Monday, 27 October 2014

Legal Action Procedures - Hire Purchase Loan (Motor Vehicle) - Part 1

Now we have reached a quite "popular" topic that is the legal procedures for car loan recovery. Why? Because most people have cars either brand new or used and most are bought through Bank loans. Out of necessity of course! A "new" car today will be classified as "used" immediately upon registration. Those with loan terms of 7 and 9 years are still paying through their noses or already starting new loans through refinancing (if the car still got some value) or buying a new car when the old loan has been settled in full. 
Before we proceed with the car loan recovery procedures, there are a few things that you need to know.
All car purchases made through Bank loans are governed by the provisions of the Hire Purchase Act 1967 (latest amendments 2010) which is under the purview of the Ministry of Domestic Trade, Co-operatives and Consumerism (MDTCC). The Act has undergone numerous amendments and adjustments to protect the rights of consumers or to be exact, the "Hirer" as well as the "Owner" that is the Bank giving the loan. There are at least 32 offences cited in this Act which covers the Owner giving blank Second Schedule (Part 1 and 2) and the  Hire Purchase Agreement to be signed by the Hirer, the agent or Owner not collecting the minimum deposit of 10%, fraudulent sale of the car by Hirer (usually through "Continue Payment" arrangement), failure in the part of the Owner to give the statutory Notices (Fourth and Fifth Schedule), non disclosure of facts and a host of other wrongdoings. Based on the examples given, you can judge for yourself that the Act has been abused with impunity all this while. 

The various penalties for anybody who is found guilty of committing offences under this Act are listed below: 


Section 36. Where—

(a) a dealer, an agent or a person on behalf of an owner prepares or causes to be prepared a hire-purchase agreement or offer in writing that, if accepted, will constitute a hire-purchase agreement with the intention of bringing about a contractual relationship between an owner and a hirer; and 

(b) the agreement or offer contains to the knowledge of the dealer, agent or person acting on behalf of the owner, as the case may be, a false statement or representation that is false in any material particular, the dealer, agent or person acting on behalf of the owner shall be guilty of an offence under this Act and shall, on conviction, be liable to a fine not exceeding ten thousand ringgit or to imprisonment for a term not exceeding twelve months or to both.


Section 38. Every person who, by the disposal or sale of any goods comprised in a hire-purchase agreement, or by the removal of the goods, or by any other means, defrauds or attempts to defraud the owner shall be guilty of an offence under this Act and shall, on conviction, be liable to a fine not exceeding thirty thousand ringgit or to imprisonment for a term not exceeding three years or to both.


Section 46. (1) Any person who is guilty of an offence under this Act or any regulations made thereunder for which no penalty is expressly provided shall, on conviction, be liable—

(a) if such person is a body corporate, to a fine not exceeding one hundred thousand ringgit, and for a second or subsequent offence, to a fine not exceeding two hundred and fifty thousand ringgit;

(b) if such person is not a body corporate, to a fine not exceeding twenty-five thousand ringgit or to imprisonment for a term not exceeding three years or to both, and for a second or subsequent offence, to a fine not exceeding fifty thousand ringgit or to imprisonment for a term not exceeding five years or to both.

(2) Where a person, being a director, manager or an officer concerned in the management of the body corporate or was purporting to act in such capacity, is guilty, by virtue of section 47, of an offence under this Act or any regulations made thereunder for which no penalty is expressly provided, he shall be liable to the penalty provided for under paragraph (1)(b).

Section 47. Where any offence under this Act has been committed by anybody corporate (whether or not the body corporate has been prosecuted) any person who at the time of the commission of the offence was a director, manager or an officer concerned in the management of the body corporate or was purporting to act in such capacity shall be deemed to be guilty of that offence unless he proves that the offence was committed without his consent or connivance and that he exercised all such diligence to prevent the commission of the offence as he ought to have exercised having regard to the nature of his functions in that capacity and to all the circumstances of the case.


Section 48. Where the agent or servant of a person commits an offence, or does anything or omits to do anything (which if done or omitted to be done by that person would constitute an offence under this Act) that person shall notwithstanding that he has no knowledge of the offence be deemed guilty of the offence and be liable to punishment for the offence unless he proves that—

(a) the act or omission complained of was not within the ordinary scope of the employment of the agent or servant; or

(b) the act or omission complained of was done or omitted to be done without his consent or connivance and that he exercised all such diligence to prevent the commission as he ought to have exercised having regard to all the circumstances of the case.


Section 51. (1) Any person who—

(a) wilfully obstructs any officer appointed under this Act acting in pursuance of this Act;

(b) wilfully fails to comply with any requirement properly made to him by such an officer under section 50; or

(c) without reasonable cause fails to give such an officer so acting any other assistance or information which he may reasonably require of him for the purpose of the performance of his functions under this Act, shall be guilty of an offence and shall, on conviction, be liable to a fine not exceeding thirty thousand ringgit or to imprisonment for a term not exceeding three years or to both.

(2) If any person, in giving any such information as is mentioned in the preceding subsection, makes any statement which he knows or has reason to believe to be false, he shall be guilty of an offence and shall, on conviction, be liable to the penalty mentioned in that subsection

As you can see, the penalties and fines are quite hefty. Like I said before, the main purpose of the Hire Purchase Act is to protect the Owner/Bank as well as the Hirers especially the ones who buy used cars in terms of protection against cars that do not meet specifications or cars with hidden defects, "chopped" or "frankenstein" cars and stolen cars. The Act also protects against improper procedures on loan processing, repossession and legal action. In 2010, some amendments even though excellent in its intention in added protection, is deemed to be too protective and in certain cases is impractical in its implementation, according to some quarters. As a result, the new provisions caused problems to consumers, the Banks and the car dealers to a point that car buying and loan processing has become so slow and frustrating.

For the consumers, it caused problems especially to those who want the car "yesterday" especially during festive season (very very important to some people) but at the same time, they also want full protection from the Act  when they got into trouble even though they (the Hirer) are also guilty of breaking the rules in one way or the other whether they realized it or not. I do not want to comment too much on this as the affected parties has already discussed this matter at length with the authorities and their grouses are easily searchable with the ever accommodating Mr Google.

I want to "talk" about the loan recovery process for car loan in accordance with the provisions of the Hire Purchase Act 1967 (latest amendment 2010) and some other related issues such as "Continue Payment", failure to state the current location of the car  and the like. As I have mentioned earlier, in a Hire Purchase Agreement, as long as the loan remain unpaid, the borrower is called the "Hirer" and the Bank is the real "Owner" of the car where the ownership claim is prominently displayed in the registration card.

Normally the interest/usury rate for a Hire Purchase agreement is of the "flat rate" type even though the "variable rate" type based on the Base Lending Rate (BLR) is also available as another option where a certain percentage point will be added to the BLR. The interest/usury rate structure is provided for under what is known as the "Sixth Schedule" as shown below:

The above calculation is closely related to the "rebate" or a discount that is given for the balance of total interest not yet due when the Hirer wants to make an early settlement for the loan. We shall take an example from the loan details below:

Assuming that the Hirer wants to settle the loan by the 36th month, the formula for rebate calculation is:

Based on the above calculation, the rebate or discount given is RM8036.70 and this amount is valid until the next due date. If the cutoff date has expired, the rebate for the next due date will be calculated for the following month which is for payment number 37 and so on.

During my younger days, the rebate is calculated manually and you can show it to the Hirer if he/she is not satisfied by just looking at the precalculated figure in the ledger. This is the main bone of contention between the Hirer and the Bank whenever there is a full settlement request. The usual dialogue is " I have paid a lot of money already, why is the balance so high? I'm a math teacher you know and I have done my own calculations! (based on a true story) The answer is "This is the math of usury. The name of this calculation is the"Rule of 78" or the "Sum of the Digits" (that is the sum of 1+2+3+4+5+6+...+12 = 78) that is a formula created in the 1920s before the existence of the calculator. The main purpose is to enable the creditors to maximize their profit where a large portion of interest/usury will be collected during the early stages of the loan. So the Bank will whack the interest/usury during the early years (approximately 75% of interest/usury up to the halfway mark of the loan) . Only towards the end  a larger portion of the principal will be collected. That is why dear math teacher, you will not find the answer in your "normal" textbook." 

Not too many people know about this as most of the computations are done with the computer. To have a bit of understanding, you can refer to the table shown below:

A Hire Purchase Agreement commences as soon as the Bank pays the car dealer or the previous owner of the car for the price of the car which includes the first year of insurance premium for a new car. If, for whatever reason the Hirer decides that he/she wants to return or sell the car and would like to make full settlement, even after a few hours, he/she will be charged interest/usury of RM330.28 and the "new" car he/she has bought, has already become a "second hand" car and shall lose a few thousand Ringgit more. That is the fact that has to be accepted.

You can also see for yourself, even up to the third year, a large portion is still "reserved" for interest/usury. That is the interest structure that has been molded into the Hire Purchase Act  which is the "Rule of 78" as what I have mentioned previously. However, it is not clearly stated in the Act as you can see here:

In your opinion, how many people can actually understand the "calculation method" given above? Yes, not many. There used to be a detailed formula but not anymore. Perhaps it is deemed unnecessary in the age of advanced technology we live in where everything is "at your fingertips". No more manual calculation in the "good old days" which is actually good in terms of understanding what the heck you are doing. You can bet your life's possession that not many "new age" Bankers actually know how to calculate the rebate manually. There are some Hirers who will insist on seeing and understanding how the formula works and I would love to see the look on their faces if confronted with such situation. Some will just say that if the computer prints it, it must be right and if the Hirer still insists, they will have to look for the "old timers" or the "old school" colleagues, that is if they still exist. Some have gone their own way after the massive "golden handshake" exercise during the financial crisis of 1997.

Whatever the case may be, that is the fact of the matter whether it is Hire Purchase Loan, Housing Loan, Personal loan, Credit Card Loan or whatever loan the Bank may call it, the interest/usury must be "cleared" first so that it will be easier to sue the borrowers (in the event of default) on the maximum amount of principal and maximize the late or penalty charges and upon obtaining Judgment, charge further interest on the maximized amount.

That shall be the introduction for the "interest-ing" topic on the Hire Purchase Act 1967 (latest amendment 2010). We can now proceed to the Loan Recovery Procedures for Hire Purchase Loan with special focus on motor vehicle in Part 2 of the series...

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