Standard Bank Caught Out in a Securitisation Lie

In mid-July 2015, Jack Darier of Parkhurst, Johannesburg contacted Standard Bank’s legal department to ask a simple question: had his home loan been securitised?

The bank replied no, but what it didn’t know was – it was a test.

Another department of Standard Bank had already sent Darier proof of the loan being securitised – busted! A different division of the same bank had sent him a Certificate of Balance, clearly showing that Blue Granite, an SPV into which Standard Bank has placed thousands of loans, now owned the mortgage loan.

Securitisation is when a debt is on-sold by a bank to a Special Purpose Vehicle (SPV) – a company with secure obligations because of its legal status and liability/asset structure,’ even if the bank goes insolvent. So, if the debtor defaults, the bank cannot take legal action against them. However, banks have found ways to get around this, by arguing it’s a simple cession (giving up of property) in court.  SPVs are supposed to be used to isolate financial risk. However, banks can also use SPVs to hide debt, based on accounting loopholes.

Curiously, Darier’s home was not in danger of being repossessed, nor did he have a judgment against his name.

Undue Enrichment

The South African Communist Party have called for an official investigation into securitisation fraud, as over 10 000 homes are repossessed in South Africa every year. Regulation 35 of the Banks Act covers securitisation. It states that a debt on-sold to an SPV is considered a sale (not a cession), where the full rights, obligations and entitlement are assigned to the buyer. Moreover, according to regulation 35, the public is not privy to securitisation documents, as they are ‘off balance sheet’. Banks securitise to move assets off balance sheet and free up capital for additional lending.

According to the Basel Accords, which are global recommendations on banking regulations, banks are to reserve capital based on the type and risk of the loans they make. Thus, by means of securitisation, banks can issue mortgage loans, bundle them together, sell them to investors and move them off balance sheet. Then if the mortgage lender defaults, credit default swaps and insurance policies will make up the deficit. But, if you as a home owner default, the bank will get a judgment against you, auction your home off at a fraction of its value, and pursue you for the shortfall.

Under the law, when the same asset is sold twice, it’s called undue enrichment.

Therefore, a securitisation is not a cession, but rather a change in ownership of the underlying asset. However, a defaulting bond borrower cannot afford to hire a silk (Senior Counsel Advocate) to argue their case persuasively in court, as they typically cost an alarming R50 000 per day. Read with Section 1 of the Banks Act, Section 72 indicates that the SPV cannot be a division of the bank – it must be an independent entity.

Securitisation Fraud

Darier laid a charge of securitisation fraud against Standard Bank at the Johannesburg commercial crimes unit. But the police investigation unit did not take action, despite the compelling evidence presented by Darier. New Economic Rights Alliance (New Era) advised Darier to ask the bank a standard set of questions, which he sent off in mid-July 2015.

Joop Dekker, the executive responsible for complaints resolution at Standard Bank responded by dismissing Darier’s questions as inappropriate and stating ‘the bank does not engage in the process of securitization and there is nothing untoward or illegal about this’. Dekker then went on to claim that New Era had mislead Darier and others by advising them to put these questions to the bank. He also said that the bank had received a judgment against New Era for ‘vexatious actions’. Lastly, Dekker confirmed that any failure on the bank’s side to reply to his questions ‘…cannot be construed as an admission to the correctness thereof.’

Darier replied, saying he was not surprised the bank found his questions inappropriate as they ‘…do not want their customers and the public to have insight into their dubious banking practices,’ and that ‘…the banks underestimate the intelligence of the public and…are trying to pull the wool over people’s eyes.’ Darier said that the bank was 100% correct that securitisation was legal. Stating that ‘The process of securitisation (i.e. selling…loan agreements to third parties for purposes of using as investment vehicles to invest in stocks) is legal.’

‘However, there is no mention of the fact that after ceding the loan agreement to a party without notification to the debtor the banks’ rights to repossess houses are null and void. The bank is thus merely acting as the agent for the third party in retrieving monies owed. I see on the website there is but 2 or 3 lines (mentioning) securitisation but there has been a convenient omission of any information which would allude the fact that the bank has no more rights for repossession.’

Furthermore, Darier stated ‘…because the manner in which securitisation works, it can be utilised in any form of loan/credit agreement (home loans, car finance, credit cards, etc.). He added that the banks ‘…are essentially utilising the hard work and income of their customers to generate massive profits for themselves.’

Darier is due to attend a meeting with senior counsel at The Northern Law Society to discuss this matter. Let’s hope it has a positive outcome for the sake of all home owners!