Saturday, 30 August 2014

Legal Action Procedures: Personal Loan Part 1

Now we have reached the topic some of you have been waiting for. The procedures of legal action against borrowers who failed to pay their monthly instalments. We shall start with the legal action procedures for Personal Loan. Why start with Personal Loan? Because this type of loan is the "lowest" in term of ranking compared to other loans since the "strength" of this type of loan rests upon the monthly income capacity of the borrower. If there is an additional security, it would be in the form of a guarantor whose assessment is also on individual income capacity. Housing and car loan would have an added "security" in the form of the house and the car themselves apart from the financial "strength" of the borrower with a guarantor (if any). That is why personal loan is often called "unsecured loan".

In cases whereby the borrower has been declared a Bankrupt and in the event all of his/her assets are auctioned off, preference will be given to those "secured" creditors with the "unsecured" creditors being the last one being considered with whatever that is left to "fight" among themselves. Usually the creditors (the Banks) with unsecured loan will end up with nothing. Credit Card loans can also be considered as "unsecured loan" with a slightly different loan structure where a certain "credit limit" is given as the maximum loan amount with only the borrower's financial capacity to depend on with no guarantor. That is why the interest structure is high to cater for the higher risks. Usually only part of the maximum limit, for example RM10,000 is used (unless the borrower went on a crazy spending spree and finish it all up in one go) and after a period of one month without payment, the remaining credit limit will be "frozen" and a very high interest rate of 16% to 18% will be charged on the balance (compounded) together with other costs thrown in. Therefore the income from the interest and from other accounts (especially the "minimum payment of 5%" gangs) can cover for the temporary "loss" of payment to a certain extent.

The procedures of legal action for credit cards is a bit different from the normal personal loan based on the "higher" income from penalty charges and the "suitable" amount for legal action to take place. You shall be able to see later the rationale of taking legal action after seeing the procedures involved and it is slightly different. One more reason we start with personal loan is that the legal procedures are more straightforward as compared to housing and car loans where they are governed by their own set of laws namely the National Land Code and the Hire Purchase Act 1967 respectively. The end result would be the same that is to obtain Judgment to be followed by the Execution of Judgment in order to recover the whole loan amount plus interest and costs albeit with some differences.

Ok. We can start now. Please refer to the info graphic below. The full slide presentation can be viewed at:

Loan Recovery: The Legal Action Procedures or at Facebook Album Collection entitled Info Graphic on Legal Action Procedures

Look at the introduction screen or the "Official" Topic for the Slides:

If you want to know more about the "Source of Funds", that is the bicycle and Tyre pumps, you can refer to this link Facts about Digital and Paper Money and Usury . The interest structure of Personal Loans depends on the policy of the lending Banks with flat interest rate, monthly and yearly rests interest options. We shall elaborate on the differences between these interest rates in another post where we shall learn about the usage of the word "rests" in the context of interest calculation.

Ok. We will begin with the next info graphic. In any loan application, in the beginning especially during the disbursement of the loan, it is always a "joyous" occasion where the disbursement date is usually the agreement date. If you want to find out more on the excitement and "happy hour" atmosphere during loan processing, you can go to Part 5 - The Collection Department

To cut a long story short, a month has passed and the first instalment has become due for payment as depicted in the picture. In this example, we will present a situation where there is no payment made whatsoever to see how long it would it to obtain Judgment through the legal process and finally the execution of the said Judgment. Yes, execution sounds a bit "brutal" but some of the methods available are close to being "brutal".

In a real life situation, the "zero payment received" phenomena happens occasionally but most of the time, there are several "ding dongs", that is the flow of communication between the borrower and the collection personnel, between promises kept and broken, between the branch and Head Office personnel on approval of certain actions, the borrower gone "missing", sick leave, public holidays and a host of other things as depicted in the following diagram:

So, a few days without payment after the due date, the Bank obviously will start making calls and sending standard written reminders. With the advent of current technology, some will have internal text messaging capability (sms) to give "subtle" reminders to borrowers and it is very cheap compared to paper and postage costs. After making calls and sending reminders, there is nothing left to do but wait for the borrower's response preferably in terms of payment and not mere promises.

It should be mentioned that telephone reminders evoke a variety of reactions from borrowers. The polite ones will apologize profusely and make a promise to pay "as soon as possible". There are also those who pretend to be polite just to "buy" some time. There are those who show no audible reaction whatsoever by not even picking up the phone! Some will respond by just saying "Huh! Ok. Seven Days..." Kinda give you an eerie feeling reminding you of the movie "The Ring" where the caller will say the same thing and in seven days you're dead. Then there are those who will scold  the Bank's staff for "the lack of compassion and understanding" with dialogues such as "I will only pay at the end of the month. Who ask you to disburse the loan in the middle of the month?" Well, it was the borrower who used to call more than ten times a day asking for the disbursement. People have very short memory. Gone were the "happy" days during the loan application barely a month ago.

Another month has passed and now the account is 2 (TWO) months overdue. Whatever promises that were made has been broken. Another round of sms, phone calls and written reminders but this time it is the "Final Reminder" being issued threatening legal action. However, the Bank will still have to wait until at least another 20 to 30 days before invoking the actual legal action as this is still considered "too early". The official "Investigation Papers" or "Collection Folder/Files" may not be opened yet as the borrower might just turn up and update the whole thing so the Bank has to be "patient" and not be too hasty. For those Bank staff who has the initiative, they will start reviewing the loan application files for "clues" or any discrepancies that might prove useful in the future because processing was done by somebody else and they might miss something. The loan will start accumulating "penalty interest" and other costs as long as the monthly payments remain unpaid.

How times flies and now we have entered the third month of non payment. Another round of sms and phone reminders. The collection staff will have to wait for a few more days (again!) or until after another promised date for payment has passed. After waiting for a few more days without payment, that will be the final straw That's it. No more waiting. Time to get serious. Time for reinforcement. Time to instruct the lawyers to issue "Letter/Notice of Demand" or LOD for short. The Bank hopes that by the sight of this letter, it will be enough to send the shivers down the borrowers' spines (I have a more "mature" expression but this will do :) ) and make them update the overdue payment. However, before that can happen, and depending upon the policy of the Bank, prior approval must be obtained either from the officer, the Branch Manager or the "Head Office". Another waiting game (again!)

This is because legal action will involve extra cost. Banks do not like to incur costs which means they will have to get "money" from other sources. They created money (remember the money creation slides?) through the loan, charge interest as "income" and if payment is not "coming back", they will have to "borrow" the cost from other paying accounts. Even though late charges will contribute as "extra fresh air" income and the interest (even though no payment has been received) has already been recognized as "income" in reality they are just imaginary numbers. "Costs" would have to be paid in cash or in digital transfer. You may say that the payment of costs are still using "imaginary numbers" but the outflow of "money" will eventually be more than the "inflow" for this particular account as we go along. (confused yet? Good)

Ok. Enough with the confusion and on with the legal action. The first step as mentioned earlier is the "Letter/Notice of Demand" issued by the Bank's panel Lawyer (after this shall be referred to as simply "Mr Lawyer"). The cost of the letter typically ranges from RM30 to RM50 or more depending on the Lawyer Firms. Why so expensive? You may ask. Well, because of the letterhead of the Law Firm. During my working days quite some time ago, it used to be RM75 to RM100 due to the "scarcity" of law firms and most of them are well established and were educated "overseas". Some non English speaking borrowers may not understand the whole content of the letter, but seeing the Law Firm's letterhead and the Bank's name on it will definitely remind him/her that something serious is happening.

But now times has changed. With the increase of local Universities offering Law degrees particularly UIA (The International Islamic Universitiy) and other private colleges offering twinning Law programs with their overseas counterpart, more Lawyers and Law Firms are available to choose from and based on the theory of supply and demand together with the competitive factor, the "price" of LODs has come down considerably even though it is still considered expensive for a piece of 80 grams paper and a few Ringgit worth of postage stamp. Whatever it is, you will have to consider the "professional value" of the letter otherwise it would be a waste of time studying Law for all those years if anybody can issue such "professional" letter. (have to give the Lawyers a bit of a breathing space, otherwise some of my lawyer friends might get offended. :) )

Back to the collection officer or clerk. Another waiting period to get the final approval to proceed with legal action. When approval is finally granted, an instruction letter to Mr Lawyer will be issued. For Banks with sophisticated system, an "online" instruction will be issued. The staff from the Law Firm will have to "log in" into the system to check for new instructions. There is a certain fee charged for usage of the system and Mr Lawyer would have to pay for it. Hmm... no wonder legal fees are high. Upon receiving the instruction, Mr Lawyer's staffs will prepare the LOD to be sent to the borrower and guarantor (if any). All the waiting "games" and "ding-donging" may drag on to the following month.

The LOD will consist of the amount overdue and a time period to pay, normally 7 (SEVEN) to 14 (FOURTEEN) days failing which the Bank will proceed with further legal action. Depending (again) on the "ding dong" factor on the lawyer's side, usually by the fourth month of overdue position, the Bank will be able to decide on the next course of action. When no payment is received after the "grace" period, the Bank will proceed with an instruction to file Summons after getting the relevant approval. The Bank must prepare a detailed breakdown of the overdue amount, late charges and costs incurred so far (postages and LOD) together with the addresses of the borrower and guarantor (if any). At this point of time, the agreement between the Bank and the Borrower will be terminated.


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