QUESTION
it is a business law essay. I am engineering student doing this business course as general education.
SOLUTION
OPTION – 2 ASSESSMENTS
INTRODUCTION:
In the given facts it states that my employer the mercantile bank purchased home loans from a lending company which deals in portfolio of home loans, which was unable to receive money from its borrowers. The lending company provided home loans to all the borrowers at an interest of 85 cents for each dollar and with sudden decrease in the value of homes the borrowers are not in a position to pay their home loans thus the lending company approached the mercantile bank and sold all the loans to the company. The banker had decided to revalue the loans for an interest of 95 cents for one dollar and also force the borrowers to pay the loans or lose their house. If in case the value of loan is below the value set by the banker then the borrower had to pay the balance amount and if the borrower is lucky then he may receive back his money if he had already paid more money.
Now we need to determine under what law the above stated contract can be described and on basis of what consideration can be made in selling this product to others. As per the facts we already have understood that the product in question is the home loan which the borrowers are not able to pay back due to decrease in the sale value. If we check for a solution under the grounds of Business law this issue falls under the home loans and mercantile law. Before moving forward with the law and the status of law applicable we have to understand certain terminologies which would be used in the essay continuing. The terms used here are lending company, borrower, home loan & the mercantile bank. Being the manager of the bank I have to get into the brief explanation of these terminologies so as to provide proper legal representation for creating this product.
Loan: Loan is known as a debt, it involves distribution of money between the lender and borrower. The repayment of loan is made with interest.
Lender / Lending Company: Under the mercantile law and the banking law lending company is the company which lends money to the purchaser on certain interest; here the interest discussed is 85 cents for 1 dolor. Lending is a kind of a financial aid given to the borrower who is in need of money and in back the lender calculates interest on the amount he had lent such that the borrower would have to pay the actual money along with interest. Also, it can be explained as a monetary help given to the person who is in need of finance.
Borrower: The other terminology dealt is the borrower who is the purchaser of the money lent. He borrows money and repays it back with interest. He receives money and repays it to the lender on installments with interest.
Mercantile Bank: A bank involved in the money making business and these banks are commercial in nature and dealt in trade.
LAWS APPLICABLE FOR CREATION OF THIS PRODUCT – HOME LOAN CONTRACT:
As we have known the basic terminologies now we go further into application of law for the product mentioned in this option. The product in question is a home loan and under the Australian law on loans there are many varieties of home loans which are available to the borrowers based on their requirement. The difference in home loans is basically on the calculation of interest. Now the application of Law, as the manager of the company I feel that there is a need for application of Law into this product is necessary so as to control and crub the sinful actions of human as they are open to temptations. In Australia exists the concept of private property and thus the role of state in economics is limited, still from 2000 legal system provides the rules and limitation to be followed by the individuals to avoid discrimination.
As a manager of the company it is essential for me to check through the applicability of law in the particular issue. The law that would be helpful in creating the product of home loan in Australia is the Mercantile Law under the Mercantile Act of 1936. As per the act mercantile bank or the agent is the person who has the customary course of authority in selling or buying goods, raise money as security on goods. Here the mercantile bank had decided to increase the interest of the home loan to be received from the borrower and he has all the rights in demanding this rate of interest so as to avoid loss on interest during inflation. The banker considers in recovering his accrued interest based on sale proceeds. Thus, he has ultimate right in demanding more for the created product and also that he can demand the borrower to pay additional amount if the value of the home is below the value assed by bank.
Under the Banking Act of 1959, there are many regulations and control made for transfer or sale of mortgage property. Being a mercantile banker the employer had to abide by the banking act along with the mercantile act. As per the status of law the lender can sell loans to mercantile buyer if he is not in a position to force the borrower for payment of the home debt or does not take the risk if the borrower becomes default he can sell the products to any but as to abide by the law. As the lender is a private individual he cannot incur much damage nor can he take up much liability. The liability of the individual is limited this is the reason why he does not take risk. He has to work in a way to avoid risk and when entering into contracts where the payment is uncertain or the parties which have to make the payment are default then he better opt to sell the product to the third party as per the norms of the Mercantile Act and the banking regulations. Thus, it is very essential for the lender to be on the safe side to avoid risk and damages.
Sale of the home loan bonds to the third party is a contract and when entering in to such contract the third party should be very careful that the data is relevant and also that there is no misrepresentation of the facts. The mercantile bank had entered in to the contract with the lending company dealing on home loans with free consent and he should check if the details and the consideration of the contract are genuine. It has to observe that the legality of the clause is genuine and that it does not fall under the unlawful types of contract such as contract illegal by common law, void by common law, illegal by statue or void by statue. As per the description of the details of the case and the terms of the mercantile act it can be termed that the present act of contract is not void by statue or by common law and as to question related to the legality of the contract it is legal as both the parties to the contract are eligible parties and can enter into contract. Under the present circumstances the borrowers had taken home loan from the lending company with a view that they can repay it based on the interest value but sudden decrease in the home values as resulted them to become defaulters and as the lending company is a private organization and is limited by the liability, to avoid the risk entered in to contract with the mercantile bank. Being the manager of the mercantile bank it is for me to check and abide the interest calculations, the manager had to consider that the bank is not at loss in entering into contract with the lending company also he had to consider on what basis can they make more money because as already known mercantile bank or the agents are money making financial institutions. Being the manager of the company it is my primary duty to see that the bank enters into transaction which does not involve risk and also the foreseeable risk while entering into the contract, as per the norms and the details provided in the contract there is no risk for the bank in entering in to the contract with the lending company and take in the home loans. As studied that the laws abiding the creation of this product are the laws on which the loans under the heading of house as stated in the Australian Law. These laws include the Mercantile Law, the Banking Law and the law of contract dealing with mortgage and payment of house loans. Effective with all these laws the sale of house loan product can be made. Thus, being the manager of the bank I can have the bank enter in to the contract with the lending company in relation to the said home loans.
CONSIDERATION BEYOND THE LAW IN SELLING THE PRODUCT TO OTHERS:
Consideration as per law of contract is one of the essential element where the promise made by one party for rendering services can only be enforced if there is payment made to the party which made the promise. It is well defined in Currie v Misa that valuable consideration as per law consists either some interest or profit, in short it is the profit paid for performance of an agreement. In the present situation the banker enters in to the contract with lending company for house loans and there is a consideration on part of the lending company that it would be receiving payment on full and final from the banker who will in turn act as a lender and get back the loan value from the borrower. This way there is consideration available for both the parties and thus both are in a gaining position and none at loss.
As per the facts given in the introduction the banker increased the interest value by 10 cents and has intended to force the borrower in payment of the loan in full and final or else the borrower have to lose their homes. It can be noted that on entering into the contract with the lending company the bank had gained the title of ownership over the property and that they have every right to take ownership on the property if the borrower becomes default in the payment of the property. The banker can make certain other considerations beyond law such as providing certain financial assistance to the borrower such that he can at first get par with the home loan and its interest and later pay the finance he had received from the bank. The borrower can take another loan from the bank and repay his house loan such that he can avoid losing his house and in a way bank is also in a gaining position as it is receiving interest even for other loan they have given.
Under the Mercantile Act of 1936, the banker or the mercantile agent is deemed to be in possession of goods or documents where the title of the ownership may be in his possession or other party on their behalf. Thus, the banker has a consideration in the contract under law and also outside the law. In the contract the banker entered in to the contract because he planned to receive loan value from the borrowers on interest more than the actual interest they had entered into, in this way he is in profit on the interest. He also states that if the value of the property is undervalued when compared to the value assessed by the banker then the borrower is to make the loss payment i.e., if the property value is assessed to be $300,000 by the bank, but is valued only for $250,000 then it is for the borrower to pay the loss of $50,000 to the bank to make up for the loss the bank may incur because of the loan. Therefore, there is consideration of profit to the bank on entering into this contract.
The banker on the other side can provide different assistance to the borrower such that the banker is not at loss and also the borrower is in the safe zone. It can advise the borrower to rent their property as there is decrease in the rate of the house than to pay the monthly mortgage or installments. In this way the borrower is on the safe side and the bank can receive its loan value, once if the borrower is in arrear even after renting the house the banker can seize the house after 2 months of notice and then can increase the value of the house while selling it. The borrower has to compulsorily pay his debt along with interest or lose their house. Thus, renting is also one of the best considerations outside law for the borrower.
While selling this product to others it should be clear that the title of goods is not misrepresented and there is profit on performance of the contract. The mercantile banker or the agent is with the consent of the owner is in possession of the goods or its title should have the authority to dispose the product under law thus in the given event the banker does have the right to sell the homes of the borrower or take the possession of the property because he has the right given to him by the lending company.
Consideration necessary for making a valid contract such as sale, mortgage of title or ownership of the property by exchange is made with relation to the terms stated under Sec 4 to 12 of the Mortgage Act. The consideration includes payment by cash, delivery of transfer of goods or any other valuable consideration, under the current event consideration includes payment by cash and also the borrower can mortgage the property to the bank until they make the complete payment such that they do not lose the house completely to the bank. Here the borrower is the original owner of the property because he has it registered on his name but his documents rest with the money lender as he is in debt with him. The money lender in turn had them transferred to the banker such that he is out of the risk of indebtedness of the borrower. The borrower can claim back the documents of his house on payment of the loan to the bank and absence of which he would lose his house. Thus it is essential for the borrower to make the payment of his loan to gain his documents of the house. As a consideration he can rent his house or mortgage it to the bank itself or even make other considerations such that he does not lose the house and the banker is also at gain. As the banker had purchased the home loan value from the lending company the borrower has to pay the under-value if any to the bank if the bank’s assessing value is high.
CONCLUSION:
Therefore, based on the above observations it can be concluded that the circumstance of the case can be dealt under the norms of the Mercantile Law1936, Banking Law 1959 and law of contract in Australia, such that the borrower gains the his property after satisfying the consideration based on which he had bought the loan from the lending company (which is with the bank as the lending company is in contract with the bank). The contract between the lending company and banker is valid as the lending company is at profitable consideration and even the bank will be the same level on receiving money from borrowers or selling the home. The reason for the lending company for entering in to the contract as stated is because of the arrears of the borrowers who were unable to make payment due to the decrease in the house values.
REFERENCE:
- Banking Act, 1959
- Mercantile Law, 1936
- Laws of Contract – Australia
- Tonto Home Loans v Tavares – liability of lender
- Special Rules for Certain Home Mortgage Transactions – Federal Deposit Insurance Corporation
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