Borrowers ripped-off by housing loan contracts

The only way to protect Malaysian consumers is to have an Unfair Contract Terms Act similarly to that in the United Kingdom (UK). With such an Act, once the term or clause is deemed unfair, it becomes unenforceable. It then becomes irrelevant to the borrower how many of such unfair terms are in the contract as they are considered null and void.

Furthermore, even if the levying of certain costs is considered valid, if the charges are excessive, they will not be allowed. Such an Act to protect Malaysian consumers is long overdue.

agreements are so lopsided and unfair? Answer: It must be contracts signed between a consumer and the bank.

Banking contracts, be it a housing loan or a credit card agreement are basically designed with the sole aim of ensuring that as much of the risks and costs are borne by the borrower. (For hire-purchase, the contracts are guided by the Hire-Purchase Act.)

Variation of Loan Interest
It is most unfair to expect the consumer to sign a contract which gives the other party the absolute discretion to vary any of the terms already agreed upon. Yet this is what consumers are subject to when they sign their housing loan agreements with the banks. The bank’s loan documentation always provides for the bank the freedom to vary their interest rate at any time. The borrower has no say to this change in the interest rate which could be at a higher rate than which he had committed to.

Some of the current terms pertaining to interest rates which can be found in loan documentation are:

As specified in item 3 of this Letter of Offer “subject always to the absolute discretion of the Bank to carry the rate from time to time whether by varying the Bank’s Base Lending Rate (BLR) and/or the margin or spread above the BLR or otherwise or pursuant to item 14(d) of the Letter of Offer” — Citibank Bhd

“….impose additional conditions, amend any terms and conditions governing the bills facilities and revise/vary the in interest rates and other charges from time to time at the Banks’ absolute discretion”. — Public Bank Bhd

Usually such terms are not highlighted to borrowers who are under the impression that the only way that interest rates could vary is if the BLR is changed and not by any other means.

For the majority of borrowers, the main deciding factor on whether to take up a particular bank’s housing loan is the rate of interest charged.

Since the interest rate is the very core of the agreement, the bank should not be allowed to change it at its own discretion.

Besides giving one party the right to unilaterally change the terms of the agreement is generally not tolerated in any contracts.

Borrower Pays Costs
The housing loan contract makes it very clear that the borrower has to pay the bank’s legal fee and the processing fee and any other fees associated with the loan.

“All costs, charges and expenses including the stamp duties, penalty fees, legal fees, etc, relating to the facility (ies) shall be borne by you” — CIMB Bank Bhd (formerly Southern Bank Bhd)

“The Borrower shall be liable to pay all fees and expenses in connection with to incidental to this Agreement including the Bank’s solicitors’ fee (on a solicitor and client basis) in connection with the preparation and execution of this Agreement and such other documents related thereto….” — EON Bank Bhd

“A processing fee of RM100-00 is to be paid upon acceptance of this offer.” Malayan Banking Bhd (formerly Mayban Finance)

The above are costs that, are part and parcel of the banks costs of doing business and should rightly be paid for by the banks.

Concurrent Actions to Recover Loans
Such a clause gives the banks the right to recover the debt by filing foreclosure proceedings to auction the property and also a civil suit all at the same time.

The clause goes something like this: “…the Bank shall thereafter have the right to exercise all or any of the remedies available whether by this Agreement or by statute or otherwise and shall be entitled to exercise such remedies concurrently, including pursuing all remedies of sale or possession pursuant to the Agreement and civil suit to recover all monies due and owing to the Bank.”

In both exercises of foreclosing the property and the civil suit, all the expenses incurred will have to be borne by the unfortunate borrower.

The practice of using concurrent actions to recover loans by banks unnecessarily increases the debt of the borrower.

Since the borrower’s property is charged to the bank, the bank should first attempt to recover the debt from the sale of the property before filing a civil suit against the borrower.

Review
The bank has the freedom to review and change the terms and conditions of the agreement at any time even when the borrower has been faithfully paying his instalments.

“The Facility and the terms and conditions thereof are subject to review at any time and from time to time as the Bank deems fit irrespective of whether or not an event of default has occurred or is continuing. Upon such review, the Bank may unilaterally:

(a) suspend or cancel the whole or any part of the Facility

(b) declare the Facility to be forthwith due and payable and /or require procuring the release and discharge of the Bank from all or any liability or obligation to make any payment from the Facility to any person;

(c) vary the form, nature, manner, limit, terms and/or conditions of the Facility and /or conditions in respect of the Facility;

(d) without prejudice to the generality of ( c) above, impose additional terms and/or conditions in respect of the Facility; by mere notice in writing to you and the security constituted by the Security Documents and the Bank’s rights under the Security Documents shall not be prejudiced thereby.”— Citibank Bhd

Like the clause that allows variation in interest, it makes the position of the borrower most insecure.

Miscellaneous Unfair Terms
Sometimes processing of the loan is held up and the progress payments are not made by the bank to the developer in time. When that happens, the developer charges the borrower interest for late payment.

When the angry borrower finds out that delay is due to the bank’s side, he will then want the bank to recover the late payment charges from the bank.

However, the bank may have a clause in its agreement which says that the bank or the bank’s solicitor cannot be held responsible even if the bank or its solicitor are the ones which have caused the delay in disbursement or documentation of the loan.

At anytime, we reserve the absolute discretion to disburse the aforesaid loan or such part thereof in such manner by such time and upon such terms and conditions stipulated by or comfortable to us and our solicitors and although we may have notice of the terms and conditions of the Sale & Purchase Agreement you have entered with the Developer/Vendor in respect to which we will try to assist your compliance, we are however not obligated or legally bound to do so and by virtue thereof you expressly agree not to hold us responsibly liable or accountable for any loss damage expense or cost incurred by you as a result of any delay in disbursement or documentation of the aforesaid loan by either our company or our solicitors in relation to any Sale & Purchase Agreement or transaction you have entered with such Developer/Vendor.”— Malayan Banking

Miscellaneous Unfair Costs
These are lower costs which banks should not even been charging borrowers. For example a few years ago, charging the borrower a fee for the “maintenance” of a loan was unheard of. Banks are definitely innovative in finding new ways to get more money from the borrower.

“ levy a handling charge of RM12 or such other amount on each reminder sent for any amount in excess or in arrears.”

“ A reimbursement expense of RM10 or other amount determined by the Bank shall be levied for the maintenance of the loan amount every half yearly. (excluding low cost houses) ­ Public Bank’s Home Plan 1

Conclusion
The only way to protect Malaysian consumers is to have an Unfair Contract Terms Act similarly to that in the United Kingdom (UK). With such an Act, once the term or clause is deemed unfair, it becomes unenforceable. It then becomes irrelevant to the borrower how many of such unfair terms are in the contract as they are considered null and void. Furthermore, even if the levying of certain costs is considered valid, if the charges are excessive, they will not be allowed. For example, in the UK, bank charges of above RM12 are considered unfair and bank customers can ask for refund for the excessive fees the banks collected in the last 6 years.

Such an Act to protect Malaysian consumers is long overdue.

Read Islamic Housing Loan Rip-Off in Utusan Konsumer January-February 2008.