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Mortgage Regulations not Brought Results

Laws restricting private mortgage lending have failed to remedy the situation in this sector as part of the moneylenders went underground.

They managed to find loopholes in the law and enacted  the new scheme – for example, the law defines the maximum amount of interest on the loan, but now moneylenders give smaller amounts at a higher interest rate, as a result the law is actually broken, but legally – all is within normal limits. In addition, the practice of the payment of interest in the hands remains in effect though unofficially. Accordingly, there is no legal mechanism to confirm or deny the payment of interest.

In order to change this situation, the Association of Banks of Georgia earlier this year initiated a bill in Parliament, according to which,  the payment of loans of private moneylenders will be possible only through the bank. According to President of the Association, such a rule would make debtors more secure, and at least they will have a document confirming the payment to the bank.

“Now they often pay without  having  any  legal confirmation of this,  and cannot even present any evidence in the court ,” – he says. In his words, under the new law,  an agreement for a loan must be registered at the  notary where  the bank account number must be specified.

“Today, the relationship between lenders and debtors is unofficial. In the case of the legalization of their relationship, the transaction will be formalized. The initiative was submitted to the parliamentary committees, but was withdrawn from the discussion due to a number of comments, but the Committee on Sector Economy will soon revert to its consideration “- Gvasalia explains.

In his words,  the activities of private moneylenders harm the prestige of  the banking sector as a whole. Under the new regulations introduced in April 2014, notarization of the loan becomes mandatory by pledging  borrower’s real estate as collateral – this restriction applies only to lenders, while for banks and microfinance institutions the rules remain unchanged. The law obliges the notary to familiarize the borrower with all the terms and the possible consequences of failure to pay the loan when signing an agreement.

A  limit on the interest rates on mortgage loans in the amount of more than GEL 1,000 was also introduced – in particular, the usurers are forbidden to lend at interest rates 2.5 times higher  than the interest on bank loans. The terms of the forced sale of the mortgaged property in case of non-payment of the loan are also changed. In particular, it will be possible to hold the first auction, and two repeated  that, according to the developers of the law,  will allow to sell the property at a price more close to the market price.