SECURITY FOR PERSONAL LENDING AND PERSONAL BORROWERS IN DIFFICULTIES
Bank Security
Security is a cover taken by a lender to cushion the institution from complete nonrecovery of a borrowing should the promised source of repayment fail to materialize of does not cover the full advance with interest.
When to take Security
a) If loans are granted for the purchase of an asset, then, practicable the asset should be taken as security.
b) Where the purpose of the advance is to acquire a specific asset, e.g., a home loan
c) If it seems possible that repayment from an expected source is not forthcoming, and no viable alternative source of repayment can be seen, then security should be looked for.
d) Security acts as collateral or as an additional cushion should the promised source of repayment fail to materialize in future.
e) Where the risks and consequences of the expected source of repayment failing are such as to make it necessary to have a clearly defined and controlled alternative source.
Types of Security and Valuation
As tangible security for personal borrowing land and property, life policies or stocks and shares are used as security. Banks will not normally rely on 100% of the value of the security because values can fall, and accrued interest and realization costs can be high. Bank security margins vary, but the following are typical of the maximum percentages
they will lend against various form s of security.
Domestic land and property 80%
Life policies 95% of surrender
Investments 80% – 100%
Obviously much depends on volatility and the lender’s view of the market and in some cases the above figures would differ greatly. Common sense and a realistic view of the present economic situation are great aids in the valuation process. In many cases bankers have been surprised at how security valuations can be eroded, particularly where a forced sale is necessary in tough market conditions. Needless to say regular revaluations of the security should be carried out, either professionally or by the bank manager (depending on the asset and amount borrowed) at appropriate intervals.
Stocks and shares should be revalued quarterly (more often if the market shows signs of volatility), and property at least every three years. Life policies tend to increase in value each year as long as premiums are paid, so it is only necessary to obtain new surrender values every five years or so.
If you are offered a second charge over property as security, a valuation of the property would first be carried out by the branch manager or, more likely a professional valuer.
This valuation would then be reduce d by the margin stated above, and from the resulting figure the amounts outstanding on any prior mortgages would be reduce d to give the value of the security to the bank. At an early stage, you must confirm the amount owing to the first mortgage.
Why is a margin required?
a) To cover any fall in value between the date of the advance and the sale of an asset. For a long term lending, the uncertainty of realizable value may be greater therefore a wider margin may be required.
b) The costs of sale and other necessary costs relating to the need to keep the asset saleable, such as security, insurance and maintenance costs on a property
c) The role up of interest since the last charging date.
Guarantees and Third Party Security
A guarantee is an agreement where one party agrees to be collaterally responsible for non payment of an advance by the borrower. The guarantor can take oath of personally meeting the repayments from personal income or by pledging personal assets. The guarantor undertakes that in the event the borrower fails to meet obligations under the
contract, will be responsible for the miscarriage.
Bankers are reluctant to take guarantees as security for personal borrowing. If they do they must ensure that:
The guarantor fully understands the nature and extent of the liability – if an ‘all
monies’ charge form is used the guarantor must be made aware of the implications of
this clause.
The guarantor is given the opportunity to take or actually receives, independent legal advice, particularly if there is any chance of ‘undue influence’ being exerted – indeed, many banks now positively insist on independent legal advice being taken by all givers of third party security.
If security forms are to be signed at another branch, that the nature of the liability is fully explained.
Supporting tangible security is provided if you are relying on a large guarantee.
The wrongful trading provisions of the Insolvency Act 1986 are unlikely to apply. Under these a director giving an unsupported guarantee for a company’s liabilities could later incur full liability for the company’ s debts to the detriment of the bank’s position if wrongly trading occurred. This would include continuing to trade knowing
the company to e insolvent
