Loan facility takeover and the things to be aware of:

A Happy New Year to you. As we commence the year 2015, I shall depart from my usual social commentary blog article and instead focus on an educational blog that some of you may have encountered or may encounter so long as you are a bank client and borrower.

So you have an offer for takeover of loan facilities from another bank? Loan facilities being taken over by another bank for whatever reasons are a usual occurrence in the banking sector as well as being some of the most stressful situations that a borrower can face because of various reasons which I shall go into shortly. Often this process is very misunderstood by the parties concerned and accusations and counter accusations fly between the borrowing parties and the respective banks and advocates for one reason or another.

Firstly, the very fact that another bank has agreed to take over your facilities is a very positive thing because it is an assurance that after the takeover bank has done its due diligence on you whether you are a personal (retail) borrower or a business (SME or corporate) borrower it has found nothing untoward on you and your business and is comfortable with your credit standing and ability to repay the facilities on the terms that it is offering to you. Never forget also that a bank is a business that wants to safeguard its income and assets hence should you wish to move your facilities to another bank simply because you are not servicing the facilities or they are in arrears, the bank will find out this information in its own way and not decline a takeoverof your facilities. Reasons for takeover are many and vary from being unhappy with the interest rate and charges being charged and levied by the current institution, irreconcilable differences with your current bankers, additional facilities that your current bank is unable to offer to you or your business etc.

Secondly, once you have accepted the letter of offer and returned it to the takeover bank alongside any other documents that have been requested for, the process of takeover of the loan facility commences. If the collateral that you have pledged for the facility is the same one that has been pledged elsewhere then the takeover bank needs to prepare a letter of undertaking in a format agreed with the existing bank from where the facilities are being taken over specifically mentioning the amount due on the respective facility as at a specific date with interest continuing to accrue thereafter until payment is made in full, the release of the securities/titles deeds etc to a named advocate for purposes of preparing a charge document in favor of the new bank and registering the same together with a discharge of charge against which the undertaking promises to make payment to the existing bank.

At this point in time there are several parties involved in the transaction as follows:

1. The borrower.
2. The existing bank - from which facilities are being taken over.
3. The takeover bank - who will be taking over the facilities.
4. Advocates for the existing bank - to handle the preparation of the discharge of charge.
5. Advocates for the takeover bank - to prepare the letter of undertaking and then prepare a charge to be simultaneously registered together with the discharge of charge.
6. Various government departments like the Dept of Lands, Registrar of Companies (for company borrowers), Collector of stamp duty, Government Valuers (for transactions involving purchase of property), Land Board etc as necessary given the type of land and the specific rules applicable.

All the processes have no defined timelines for conclusion particularly where the government departments are involved and depend greatly on the efficiency of the various players within the process and to a lesser degree whether applicable land rates and taxes are upto date, whether the file for the parcel is available at the respective Land registry, whether the company file is available at the Companies Registry and recently an even stranger one………..…..if the franking machine to affix stamp duty is working!!

The completion period could be anything between 30 days to 90 days and beyond and this is the point where all things seem to fall apart because there appears to be no appreciable progress being made in the eyes of the most vulnerable party in this whole transaction, the borrower. It is also at this point that the existing bank reminds the borrower of the need to continue servicing the loan instalments until take over has been completed.

For business accounts, the possibility of complete disruption to your business cash flow is a real threat where the takeover bank declines to avail some facilities to you while the existing bank has suspended your facilities during the transition period meaning you are not able to access any credit lines previously negotiated with them. Some banks as a policy go to the extraordinary lengths of refusing to release your securities and title deeds forcing you to instead renegotiate with them to provide the facilities that were being offered by the takeover bank at similar or better interest rates.

Many borrowers seem to believe and understand that a letter of undertaking to takeover facilities automatically means a suspension of interest and future monthly instalments due on the facility by the existing bankers and this could not be further from the truth. In any case the need to repay your facilities is embedded within the letter of offer/loan agreement that you have signed with your existing bank and nowhere within that agreement does it state that repayment of interest and principal shall be suspended if you choose to transfer your facilities to another institution.

Similarly, the letter of undertaking talks of the takeover bank undertaking to pay an amount ‘x’ due on a facility as at a defined date to the existing bank with interest due on any unpaid balance after the defined date. A prudent borrower would therefore continue to service their monthly repayments within the transition period because in any case the surplus amount paid to the takeover bank will either reduce the facility amount negotiated with them or be reflected as a credit balance on the applicable transaction account linked to that facility.

If you have other securities that you may pledge to the bank then this allows you some leeway as you can continue with current arrangements with your existing bankers who shall be blissfully unaware of your transition to another bank for some time thus ensuring your business continuity without heart burn and head ache.

The penalty for not meeting your monthly obligations include continual follow up action by the existing bank and being listed on the Credit Reference Bureau as a defaulter as banks are obligated to report non-performing loans, notwithstanding the fact that the loan is due for takeover by another institution and is in the transition stage, to the CRB after a specified period.

So even as a bank dangles a good discount to you to move your facilities lock, stock and barrel to them be aware of the possible delays that may cause you sleepless nights, irreparable damage to your business cash flow and general aggravation. You must always ask the bank if they have a policy of allowing access to part of the facilities within the takeover period so that your business can continue to function.

to be forewarned is to be forearmed!!