Granting loans and overdrafts is part of the banking business, and to stay solvent, a bank must be certain that the customer to whom a loan is to be given or an overdraft granted has the means of repaying same as and when due.
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However, no matter how cautious a bank might be or how creditworthy a customer might seem, the bank is never totally sure that the customer will pay back the loan at the time due.
It is for this purpose that the bank usually requires that the customer who is desirous of receiving a loan from the bank provide security from which the bank can recover the money advanced in the event the customer fails to pay back.
Security is insurance against unforeseen developments, and the last source through which the bank can get its money recovered, should things turn sour. Security provides the banker with something to fall on if every other source fails.
Apparently, good security does not promise us that the advance will or will not be bad, nor does its absence actually impair the chance of success of the investment. All it tells us is that should things go the other way, it should be visited and that is why security is seen as a residual factor in lending and the credit decisions are never based solely on the availability of security although good security may assist a marginal proposal.
Types Of Bank Securities
The common types of bank securities are a lien, pledge, mortgage, guarantee and indemnity, negative pledge, set-off, and even insurance. But the most commonly used security is a mortgage. Various types of bank securities are explained below:
- Lien: In relation to bank securities, a lien is a security giving the banker the right to retain possession of the customer’s property until the money advanced is paid. It is noteworthy that, unlike most bank securities, a banker’s lien is informal security. When it is said that a customer pledges his/her property to the bank as security for a loan, what it means is that the customer makes a physical or constructive transfer of his/her property to the bank to be held by the latter until money owed is absolutely paid. This may be confused with a pledge, but it is not. Unlike mortgage and pledge which are formal securities, a lien is informal security, i.e., as at the time the bank took possession of the property on which it later sets up a lien, there was no intention on the part of either the bank or the customer that the customer was depositing it as security and their right of lien arose only by operation of law. On the other hand, a pledge and mortgage require prior agreement or intention on the part of both parties that the property involved is being passed to the bank as security.
Therefore, a lien is not established by way of contracts or agreement between parties but rather it is a right that is developed as a result of the action of the parties and by operation of law. This means that where one party deposit their property with another to whom the debtor is indebted, the creditor, by operation of law, has a lien in such property in the event of default.
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- Negative Pledge: Where a customer undertakes in writing not to charge any of his assets to any other lender without the consent of the banker, there is said to be a negative pledge.
- Guarantee: Sometimes, the bank may require that the customer obtain the commitment of other persons to pay the money advanced in the event that the customer defaults. This form of security is referred to as a guarantee. When a person admits guaranteeing the debt of another, a separate contract is created between that person as guarantor, on the one hand, and the creditor on the other hand. This is a contract of guarantee, and it can be enforced against the guarantor without joining the debtor.
- Set-Off: Where a customer operates more than one account with one bank and one of such account is in debt, the bank may use the credit balance from any of the customers operates two or more accounts with the bank and the payment of due credit facility granted on one of such accounts. This is called set-off.
- Mortgages: Another transaction that can define or redefine the relationship between banks and customers is called a mortgage. The customer/mortgagor is expected to pay back the debt in instalments and the property transferred is considered security for the debt, title of which will revert to the customer upon payment of the full sum agreed upon by the parties. The following are the different terms that are common with mortgage transactions.
- Legal Mortgage: This is created when all legal stipulations for the creation of a mortgage have been met. It is formally created with the consent of the Governor. It has priority over an equitable mortgage.
- Equitable Mortgage: This is an arrangement between the parties without a formal structure of a legal mortgage, but which involves the transfer of property from one party to another, through the deposit of title documents, in exchange for a loan. When this happens, it will be implied that the parties intend to create a relationship of mortgagee and mortgagor between themselves, and the courts will treat them accordingly even in the absence of an express agreement to that effect.
- Foreclosure: The transfer of a property by the mortgagor to the mortgagee is tied to the mortgagor’s indebtedness to the mortgagee, and as soon as the debt has been repaid, the property reverts to the mortgagor. However, where the mortgagor defaults in making the agreed payments, the mortgagee may decide to sell the property in order to satisfy the debt. Thus, the mortgagee exercises a power of sale over the goods which he or she has property in due to the unpaid debt, and the exercise of the mortgagee’s power of sale is called a foreclosure. The power of sale is given to the mortgagee for his own benefit, to enable him to realize his debt.
The debtor-creditor relationship of the bank and its customer will cease to exist where a mortgage transaction is entered into by the parties. However, this may not always be the case as the parties may continue their usual bank-customer relationship and also pursue a mortgagor-mortgagee relationship.
As regards the power of sale of a mortgaged property by the mortgagee, it is settled law that the only obligation incumbent on a mortgage is that he should act in good faith as well as conducting the sale as he thinks conducive to his own benefit.
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