2015-05-04
The Bank of Lithuania has assessed the rent-to-own service when a service provider (most often a construction company) provides customers with the possibility, after termination of their lease agreement, to acquire the housing being leased and credits the lease contributions into the housing price.
The Bank of Lithuania has assessed the rent-to-own service when a service provider (most often a construction company) provides customers with the possibility, after termination of their lease agreement, to acquire the housing being leased and credits the lease contributions into the housing price. Such a lease relationship is not within the area of the Bank of Lithuania’s regulation; however, this service may pose serious risks to consumers. Therefore the Bank of Lithuania has applied to the State Consumer Rights Protection Authority, drawing attention to the risks that are likely to arise for the users of this service.
The Bank of Lithuania currently only regulates by its Responsible Lending Regulations (RLR) the activities of credit institutions in providing housing loans to customers. In the Bank of Lithuania’s opinion, in the provision of the lease to own housing service, the RLR requirements would not be breached if two major conditions would be satisfied:
1. There must not be any advance obligation by a credit institution to grant a loan for the acquisition of the housing being leased, i.e. there must not be any advance agreements between a lessor or lessee and the credit institution regarding a loan for the acquisition of the housing being leased.
2. The minimum initial contribution required by the RLR can be paid as a lease fee; however, before granting a loan for the acquisition of the housing, the credit institution must assess compliance with RLR requirements. A credit institution must make sure that all lease contributions have been paid from the customer’s own funds and take into account the property’s actual value established during the property’s repeated valuation at the end of the lease term.
The Bank of Lithuania draws attention to the fact that such an initial contribution accumulation method may pose significant risks that the acquisition of the desired housing will fail. Should these risks materialise, customers may lose the lease contributions paid, which were designated for the accumulation of the initial contribution, unless otherwise provided by the lease agreement. The risks depend on the agreement being concluded, but the Bank of Lithuania singles out the few most likely.
The risk of credit non-provision with a change in the consumer’s financial situation. A consumer’s financial situation may change essentially during the lease term. When the time for buying the housing comes, the financial situation may no longer satisfy a credit institution’s requirements applicable to those borrowing for the acquisition of housing.
The risk of credit non-provision with a change in the RLR's regulation of credit institutions or other legal regulation. A customer’s solvency, the maximum ratio of a loan’s monthly instalment and monthly revenue, and the required minimum amount of the initial contribution are evaluated preliminarily based on the regulation applicable during the conclusion of a lease agreement and taking into account the customer’s financial situation; however, the credit institution would only take a decision on granting a loan upon the expiry of the lease term. The financing conditions during the lease term may change substantially and the acquisition of the housing by the customer may become impossible.
The risk of a change in housing prices. With a change in the price of the housing being leased (it having increased or decreased), depending on the lease terms and conditions, a consumer may be obliged to pay more of his own funds than was projected at the beginning of the lease term. As a result, the consumer may be financially incapable of buying the housing he had leased.
Additional risks. A consumer may be subject to other risks unrelated to credit conditions, housing prices or regulatory environment; it is therefore recommended to closely assess all terms and conditions of agreements being concluded. Such additional risks may, for example, be related to the deterioration of a lessor’s financial standing or the service provider’s abuse of the right of the termination of a lease agreement.
Therefore the Bank of Lithuania has applied to the State Consumer Rights Protection Authority, drawing attention to risks that are likely to arise to a service user. As assessed by the Bank of Lithuania, credit institutions should inform customers intending to make use of the lease to own housing service of this service-related risk.
The Bank of Lithuania, in its turn, intends to monitor the development of this service, its provision practices and impact on the housing market. Should unwanted macro-prudential risks come clear, the Bank of Lithuania may initiate respective measures related to this service.
The overall assessment of the service presented by the Bank of Lithuania is not based on the peculiarities of the service provided by a specific service provider. This opinion cannot be taken as an official explanation of legal acts or the Bank of Lithuania’s decision in a specific case.