A couple of years ago, it was reported in the media that unfair housing loan terms were to be revised by Bank Negara Malaysia (BNM) before the end of 2019. Two years later, consumers across Malaysia are still waiting for an update.
Bank Negara Malaysia (BNM) had then shared that they have found some terms and conditions in housing loans and financing contracts to be disproportionately skewed in favour of banking institutions, to the detriment of consumers.
“These included terms and conditions that provide absolute exclusions or limitations of a banking institution’s liability and obligations, and place undue reliance on signed declarations to assert that financial consumers have read and understood a contract,” BNM noted in its 2018 Financial stability and Payments Systems report.
For too long, Malaysian consumers or borrowers have been at the losing end of such unfair terms of housing loans and have no choice but to accept such terms or risk having their loan application rejected.
What are the unfair terms and conditions in housing loans?
Some of the concerns raised were:
Bank’s lawyer is acting in the best interest of the bank
It is a standard practice that borrowers of housing loans have to pay for the legal fees incurred for the said loan. However, although the borrower is paying for the property’s legal fees, the lawyer responsible for the housing loan is actually acting for the Banks and not the borrowers and is only obligated to act in the best interest of the Banks.
Included in the standard terms of the housing loan to the borrower other than the amount of the loan and the corresponding interest rate to be charged is a barrage of terms that are grossly unfair to the borrower. What’s more, the borrower is not allowed to vary such terms and must either accept or reject the loan offered it its totality.
In addition, whilst the borrower has time to shop for different loan products by comparing the various Letter of Offer before deciding on which Bank to finally take the loan from; the borrower is given little or no time to vet through the official Loan Agreement before it is signed. This is because after the borrower has returned the Letter of Offer, the borrower will be told to go to the loan lawyers’ office to execute the Loan Agreement and other security documents.
Once at the loan lawyers’ office, the borrower will be presented with a thick stack of Loan Agreement papers as well as subsidiary security documents and will be told that the Loan Agreement and its subsidiary are standard contracts and cannot be varied in any way and the borrower must execute the Loan Agreement or else the loan will not be approved.
Half of the borrowers will just sign the Loan Agreement after just checking the important details such as the borrower’s information, loan amount and the interest rate charged. The other half may read through the Loan Agreement and find many unfair and lopsided terms and will attempt to clarify with the property lawyer only to be told that the terms cannot be negotiated. Hence, the borrower has no choice but to sign the Loan Agreement or have the loan rejected.
Unequal bargaining power
The recent Federal Court ruling in CIMB Bank Berhad v Anthony Lawrence Bourke & Anor (2019) 2 CLJ 1 states that Banks cannot escape liability for their mistake by relying on disclaimer clauses in the Loan Agreements comes as a big relief to house buyers.
The Federal Court has held, inter-alia, as follows:
- Clauses which absolutely restrict the rights of customers to enforce a contract via legal proceedings are void pursuant to the Contract Act, 1950
- Contracts which clauses to absolutely exclude liability were ‘patently unfair’ and unjust to bank customers, and merited the application of principles of public policy as well as interference by the Courts.
In reality, the bargaining powers of the parties to a loan agreement are different and never equal. The parties seldom deal on equal terms. In today’s commercial world, the reality is that if a customer wishes to buy a product or obtain services, he has to accept the terms and condition of a standard contract prepared by the other party. The parties in the instant case, are no different. They have unequal bargaining powers between the Banks and their customers. It is unconscionable on the part of the Bank to seek refuge behind the clauses and an abuse of the freedom of contract.
Unfortunately, most house buyers will not have the resources to sue their Bankers and the announcement by BNM that unfair clauses in Loan Agreements for housing loans is a much-welcomed move.
HBA also welcomes the move by BNM to require Banks to use less technical and legal jargon in Loan Agreements that only trained lawyers can understand and draft these Loan Agreements and other subsidiary documents so that the average layman will be able to appreciate and comprehend.
Apportionment of payment to interest and principal shrouded in secrecy
Another grave injustice to borrowers is the allocation of monthly instalments towards the settlement of principal and interest as this is not disclosed anywhere in the Loan Agreements or even in the standardized templates.
To illustrate a real-life example, we had a complainant who took a 20-years housing loan about 6 years ago. After diligently paying his monthly instalments towards his loan for 5 years, the complainant assumed that the principal amount outstanding should only be about 75% of the original amount. Unfortunately, as the complainant personally experienced, the amount was closer to 83.5%. No doubt, the use of Excel Mortgage template is practised universally by Banks but a layperson will think otherwise, using their simple arithmetic calculation.
There needs to be greater transparency on how the allocation of monthly repayments for interest and principal is done and this must be disclosed in the Loan Agreement. Perhaps, BNM can fix the method of charging interest?
RM500,000 cap in standardized template should be removed
HBA notes that the Association of Banks, Malaysia (ABM) and Association of Islamic Banks made a remark that they are currently reviewing all standardized housing Loan Agreements template which was approved by them but limited to the principal sum of RM500,000 or less to address the concerns raised by BNM. The price of houses has increased substantially over the past 10 years when the template was first initiated.
In this regard, HBA calls for all residential housing loans (including service apartments, etc that are classified as residential dwelling under the Housing Development Act) regardless of the loan amount to be covered under this new ruling as announced by BNM. HBA hopes that BNM will take a comprehensive review of the Loan Agreements to identify all clauses that are lopsided and grossly unfair to the borrower and ensure that these clauses are removed from the standard Loan Agreement for ‘standard’ housing loans.
Recommendations for House buyers taking up a new loan
On the sideline, our recommendations to customers are as follows:
- Chose Flexi-loans, where one can ‘re-use’ their monthly repayments;
- Encouraged to ‘pay more’ as and when they have extras (like bonuses) to enable them to shorten the loan tenure;
- Talk to the bank for an option to start paying their monthly instalments rather than service progressive releases; and
- avoid a ‘lock-in period’ so that the Bank will not impose a penalty for early redemption.
BNM should balance the scale of fairness
HBA calls for Banks to continue to take cognizant of their borrowers’ hardship and protect the interest of their home loan owners instead of only focusing on profits and creating a balance sheet that will appease their shareholders.
HBA also calls on BNM to continue the close monitoring and policing of Banks in Malaysia to ensure that they do not take advantage of their borrowers. The battle of a borrower versus Banks is a battle of ‘David vs Goliath, and the timely intervention of BNM is needed to balance the scales of fairness in the banking arena.
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