of the equation, and that is clearly the citizen," said Andrei Vyugov, head of Blokpost, a consumer protection agency.

In a March interview, Aksakov said the law on consumer loans would be passed before the Duma's summer recess, but he conceded Friday that the earliest it could now be expected was during the fall session.

Until then, the Central Bank will try to curb the problem alone.

Alexei Simanovsky, head of the Central Bank's oversight department, said "a serious discussion" awaits banks that do not comply, and some may even face sanctions, Interfax reported. Ninety percent of the country's banks were ready to fall in line, he said.

But critics said loopholes in the document might allow banks to continue with business as usual.

"The idea is that [banks] would disclose all relevant costs, but then the question comes: What do you define as relevant costs?" said Altynay Davletova, vice president of structured finance at Merrill Lynch in London.

A bank, for instance, can still require its clients to open a special account in addition to taking a loan. Though the fees on the loan may seem fair, the cost of the special account can be twice as high, and would not need to be disclosed under the Central Bank's new regulations.

Blokpost, in cooperation with the Federal Consumer Protection Agency, filed a class-action lawsuit against Russky Standart over this practice last year. But in March a Moscow District court was unable to find any breach of the law, and sided with Russky Standart.

Mikhail Korshunov, head of product development at Nomos Bank, said it would take two to three months for their branch network "to implement the bureaucratic changes," including those to its contracts and commercials.

Home Credit, a Czech bank that was found guilty by the Supreme Court this year of charging hidden fees, said the experience of similar regulations in other countries showed that profitability would not be affected.

But banking experts predicted some backlash, and even pointed to the risk of widespread defaults.

"One of the risks is that borrowers who have taken out a loan in the past could come back and say none of the new disclosures had been explained," said Davletova of Merrill Lynch. If this leads enough angry borrowers to default on their loans, the banking sector could face a crisis.

"When regulation imposes additional costs, that should weaken the banks," Alexander Batchvarov, head of international structured credit research at Merrill Lynch, said by telephone Friday.

"The bank can become a weaker servicer, and that effects the bank's portfolio," he said. "Investors would certainly look at this."