What next after defaulting on your loan?

According to the Bank of Uganda Financial Stability report, credit risk remains a big shock to Uganda’s economy. While this was greatly fostered by the Covid-19 pandemic causing commercial banks to write off Shs128.9b worth of loans, they grapple with many bad loans and one of the ways to redeem themselves is by selling off the borrower’s collateral.

The moment the calls from the lending bank start upon defaulting cause a lot of distress to any borrower causing many to cut off communication. Owing to that, banks proceed with trying to recover their money. However, many borrowers allege that banks sell off their collateral without being given a chance to look for the buyer thus recovering the item’s full money value.

Apart from the Mortgage Act governing the relationship between the borrower and the lending bank, there is a contract between the bank and the borrower.

Dr Tumubweinee Twinemanzi, the executive director supervision at Bank of Uganda, says borrowers need to understand that on accessing a loan they have entered into a contract that specifies their obligations and those of the bank.

“In some of these contracts, a borrower is asked to read the consumer empowerment guidelines to know what their obligations are because the contract is binding. When you fail to make a payment, you have breached the contract. Therefore, go the provisions of the contract that talk about remedying a breach,” he advises.

Dan Babonereire, a financial advisor, says the bank cannot sell a client’s property without telling them that they have defaulted. 
He says when the loan goes into arrears; more than 30 days without the monthly pay, the bank writes to the client telling them they have defaulted. “Two weeks later, the bank sends another warning. If there is no communication from the client, the bank writes to them that the credit facility has been recalled. However, if the client responds with another proposal, the bank may consider it,” he says.

Oftentimes, clients are poor communicators which will force the bank to give the client a notice of sale which takes 21 working days before advertising the property for another 45 days. 

Looking for a buyer
At this point, everyone knows the property was collateral and this is a distressed sale where a client is selling to come out of a nasty situation. Therefore, the client’s negotiating powers also reduce. Additionally, some in real estate also steer clear of such purchases causing diminished market options.

While the client may always find a buyer at any time during the course of the loan, Dr Twinemanzi wonders why one waits until they have defaulted to do that? 

“Oftentimes, people know that they may have difficulty in paying and that is when the borrower should start the conversation with the bank. Do not wait to default thrice then tell the bank you can look for a buyer for your collateral,” he says.

Recovering bank money
In the event of a bad loan, the bank’s interest is never in selling the property or getting the client the best value but to redeem its money. Therefore, Babonereire says the best way a client can get the best value out of their property is to handle the sale themselves. 

“The agreement is tripartite where the borrower deposits the money in the bank account after the sale while the bank hands the new owner the land title. The bank acts as the guarantor for both parties and will deduct its money as soon as the payment is done,” he says. 

Additionally, when a client sells the property themselves, there are no legal complications. 
However, when the bank handles the sale, there are additional costs absorbed by the borrower thus deducted off what the property fetches. These costs include advertising, court broker fees, cost of managing the whole process, eviction, and guarding the property.

Babonereire adds that even if the borrower gets a good price for their property, owing to the distress they are facing, they will never appreciate it. 

“It is an emotional moment and the losses are high. Aside from the fees above, interest is high yet the property is being sold at a forced sale value (not less the 30 percent less than the open market value),” he says.

Borrower’s rights
While the borrower has defaulted, they are entitled to some rights and Babonereire shares these:
The law gives the client first priority to redeem their property. “That is why the 45 days are given so the client can look for alternative means to getting the bank’s money. This is what is referred to as sale in distress,” he says.
 
Even when the sale process has started, there is provision for a private treaty where the process is halted as long as the borrower shows up with the money or a ready buyer.
 
The client can also ask for property revaluation, six months before the anticipated sale. That is because the property value may have appreciated thus fetch the client more money so the law is trying to give the client the best price possible. “The safeguard is the client can engage their own valuer for an independent price. However, if the bank discovers that the valuer (yours or theirs) gave them a wrong value, they pay an indemnity to the bank,” he says. 

Amendment in CRB Act
To ensure accountability among borrowers, Dr Twinemanzi says the Credit Reference Bureau (CRB) Act has been amended. 
“One may have the capacity to pay yet unwilling. However, when they know that loan defaulting will negatively affect their credit score thus their potential to get any loan facility, they will want to keep it clean,” he says.

Keeping safe
Borrowers should carefully read their contract with the bank ensuring it is in line with the Mortgage Act while also ensuring they know the prudential guidelines by Bank of Uganda stating the rights of the clients.

Additionally, no one is assigned to watch your back. So, work with a financial consultant to clarify on clauses or better advise you on the contract, just in case it is not in your favour is advisable.