Securitisation and debt markets: an industry of lies and deception
Before delving into the somewhat mysterious practice of securitisation, asset backed note programmes and the local debt markets, let me provide a contextual basis for the findings I have presented hereafter.
I was particularly surprised and somewhat overwhelmed by the positive response I received about an article which was recently published in the Acts Online digital publication. The author, Ciaran Ryan, highlighted the correspondence been myself and Standard Bank and the Northern Provincial Law Society respectively. Essentially it highlighted some contentious issues regarding the securitisation of my own home loan and the legalities of securitisation in general.
The original article can be found here.
After being inundated with requests for information from various people it became clear how many South Africans were interested in the subject and who were experiencing harrasment by the banking industry.
In an attempt to assist the general public in acquiring a more coherent understanding of the practice of securitisation and draconian banking practices, I have consolidated over a year’s worth of research into a comprehensive overview of the inner workings of securitisation and the banks' general disregard for local laws and legislation.
It should be noted though, that I do not purport to be a financial markets and legal expert. I have merely drafted a summary of the plethora of information freely available online in the public domain, with the intent to encourage members of the public into undertaking their own research into the matter.
It is fundamentally important that borrowers understand their rights and obligations as well as well as the rights and obligations of the lender (and their rights when they sell off a loan). Herein the lies the problem: the securitisation industry is a rather clandestine operation where the inner workings and information thereof is closely guarded by the financial sector and banks.
There is argument that I am being somewhat precipitous and innately controversial by making this statement but if you consider the historical and legal records where the securitisation matter has arisen, it certainly paints a picture.
What is securitisation?
The most obvious explanation of securitisation is taken from Wikipedia which states as follows:
"Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables) and selling their related cash flows to third party investors as securities, which may be described as bonds, pass-through securities, or collateralized debt obligations (CDOs).”
Securitisation in general is a practice whereby a credit provider issues borrowers with loans and thereafter bundles the loans together in a product offering and sells the loans off their books to another legal entity called a Special Purpose Vehicle (referred to as a SPV hereafter). These SPV’s are also referred to as “Issuers" and this is explained in greater details later. It is effectively selling of the cash flow receivables of the loans with interest to third party investors. The bundled loans carry promissory notes (promises to pay a debt), underpinned by underlying securities in most instances such as physical immovable property, sureties and notarial bonds. Notes are bundled in a tranches which are issued by the SPV to investors for trading on the debt markets of various stock exchanges. These notes are effectively also considered to be securities. There is usually another guarantee SPV which provides a limited guarantee to investors to prevent insolvency of the scheme.
If we look at these bundles of notes as a stock which can be traded then it becomes a bit more apparent as to the nature of debt markets. There is initially a principal amount of debt owing when the bank sells off the loans and assuming that all borrowers pay timeously they can determine the how much earnings they would achieve over the period until the instrument reaches maturity. This is due to interest on the loans payable over a period. Thus simplistically speaking the value of the stock would increase over a period. There are fluctuations in the value of the instrument due to repayment performance of borrowers, change in interest rates and a number of other factors.
You may also have heard of asset-backed noted programmes and debt market investments which are common but not limited to the securitisation industry.
It is at this point where I take the opportunity to highlight two proverbial elephants in the room: a) A securitisation is a sale of a debt agreement and the divestment of all rights attributed to that debt agreement; b) The debt agreements which are sold are ultimately registered on the JSE and as such there are tangible and concise records of securitisation scheme and register of securities on the exchange.
These subjects are revisited later.
What is the role of banks in securitisation schemes and how does it affect their rights to claim?
The matter of securitisation was rarely seen as a defence in court claims when the advent of securitisation in South Africa began in the late 1980s. I assume this is due to the following 3 factors:
a) Legal practitioners had insufficient training and/or were unaware of securitisation and the banks’ rights to claim. It’s a question of those in the know are those protecting the industry.
b) There has been no contestation because the general public is unaware of the workings of securitisation and sale of debt and thus are unaware of its potential for application in court.
c) The banks and regulatory bodies suppress all attempts at acquiring evidence of it.
Since then there has been increasing application of this matter in court trials in recent years but the effective use of the securitisation matter as a legal defence is somewhat lackluster. There is a greater understanding of the banks’ role in these schemes and the banks themselves have undertaken measures to alter their strategies in dealing with the matter. A matter which they are all too eager to downplay.
The banks act as service agents and administrators for the investment schemes and SPV’s and manage the collection of receivables from the borrowers.
What is glaringly obvious is that there is a sale of assets to an SPV and as such the banks are divested of all their rights to claim in their name.
At this point we should take a brief moment to consider an important fact: under banking law, a bank may not have any direct or indirect control in securitisation schemes and SPV’s. Yet it could be determined through further investigation who the SPV’s were structured by and under whose instruction. The extract shown adjacent, from the aforementioned transaction supplement, shows a high propensity for direct involvement in the scene by Standard Bank. I would surmise that there is direct correlation between the SPV owner trust (legal owner of the SPV and the board of directors at Standard Bank).
Banks may also not act as agents for SPV’s under banking and credit act rules but nevertheless if we assume they are allowed to act as the collections agent on behalf of the SPV’s, should they not be required by law to be a registered debt collection agency?
The fact of the matter is your home loan or trade credit facility or any other form of substantial loan has a high probability of having been sold to an investment scheme. The JSE debt market in itself is an anecdotal piece of evidence of the existence of the size of the securitisation market. The value and size of the market as well as the fact that it relies on exchange of debt securities is indicative of many loans being sold to these securitisation investment schemes. Granted government bonds and debt instruments constitute a large percentage of the debt market but the value of debt securities issued specifically under securitisation scheme sis still large and statistically and arithmetically would be comprised of thousands of loans in total. The banks are indiscriminate in their selection of whose loan they sell off. You are merely an asset on their books.
The rules and legislature regarding securitisation stipulate that the bank is divested of all its rights to ownership and claims regarding a loan agreement when it sells off that loan to an SPV. Therefore a bank has no locus standi to make claims against a borrower. Any claim against the borrower should be in the name of the SPV who is the legal creditor.
This is indicated on the South African Securitisation Forum website
Even the banks themselves realise that there is a need to provide more indication of this and as an example if you visit the Standard Bank website. In the home loan section there is a tab with information regarding securitisation. It recently updated this page to include information regarding their locus standi (or legal rights) in respect of claims. In recent times they merely alluded to it being legal and borrowers are obliged to continue paying them with a two line statement.
Various government publications cover this aspect of regulation. The extract below is taken from a practitioner update released by the Competition Commission.
" Paragraph 4(2)(a) of the Securitisation Notice requires that the transfer of assets to or acquisition of assets by a special purpose institution should totally divest the transferring institution and all its associated companies of all rights and obligations originating from the underlying transactions and all risks in connection with the assets transferred or acquired subject to certain provisos.”
In theory the bank's right to repossess a home or effect sureties associated with loan agreements is null and void. In the past banks have actively denied any securitisation of loans and have presented multitudes of papers in court in their own name to effect sequestrations, repossessions, judgments and other claims of which numerous cases could have been done illegally as they presented themselves as the legal creditor in court. The typical modus operandi was to flatly refuse to provide the borrower with any information pertaining securitisation of their loan and the legal creditor and deny securitisation took place. This is done with the full knowledge that the borrower cannot obtain this information for use as defence in court. One only has to do some basic consideration to realise the number of potential illegal claims which have been presented in court by the banks and their legal representatives.
The banks and financial industry would be quick to make the argument that as a borrower you have the obligation to pay regardless of the creditor and if you don’t pay you would benefit from undue enrichment. Additionally they would claim that legally they can separate sureties, notarial bonds and physical assets from the loan agreement. However, should it not be argued that these are bound to the loan agreement and the right to claim these is ceded to the new creditor along with the loan agreement? It’s simple cause and effect; the bank would make claim on these in the event of arrears or default and the trigger default would rely on contractual terms of the loan agreement to make claim against the collateral/security. The securitisation is a sale and this is why the bank is divested of it’s rights because how can one legal entity hold ownership over your loan whilst the security pertaining to that legal agreement is held by another legal entity. This is not a cession!!
The banking industry as well as the legal industry have successfully engrained this sentiment in the courts and legal system and judges tend to view it as a desperate attempt by defaulting borrowers to avoid paying their debts. This is due to the fact that borrowers can never prove securitisation and the courts rely and factual evidence to support this defence.I won’t be so bold to say that the banks have an indirect influence on these matters in court but I would strongly assert that the legal system views this subject as a grey area which glosses over their transgressions as well as the finer details of banking and credit laws. For example banks retain ownership of the title deeds on properties in home loan agreements and do not transfer deeds to the SPV. Perhaps more inquiry into whether these title deeds should be transferred to the SPV is required by regulatory authorities. As was noted earlier the right to claim against this property should transferred with the loan agreement as the the right of claim itself is dependant on the loan agreement.
Furthermore under the rules of the National Credit Act the loan originator is obliged to notify the borrower of any cession or sale of the home loan and this is generally overlooked by the NCR, Banking ombudsman and the legal societies in general.
There is a clear and concise regulation in the banks act of 1990 which stipulates that a bank may not act as an agent for a securitisation scheme.
If one can prove a loan was securitised then any claim against a borrower must be submitted to court in the name of the legal creditor which is the SPV. When the SPV makes its applications in court you can take the approach of defending this along the following lines:
- As a borrower you were not notified of the sale of your home loan as per NCR regulations and is grounds for having the credit agreement declared null and void
- the borrower must give consent to the sale/cesison of a credit/loan agreement
- you can argue that you do not and never had any credit agreement or knowledge of obligation to pay the SPV.
Securitisation as a legal defence
The next big question is why shouldn’t you use securitisation in your defence? Life is a funny beast. The instances and probabilities of default increases daily with ever increasing burdens of a stagnant regressive economy and any manner of events can lead people and businesses into financial hardship (negligent behaviour included admittedly).The point at which you would ultimately be in the need of using the securitisation matter would likely be due to default on repayment of a loan. This would perceivably be after a long enough period where you have paid enough instalment to indicate you were and are committed to repaying the loan. I am not a proponent of taking a loan for the purpose of trying to swindle the banks out of money. What I am saying is the banking system is a self-perpetuating system which utilises the hard work of millions of people to generate massive profits for a small few. The banks are vociferous in their approach to recovering debt from defaulting borrowers and will strip assets from some of their longest serving customers and leave them destitute without batting an eyelid. Much of this is done illegally though. One should also bear in mind is that the directives and policies implemented in the banks are from the senior management and boards of directors. Boards comprised of individuals who earn in excess of R50 million for management of a system they have enslaved people into. It is socially and constitutionally unjust that certain organisations and individuals are precluded from adhering to the laws of South Africa.