26.07.2010 13:39
On Friday, the District Court of Reykjavík ruled that the contractual interest rates on exchange rate-linked loan agreements shall not remain unchanged without provisions linking the loans to currency exchange rates. The Court ruled in favour of Lýsing hf., which had filed suit against a borrower with an exchange rate-linked motor vehicle loan, demanding that the interest terms be amended in view of the derogation of exchange rate linkage. The Court decided that the Central Bank of Iceland's non-indexed interest rates should be used as a basis for interest rate determination. The decision will be appealed to the Supreme Court, which will probably hear the case this fall. The District Court judgment came on the heels of two Supreme Court of Iceland decisions, handed down on 16 June, which deemed exchange rate linkage unlawful. Since those judgments were rendered, both the outstanding balance of the loans falling within their scope and the interest rates pertaining to those loans have been up in the air. As is well known, the Central Bank (CBI) and the Financial Supervisory Authority have issued guidelines specifying that the CBI's nominal interest rates should form the basis for interest calculation. That move has proven controversial, but it is clear that if the Supreme Court upholds Friday's District Court decision, all loans containing unlawful exchange rate linkage provisions will be handled according to the guidelines.