New Economic Rights Alliance brings heat to the banks
Attorneys Liddle & Associates, acting on behalf of NewEra, has given the NCR 10 days to respond to its demands, failing which it will refer the matter to the Consumer Commission and ask it to subpoena the banks for the requested information.
Securitisation is the financial term used to describe the pooling and on-selling of mortgage, credit card, vehicle and other loans. NewEra argues that banks lose legal title to these loans as soon as they are securitised.
NewEra, which is a non-profit organisation with 135,000 members, has made several failed attempts to bring legal action against the major banks on the grounds that the banks are foreclosing on defaulting borrowers, forcing them out of their houses and repossessing their cars, when in fact they have no legal standing to do so. The banks managed to throttle the High Court actions on technical legal points.
The banks cited in the complaint are Absa, Abil, Firstrand, Investec, Nedbank, Standard Bank, Sasfin and Imperial.
“Our case took no more than 45 minutes to argue,” says Scott Cundill, NewEra’s founder, referring to the most recent hearing earlier this year in the South Gauteng High Court. “Thirty of those 45 minutes were spent arguing with the judge about who was going to pay the legal costs. This is all true, I am not making it up. Alongside the silks (senior counsel) were their junior advocates, instructing attorneys, their clerks, their assistants and of course the clients (the banks) themselves.
“And their main argument? NewERA makes no sense, they have no case and the whole thing should be thrown out immediately for being ‘vague and embarrassing.’ Oh yes, and NewERA should pay the bill.”
Cundill says he nearly choked on his cappuccino when one senior counsel claimed before the judge the Reserve Bank was a public interest group, just like NewEra. The entire case was a circus, he says, with people in black robes bowing, scraping and pleading before the judge.
Banks do a roaring business in the sparsely regulated securitisation trade by selling financial instruments that have long and predictable income streams, such as a 20 year mortgage bond. They get paid up-front on the sale (securitisation) of these instruments, often as much as 2,5 or 3 times the face value of the loan. This will probably get your blood boiling if your house or car has been repossessed, and perhaps explains NewEra’s surging membership.
So what is NewEra’s argument?
Essentially, it says a bank no longer has legal title to a loan that has been securitised. Based on statistics published by the Reserve Bank, it appears most mortgage, credit card and other retail loans issued by the banks in SA have been securitised.
The securitised loan has a new owner, and the bank’s legal position has changed to one of collection agent for the new owner, a fact that the bank does not disclose to the borrower.
If NewEra’s argument is proven correct, it could open the door to massive claims against the banks by customers who have been dispossessed of property as a result of foreclosure.
A raft of similar cases are now underway around the world, from the US to the UK and Europe.
No more Mr Nice Guy
NewEra says it is bringing the complaint to the NCR because of its inability to have its evidence heard in the High Court. It has called upon the NCR to elicit a full list of securitised transactions from the banks, something its court case has been unable to achieve. Once it has the securitisation information to hand, it plans to bring an entirely new case before the courts. When that happens, it's no more Mr Nice Guy, says Cundill, who is clearly frustrated at NewEra's inability to air the substance of its case before the courts. Some of the priciest lawyers in the country have been whistled up by the banks, a clear sign they are a tad nervous about NewEra's case.
A year ago, independent legal experts might have rated NewEra's odds at 50:1. Now, they are not so sure. The reputation of banks has seldom been lower, particularly after the Wall Street bail-outs, the Libor fixing scandal, sumptuous bonuses for bankers, the derivatives time-bomb, the rush to foreclose and now the securitisation scandal. Numerous home owners in the US have won court victories against the banks by challenging their legal standing on discovering that their home loans had been securitised. Last year five US banks were forced to pay $25 billion in settlement to customers whose homes had been fraudulently or wrongly foreclosed. Another multi-billion dollar settlement was slapped on US mortage banks earlier this year for similar reasons. Attorneys in the US believe this may just be the start of a tsunami of legal actions against the banks from aggrieved customers forced out of their homes by foreclosure.
South African courts will be forced to take note of these developments, whether the banks like it or not.
Liddle & Associates says it is bringing the complaint in terms of Section 136 of the National Credit Act (NCA), and as a matter of public interest as defined in Section 4 (c), (d) and (e) of the Consumer Protection Act (CPA).
The NewEra complaint says Section 69(4) read with Section 69(2) of the NCA requires a credit provider, upon entering a credit agreement by virtue of the transfer of rights, to “report to a credit bureau, since the national (credit) register has not yet been established.”
In essence, this means that when a loan has been securitised, the transaction must be reported to a credit bureau under the NCA. NewEra says the banks are violating this law.
“We accordingly request a full list of specific credit agreements which were securitised by the said credit providers, which information should be part of the public record, in the interests of adequate disclosure, in terms of the purpose of the NCA, in particular Sections 3(d), 3(e)(i) and 3(e)(ii) and 3(f),” reads the NewEra complaint to the NCR.
“We draw your attention to the fact that the credit providers are not reporting to the credit bureaus herein, they are refusing to disclose this information to the customers and they are not disclosing this information to the courts, which information is vital to establishing their locus standi to sue (borrowers).
“We also draw your attention to the debt review process in which it is essential that the credit provider provide full disclosure therein to ascertain locus standi and compliance with the provisions of the NCA, especially with respect to their registration as credit providers and the resultant cost of credit and interest chargeable therein.”
Cundill says NewERA will file amended documents with renewed ferocity. “Remember, we are not suing for money and our lawyers are acting pro-bono. We are trying to protect millions of South Africans from what we believe are blatant and unscrupulous actions of the banks. We need the courts to rule on the merits of this case. Is that too much to ask?”
Consumer Protection Act
National Credit Act