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On Situation in the Banking Market, the Bank-Borrower Relations and Prospects for Amicable Settlement of Non-Performing Loans

Date of publication: 4 June 2015

Maksym Kopeychykov, Attorney at Law, Partner

Source: RBC-Ukraine

Borrowers increasingly get rid of bank loans by selling the collateral to a third party

A difficult 2014 has intensified the trends aimed at ceasing dependence of the clients from banks. Thus, borrowers more and more often get rid of credit relations with the bank through the sale of collateral with all obligations to a third party.

More simply, a person finds new buyers for an apartment or a car purchased on credit, comes with them to the bank and formalizes a deal. A new client repays loan or most of it, thus, becoming the owner of the pledged property and freeing the borrower of its obligations to the bank.

In early 2015 the trend definitely preserved, although it is quite difficult to give an adequate assessment to the transactions carried out according to this scheme. The actual market exit of Delta Bank, the most active in consumer lending, and the specific approaches of Privat Bank, the largest player in the consumer market, complicate the task greatly.

Further, banks generally do not make information about such debt repayment mechanism available in their information materials – it is a highly individual product that is part of negotiations on debt restructuring, and in most cases the debtor acts as the initiator. That is, the initiative entirely comes from borrowers and means a responsible approach to fulfillment of its obligations to the bank.

Self-realization of the objects of pledge or mortgage has a number of advantages for all parties to the transaction. The borrower gets rid of the credit encumbrance. The buyer gets the property faster and with a certain, albeit a relative, guarantee of a pure legal history of the purchased object. Here it is necessary to make a reservation – some small banks are rather irresponsible in choosing collateral/mortgage, and even themselves initiate various “scheme” transactions, including with the objects that ceased to be a possession of the owners against their will. In turn, a bank gets rid of a defaulting client.

However, to launch such a transaction the bank must assess whether it is ready to forgive a part of the claims in exchange for repayment of the principal debt or a part thereof. The amount of write-offs is different and depends on the amount of debt, personality of the borrower, amount of his assets.

Sometimes banks are willing to write off considerable amounts from the borrowers. In our practice there were cases of writing off 80% debt. Although the debt was written off by the collectors, which obtained the rights of claim, rather than the bank itself. To be fair, I note that the transaction was profitable for the collectors, which acquired the right of claim with an even greater discount.

It is important to understand that such transactions are not limited to the search for a buyer willing to take on and fulfill all loan commitments. They can be registered only with the consent of the bank. To obtain such consent, it is necessary to perform a particular sequence of actions. To begin with, the borrower must notify the credit manager that a third party buyer for his property was found. Then the manager on account of the borrower (an essential point that must be remembered) organizes drafting and signing of all documents.

Specific actions depend on the type of the transferred object (apartment, car or other valuable property), the registrations available and the expected effect of the transaction. It may be either a complete cessation of credit legal relations or a transfer of debt.

These transactions are simple enough and rarely time-consuming, as the banks have standard packages of documents. If you are a borrower and decided to carry out this procedure, or intend to buy out somebody’s collateral, look carefully to ensure that all documentary changes were made to the appropriate registers.

For example, in a security commitment the person must be replaced if credit relations are preserved, or encumbrance must be terminated if the debt is repaid to the bank. It will determine whether the bank will have further claims to you (which will affect your credit history), or the issue will be closed finally.

To the point, the procedure of resale of a collateral with the loan obligations does not entail any particular additional costs. Most banks do not charge any additional fees during repayment of debt, and the cost of notarial services is standardized. The bank usually bears no expenses (except, of course, salaries to its employees).

And once again – watch out for re-registration of all necessary documents. If you are a borrower, make sure that the obligation to the bank has been terminated during disposal of the pledged property (if it is agreed with the Bank).

If you are a new buyer, it is crucial for you to check the legal capacity of the seller and correct assessment of the acquired property. So you minimize the risk of appealing against the agreement as concluded by virtue of difficult life circumstances or because of incapacity of the party.

In this case, there is practically no risk for the bank, because the bank does not give consent to removal of encumbrance until it sees the money and the payment order for their crediting as payment of the debt or a part thereof.

Therefore, my recommendation is quite clear: if you feel unable to fulfill the loan obligations secured by pledge, try to find a buyer for the pledged property, and negotiate with the bank its sale and debt restructuring. It will be more fair and cost-effective rather than trying to hide the pledge or declare the loan agreement null and void.