Lenders beware – 48 is the new 60
For the first time in four decades since the enactment of the Money Lenders Ordinance (Cap. 163) (the “MLO“) in 1980, the Legislative Council (“LegCo“) yesterday passed a resolution to amend and lower the two interest rate ceilings stipulated in the MLO.
What are the amendments?
Sections 24(1) and 25(3) of the MLO will be amended so that:
the legal ceiling on interest rates (the “Excessive rate“) be lowered by 60% per year at 48% per year; and
the exorbitant rate (the “Exorbitant rate“) be lowered by 48% per year at 36% per year
(together the “Modified interest rate limits“).
Schedule 3 of the Money Lenders Regulations (Cap. 163A), which is a form of summary of the relevant provisions of the MLO to be included or attached to a note or memorandum to a loan agreement pursuant to Section 18 (1)(b) of the MLO, will also be amended by deleting specific references to limit threshold amounts and referring to the relevant sections of the MLO which set out the amended Interest Rate Limits.
The amendments are made to catch up with current times and consistent with the Hong Kong SAR Government’s objective of protecting the public interest, encouraging and promoting responsible borrowing through regulatory measures and public education. public and to mitigate the risks posed by excessive borrowing, particularly by individuals. consumers.
Click on here to view LegCo’s filing on amended interest rate limits.
When do the changes take effect?
The amended interest rate limits come into effect on December 30, 2022. Such limits will have no retroactive effect in accordance with Articles 24(3) and 25(9) of the MLO, which provide that the interest rates contained in the agreements currently in force will continue to apply after the entry into force of the amended interest rate limits .
In other words, lenders are not required to modify or reopen existing agreements entered into before December 30, 2022 that charge an effective interest rate greater than 48% per annum, but will be required to adopt the limits of modified interest rates in any loan agreement entered into. from (and including) December 30, 2022 which are subject to MLO.
Consequences of a violation
The consequences of breaching the amended interest rate limits under the MLO will remain unchanged, including:
- Criminal offense and penalty – Under section 24(1) of the MLO, any person, except authorized institutions as defined by the Banking Ordinance (Cap. 155) (“AI“), who lends or offers to lend money at an effective rate which exceeds the excessive rate commits an offense and is liable under section 24(4) of the MLO:
- on summary conviction, a fine of up to HK$500,000 and imprisonment for up to 2 years; and
- on conviction by indictment, a fine of up to HK$5,000,000 and imprisonment for up to 10 years.
- Excessive rate – Any contract submitted to the MLO and charging (or purporting to charge) an effective rate of interest in excess of the excessive rate, together with any guarantee or other credit support given to secure that contract, is unenforceable under Article 24(2). ) of the MLO.
- Exorbitant rate – Under section 25(3) of the MLO, if the effective rate of interest under an agreement for the repayment of a loan or for the payment of any interest on a loan exceeds the rate of extortion, the transaction is presumed to be exorbitant unless it is proved by the facts that the transaction is reasonable and fair. If the transaction turns out to be extortion, a Hong Kong court can reopen the transaction and make whatever orders it deems appropriate.
What does this mean for the money lending industry in Hong Kong?
(1) Application of Articles 24 and 25 of the LMO
- Non-AI lenders – The excessive rate and the exorbitant rate apply to all lenders (whether or not they are approved lenders), except (i) AIs, (ii) loans made to a Hong Kong company or abroad whose paid-up share capital is not less than 1 million Hong Kong dollars (or its equivalent in another currency freely convertible into Hong Kong dollars) and (iii) persons granting the loan referred to in subparagraph (ii) above. Note that although IAs are not subject to the provisions of the MLO and affiliates of IAs are exempt from obtaining a pawnbroker’s license, affiliates of IAs are subject to Articles 24 and 25 of the MLO.
The application of the amended interest rate caps would depend on:
- whether the lender is carrying on (or purporting to be carrying on) a business of lending money in Hong Kong at the time of entering into the agreement; and
- the appropriate law of the agreement being the law of Hong Kong when assessed objectively, which includes relevant factors such as the place of business of the lender and the place where the loan is advanced and repaid in determining the nexus of the transaction with Hong Kong. In the event that the loan agreement is governed by foreign law, the Hong Kong court will assess whether the appropriate law of the agreement should have been Hong Kong law.
- AI – Although IAs are not subject to MLO under MLO Section 3, the Code of Banking Practices (the “CCP“) states that IAs should not charge effective interest rates that would be deemed exorbitant under the MLO, or otherwise IAs should justify that charging any effective rate above the exorbitant rate (but not exceeding the excessive rate ) was reasonable and fair.
Unless justified by exceptional monetary conditions, the effective interest rate charged on any loan advanced by the IAs must not exceed the excessive rate as indicated in the MLO.
- Summary – Unless it is clear that the Lender and/or the Loan Agreement entered into by the Lender is not subject to MLO or CBP, the Lender will not enter into any new Loan Agreements effective December 30, 2022 that imposes effective interest rates (as defined in the MLO) that exceed the amended interest rate limits.
(2) New Loan vs. Old Loan Modifications
Instead of entering into a new loan facility transaction, it is not uncommon for lenders to sometimes prefer to structure a term extension or refinance by modifying a legacy loan agreement in order to take advantage of, among other things, the benefit of any existing warranty and credit. support package provided.
If this Legacy Loan Agreement provided for an effective interest rate greater than 48% per annum, and the proposed amendment to extend the term of the Loan was to be drafted and completed on or after December 30, 2022, the Lender would, within these circumstances, determine whether the existing effective rate may need to be adjusted in accordance with the amended interest rate limits even though technically the old loan (including interest rates and other terms) was already in effect prior to the entry into force of amended interest rate limits.
(3) Guidance Proposed by HKMA on Prior Notification
In light of the amended interest rate limits and in accordance with the letter dated June 16, 2022 from the Hong Kong Monetary Authority (“HKMA“) to the Hong Kong Banking Association:
- HKMA expects IAs to take steps to migrate customers who are currently subject to effective interest rates above 48% per annum to credit products that charge lower effective interest rates.
- HKMA has also provided draft guidelines for feedback regarding prior communication to customers. The proposed orientations include the following measures:
From a date to be confirmed by HKMA to December 29, 2022
Notification to all customers
RNs must inform potential and existing clients of the changed interest rate limits at the time of credit application and at the time of credit application approval.
Before December 30, 2022
Notification in the event of a change in the interest rate(s) of the inherited arrangements
If the IA decides to revise the interest rates of their existing credit products (the “Revised credit interest“) by December 30, 2022, they must comply with the customer notice requirements set forth in CBP.
If the revised credit interest is expected to exceed 48% per annum from December 30, 2022, RNs are required to advise clients of:
No later than October 31, 2022
Special requirements for customers regarding new credit agreements subject to interest rates of 48% and more per annum
IAs must inform all customers who enter into a new credit agreement no later than December 29, 2022 and who will be subject to effective interest rates above 48% per annum from December 30, 2022 on:
*The customer guidance and notification schedule shown above is subject to change and will be confirmed in a circular to be issued by HKMA as soon as possible after the resolution is passed by LegCo.
Urgency and next steps
The resolution was passed on October 26, 2022. Although lenders are not required to modify old agreements that charge effective interest rates above 48% per annum (subject to the points raised in paragraph (2) (New loan vs changes to an old loan) above), as a good practice, lenders (including IAs) should begin to review the interest rate terms of their existing and future loan and credit agreements to ensure that borrowers and customers are given sufficient written notice.
Failure to comply with the amended interest rate limits risks severe penalties that should not be taken lightly. Industry stakeholders should be prepared to adopt appropriate measures to ensure compliance with the amended interest rate limits from 30 December 2022.
The application of MLO to a loan agreement and/or non-AI lender, including the implications of changes to any legacy transaction, is fact-sensitive and should be considered on a case-by-case basis. We regularly advise credit funds and other non-AI lenders on their lending transactions, including MLO analysis, and are well placed to assist you in this regard.
To the extent that you may require assistance in performing a document review of any legacy transaction documents, we also have a number of legal technology offerings available to help you achieve cost savings.