After screening of the Special Assignment programme on SABC 3 on Thursday, the 30th of May, a number of consumers have contacted me to give more clarity about securitisation.
The program probed the practice of credit providers (mainly banks) instituting legal action against consumers who had defaulted on their monthly obligations to the credit providers, and asked whether the procedure was legal if the loan was securitised.
There are many South Africans who have mortgage bond agreements and credit agreements for vehicles, loans and credit cards who do not understand the concept of securitisation. This is not surprising, as it became evident in the programme that even the bank employees had no clue either.
In a nutshell I will endeavour to simplify the concept of securitization.
Securitisation is the process whereby cash flow producing assets (such as home loans, car loans etc) are pooled together and the value of such loans is packaged as securities which are then sold to institutional investors in the capital markets.
Some of the main role players in the securitisation process are the following:
- The Arranger: the company that handle all aspects of establishing a securitisation transaction and takes the deal to the market – this is normally done by a bank.
- The Originator: the credit provider that has the assets on its books and sells it to a Special Purpose Vehicle (SPV) – also known as a Special Purpose Instrument (SPI).
- The Issuer: the SPV that buys the assets from the Originator and issues securities backed by those assets in order to acquire cash to settle the purchase price of the assets acquired.
- The Investor: the entity that buys the securities – in the form of bonds or commercial paper – issued by the SPV. These investors could be entities such as life insurers, pension funds, etc.
It is important to note that the asset is the future amount receivable (the obligation from the consumer to the credit provider) to be securitised that the credit provider has on its balance sheet and that will be sold to the SPV – mortgage loans, leases, etc. The SPV normally takes out insurance on the receivable amounts in case of unforeseen circumstances – such as default by the consumer.
The major issues consumers are the following:
- They don’t know whether the credit provider where they took out the loan is still the legal owner of that loan as they are not informed when a loan is securitised – and surely one should only make payments to the legal owner.
- Should they default on the repayments of their loan, the credit provider who has securitised their loan can neither seek judgement against them for repayment of the amount nor attach the asset. Only the legal owner can start legal proceedings against the consumer.
- In practice the credit providers have been suing consumers, sold assets on auction at well below market value and demanded that the consumer pay off the shortfall between the outstanding balance of the loan and the proceeds of the sale – less all the costs involved.
- This after the loan had already been settled in their books and despite the fact that the insurance taken out by the SPV for defaults was paid out to cover any losses by the investors.
Robyn Zimmerman, an attorney specialising in the NCA, reiterated that the Courts are being misled by the credit providers to sanction actions, that is in fact illegal, as legal.
The issue at stake is not that the consumer s should side step their obligations, but force the banks to comply with legislation and show a more humane approach toward defaulting consumers.
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