In June 2016, the Armenian Parliament passed a law (amendment to the Civil Code and inter alia in Article 236), with which it proclaimed that any limitations on the rights of the pledgor to repledge the object of the original pledge is null a void. What does this mean in a layman’s terms? It ultimately means that any person who has taken out a loan against a piece of property such as a house can effectively use the same property (yes, the same house) as security to take out another loan. Since January 1st, 1999 (the day the Civil Code came into force) borrowers were at the mercy of their lenders (in Armenia’s case usually the banks) when it came to repledging their property that was used as primary collateral. The lenders usually charged exorbitant fees ($300 - $3000) to provide a piece of paper to the borrowers notoriously known as Consent to a Secondary Pledge.
Obviously, this was a very important legislative amendment that somehow liberalized Armenia’s secondary mortgage markets, as well as increased access to financial resources for Armenian businesses and ordinary consumers of lending services. Additionally, it intensified competition among lenders who introduced financial incentives and marketing techniques to lure the best borrowers into their balance sheets. Concurrently, this amendment created another problem (that’s usually the case, right?) and this time for unsecured debt holders, but first things first. Let’s explore two cases when this piece of legislation might create problems in financial markets.