Recovering loans civilly

Standard Chartered Bank has lowered its mortgage lending rate to 10.9 per cent in a grand sale offer that started on July 15 and will last 45 days until August 31. The new rate is 1.77 per cent above the Kenya Banks Reference Rate (KBRR).

Although the reduced mortgage rate remains unaffordable to many prospective home owners, other commercial banks must borrow a leaf from StanChart and reduce lending rates. The lenders could even encourage more clients purchase homes on mortgage by embracing “gentlemanly” ways of ensuring defaulters pay up.

Dispute resolution

For instance, there are forms of Alternate Dispute Resolution (ADR) entrenched in the Constitution that banks can embrace to maintain cordial relationships with defaulters.

Article 159 (2) (c) of the Constitution encourages the use of ADR (reconciliation, mediation and arbitration) in dispute resolution, which could eventually lead to a significant drop in non-performing loans.

Other legal methods may include debt rescheduling, partial discharges and negotiated settlements instead of rushing to court seeking orders to foreclose and eventually auction property.

The alternative way of settling disputes not only saves time and money compared to litigation which drags in courts.
In mediation, both the lender and defaulting client will be in charge of the outcome while the mutually settled on mediator steers the process as long as parties are committed.

It takes more than six years for banking related cases to be heard and determined in court with legal fees of up to Sh1 million.
Currently, mortgage apathy is partly attributed to legal remedies banks employ for non-payment. For instance, the basic remedy most lenders opt for is to sue for the remainder of the debt or to foreclose – obtain a court order to stop the right to complete payment. The bank or financial institution may also sell the house under the statutory power of sale after a court order.

Power of sale

The power of sale arises as soon as the legal date for repayment of the loan has elapsed. Legally, three months must elapse after notice to pay the outstanding debt, interest is in arrears of two months or over a breach of a covenant in the mortgage deed.
The lender can also take possession of the property or appoint a receiver to receive all the income from the house.

But now, commercial banks, mortgage firms and other financial institutions will no longer be on a selling spree following provisions of the Land Act (2012).

According to the new law, commercial banks are compelled to sell property of a defaulter at the highest market value.
Before the passing of the law, there were reported cases of the financial lenders auctioning property below 29 per cent of their market value.

Presently, property that fails to register a specific market value cannot be sold for a song therefore making it harder for lenders to recover debts.

The financial lenders have been stopped from selling property below 75 per cent of the prevailing market price.

Legally, a valuation must be undertaken to get a valuation report or else the bank, mortgage firm or financial institution will have contravened the law. The intention of the new law is that the bank sells the property at the highest market value to settle outstanding balance and the defaulter pockets the proceeds. Furthermore, tenants will also not be waking up to auctioneers on their doorstep after their landlord defaulted on loans.

The law requires that banks involve tenants, spouses and other guarantors before selling off property that was used as security for a loan.

—The writer is an advocate of the High Court.