Legal Statutes in the Banking Industry in Australia 1800s to 1900s - Research Paper Example

Running head: Legal statutes in the in the banking industry in Australia 1800’s to 1900’s Title: Institution: Instructor: Module: Date: Legal statutes in the in the banking industry in Australia 1800’s to 1900’s Introduction Academics have most recently taken into account the Australian company law. The reason is that Australian law is depicted to come from the English law. The Australian company law evolves from different perspectives and this paper discusses the legal statutes that govern lending decisions between 1800’s and 1900’s. It also discusses the securities that were used in these periods by banks as collateral for customers to repay their loans. The paper indicates that the advancement of loans gives a favors to the customer since most f the work is left to the banks for processing the loans. On the other hand customers are expected to carry out enough research on the banks before going for loans in those banks (Louis, 1935). The Australian law is a clear indication of the English law. This paper discusses prepared aspects of official emergency liquidity support to corporations under strain. The paper tries to argue that properly designed lending procedures with clearly laid out authority and accountability, and disclosures rules, will promote financial stability, reduce moral hazard, and protect the lender of last resort from undue opinionated pressure. The lending procedures are clearly outlined in the paper. Legal regulations that governed lending during 1800’s In the period of 1800’s there were different ways in which banks would accumulate adequate funds for lending to customers. As a result these banks play a role as an intermediary between those with excess reserves as well as those in need of financing. Banks take the responsibility of collecting the excess money through deposits and then redirect them through loans into capitals. Companies usually purchased credits from banks due to the lack of liquidity that would reduce the profitability of the firm. Companies usually find the costs of borrowing to be favorable in the sense that it is less expensive to borrow in the recent than in future. Australian banks in the in the 1800’s were governed by statutes that required signature loans to be given to customers who needed fast loans on a signature basis. However this method of lending had a problem of not having collateral and good credit. By then, it was very difficult for corporations to get these loans because they did not have collateral (William, 1952). The law required that for corporations to get these loans then they should have a good reputation for making their payments on time and honoring all the loan agreements with the bank. This was the only thing that could have been considered as collateral for such loans. There were various binding principles for signature loans where a corporation should be based near the bank area. These loans were difficult to be offered since their credit rating was not strong enough. Promise to Pay The bank and customers were required to make a contract during the time of lending. This contract was for the purpose of defining the terms with which the lender and the borrower would work to meet their duties. (Public Loans Act 1900, Cap 36), the law required that a contract to be made between these two people so that it delineates the borrower an obligation to repay back the loan. The borrower had to pay the loan according to a given schedules as well as at a specified interest rate (Juster, 1966). The lender was required to require collateral that would serve the purpose of securing the loan and to enforce payment through the courts. The lender would also require the borrower to provide security against default by assigning collateral assets. In 1800’s the lending regulations did not clear instructions concerning credit terms. There was a problem in defining the repayment schedule, interest rate, necessity of collateral, and debt retirement. The law restricted the establishment of national banks for mobilizing loans in the regions. Legal restrictions prevented the establishment of national banks. Local banks mobilized credit within regions however there were few mechanisms to move credit between regions. The demand for long-term credit increased in the 1820s, 1830s, and 1840s as a result of canal building that had dominated in the transportation firms. Factory production emerged in manufacturing firms and new technology led to new methods of doing agriculture. There were defaults that occurred in the year 1837 followed by a depression between 1839 to 1842 and this led to view that long term lending was not safe for banks (Lamoreaux, 1994). Consumer Credit Lending in terms of consumer credit was available in the 1800’s. During then, most consumer credit would be extended directly by merchants and service providers. Store credit was also used when there are unexpected expenses, unexpected declines in income, a seasonal pattern to income, or lack of funds by the companies. However this type of financing did not have collateral that the companies would repay their debts (Public Works Loans Act 1875, Cap 89(3)). If there is any collateral then the collateral would be forfeited if the repayment terms were not met. Lending money to companies during this time was seen to have high interest rates. This was a disadvantage to the companies and this needed reforms. Securities that banks required in 1800’s as a collateral from customers Seligman, 1927 denoted that, the banks during the period 1800’s accepted factoring as one way of giving surety that loans borrowed by he customers are going to be paid. Factoring was used by companies who were not able to arrange traditional bank financing. With factoring, companies would create invoices that were submitted to the Fostrian Business capital. The Fostrian would then purchase the invoice and advance the customer with a 90% of the invoice amount. The customer is the called for collection of the invoice amounts. These customers would then promise to pay for the invoices at a later date. Upon payment of the invoices to the Fostrian he customers were then paid the balance of 10%. Factoring was considered as a good way of providing security since businesses would get business finances quickly. Factoring Factoring at those times had its own benefits as a security for loans by banks. Companies would have the advantage of preparing strong financial statements as well as getting a working capital credit line through the factoring of the accounts receivables. However, even though this method is used till today, it posses’ problems due to diversity of factors in different industries factoring way of security financing are not used today. The use of French and English Fancy foods as collateral was considered in Australia when lending money to customers by banks. This involved the use of a full assorted of jet, coral and steel goods. A balm of thousand flowers that was composed of palm oil, honey and other valuable articles was also considered as collateral (Barron et al, 1997). The use of Putman Clothes as collateral in Australia in the 1800’s was one of the securities that banks would consider for loan repayment by customers. This involved the use of iron that was well galvanized with Zinc and could not oxidize and rust easily. The modus operandi was also use as a valuable clothing in Australia as a security for loans. The agents were given a Gold Hunting case watch for the value of loans given to customers as collateral. The Gold watches were to be presented at the first instance after the customer has taken the loan (Phelps, 1952). A beautiful engraved gold watch with a double case, lever cap will act as guarantee that the customer will pay for the loan to the bank. Australian banks also considered gold pens and cases as security for loans from the customers. Land was also used as collateral by the banks who gave loans to its customers. The land was expected to be large that can thrive settlement with a mild and healthful climate. It should have rich soil that produced large crops with the size of 20-25 acres. The land was used as collateral especially for house loans. Consols and guilt edged securities (Common Wealth of Australia Constitution Act 1900, Cap 12), in the 1890’s the banks used Consols as security for loans given to their customers. During the time the banks found Consols to be oh high value and had more liquidity and high earning ability. In 1800’s guilt edged securities were also used as collateral by banks for the payment of the loans advanced to the customers. These securities led to banks facing large amounts of losses in their operations. Hence in the 1900’s banks decided to do away with the Consols used as collateral. They found that the consols had often fallen in prize which led to the diversification of securities by he banks in the 1900’s. The banks were forced to establish a special reserve that would cover the depreciation on its investments (Juster 1966). Legal regulations that governed Lending by banks in the period 1900’s until today Development of the Law of Credit According to Lewis, 1990, the law has taken into consideration the protection of borrowers since they are easily exploitable by lenders. Often these two parties do not have equal negotiating opportunities to confer with all the terms of the agreement. This makes banks to take the advantage of their customers. The law establishes a notion the banks can have a fee that can be charged to the customers for the lending of their funds. The rate of interest is regulated in such a way that banks cannot impose high rates to their customers which tends to be unfair. Legal Rate of Interest In 1900’s up to today, the law requires that interest to be computed in a number of ways. Banks are found to use the most profitable way that is within the requirement of the law. (Finance Act 1900, Cap 36), when figuring out the legal rate of interest banks are expected to determine which expenses are a part of the finance or interest charges. The fees charged when filling or recording a document should not be included in the interest by banks. This will be taken as making the customer who has appraised the formation of the document. The law does not allow this and requires the bank to be fair when dealing with their customers in the advancement of loans (Guttmann, 1994). Mortgage Lending Mortgage loans are allowed to be advanced by the law. (Loan Act 1901, Cap 12), a mortgage is considered as a loan in the sense that both possession and ownership of the house transfer to the buyer. A bank is required by the law to carry out mortgage loans just like the other forms of loans. Failure of a corporation to pay a mortgage loan then the bank will place a lien of the mortgaged house. The bank cannot own the house but it can sale the house to regain the money that was lend to the customer. Until the 1930s, many home mortgages were three-to five-year contracts. The associated monthly or quarterly payments often covered only accumulated interest and included little or no principal repayments. At the end of the mortgage, a full payment equal to all or most of the principal was due. Those who owned homes usually refinanced the mortgage and sometimes even paying off some of the principal due but just as often refinancing the entire amount. At this time the homeowners gained little equity in their homes as a result of their payments where equity was acquired only as housing prices rose. In 1933 the Home Owners Loan Corporation was created by which would refinance home mortgages. Here principal payments were required to be fully amortized, spread out over the life of the loan (Lendol, 1999). The law that governed lending by banks till today gave certain demand that banks with their customers should meet. Banks were required to decide on repayment schedules for the companies who were borrowing money. They were required to define the maturity of the debts in the credit contracts. The banks were also required to define the interest rates with which these loans will be advanced. The interest rates would be sufficient to cover the term of the loan or adjusted to reflect change in market conditions. The contracts that would be made between the bank and the corporations were to be defined for the assurance of payment or compensation in case of a loss. Collaterals would include things such as real estate or land. The time of debt to retire was to be defined as well. The legal statutes advance for the bank to have confidence on the customer when lending. The company’s ability to pay the loan should be the major policy for lending banks. The bank should use various financial tools that will enable them to evaluate the credit worthiness of a customer. Banks are required by the law to use both subjective and objective guidelines in evaluating risks. The banks are allowed to carry out commercial transfers. This ensures that companies export and import funds just like in commercial bank transactions. The government regulates the banks through the asset recovery management department. This department issues a loan recovery policy to the banks. There is a policy on collection of dues from defaulting borrowers and security repossession for realization of dues. The debt collection policy of the bank is regulated in such a way that dignity and respect to customers. The bank should not follow policies that are unduly coercive in recovery. The policy requires banks to have courtesy, fair treatment and persuasion when recovering dues form borrowers and taking possession of security. This ensures that the banks promote confidence and long term relationship with customers (Charitable Loan Society (Ireland) Act 1900, Cap 25). The board of Governors of the Federal Reserve System, 1957 advocated that, the law requires that the repayment schedule for any loan sanctioned by the bank should be fixed. This should take into account the repaying capacity and cash flow pattern of the borrower. The bank had the responsibility of explaining to the customer methods that they use when calculating interest rates. The bank would also show how the equal monthly installments are appropriated against interest and principal due from the customers. Customers are required to adhere to the repayment schedule given by the bank. This will help the bank in assisting them in times of difficulties when meeting the repayment obligations. The law also regulates the relationship between the banks and its customers through the security repossession policy. (Company’s Act 1908, Cap 12), this involves taking possession of the mortgaged properties or taking the property as a non banking asset by enforcing the policy. This policy plays a big role in the fairness and transparency in repossession, valuation and realization of security. The banks are required to conform to the law on all its practices in conforming with the follow up and recovery of dues and repossession of security from customers. The law requires that all the members of the staff or any other person who is authorized to represent the bank in the collection or security repossession would follow the various guidelines. The law requires that the authorized person working with the bank to be made known the banks customers at the first instance. Here the authorized person to represent the bank in collection of dues will identify him or herself as having the authority to transact business for the bank. The bank is required to respect the privacy of its customers under the law. The law also requires the bank to be committed with ensuring that all written as well as verbal communication between the bank and the customers to be in simple business language. The bank is also expected to adopt civil manners for interacting with its borrowers (Seligman, 1927). (Compensation Act 1950), the security repossession policy requires that the bank should make communication with its customers between 0700hrs and 1900hrs. Failure of this, the bank should give explanation for default to the borrower unless otherwise. Other circumstances by the bank may warrant it to visit the borrower at odd hours and occasions. The policy also restricts the bank from calling the customer at particular times or at a particular place. This should be honored by the bank at put into practice. The bank is also mandated to document all the efforts taken to recover dues and the copies of communication should be sent to the customer and recorded. In addition, the bank is also required to resolve any dispute that may exist regarding the dues in a mutually acceptable and in an orderly manner. The existence of inappropriate occasions such as bereavement between the bank and the customer must always be avoided by all means. The bank may decide to call or make visits in collecting the dues. These acts are considered to be good loan follow up measures. The regulating law gives a mandate to the banks that they should give a notice to their borrowers. (American Loan Act 1915, Cap 81), the bank cannot raise a legal recovery measure including the repossession of security without giving due notice in writing to the customer. The bank has to follow such procedures as required by the law during recovery or repossession of security. The law denotes that, repossession of security simply is aimed at recovering of dues. It does not deprive the borrower of the property (William, 1952). The bank is required to undertake the repossession process in the time of repossessing security form the customer. The recovery process involves the repossession, valuation of security and realization of security through the use of appropriate means. The process should be carried out in a fair and transparent manner. According to the law, repossession only takes place after the bank has issued a due notice to the customer. The bank should also take all the reasonable care to ensure that there is safety and security of the property after taking custody in the ordinary course of the business.  The law also regulates the operations of the banks in relation to its customers by requiring the bank to value and sale the property of the customer without owning it (The Company’s Act, 1900, Cap 48). The bank will value and sale the property repossessed from the customer as per the expectations of the law and in a fair and transparent manner. Louis, 1935 suggested that, the bank has the right to recover the balance due from the customer after selling the property. Any excess amount that is obtained on the sale of the property is returned to the borrower after meeting all the expenses provided by the bank. However, the borrower has an opportunity to take back the security. This is because the banks intention of selling the borrowers property is not to deprive the borrower the property. The bank may consider handing over the possession of property to the borrower any time after repossession. On the other hand the handing can be done only before concluding sale transaction of the property, provided the bank dues are paid in full. If the bank is satisfied with the genuineness of the borrower of the ability of paying the loan installments as per the schedule whose consequence was the repossession of security, the bank may then consider handing over the property after the receipt of the installments in arrears. Australia 1900’s regulations for lending by banks The government gives statutes that can be used by corporations when negotiating for a loan modification. Here, it is clear that violations in truth in lending act and the real estate settlement procedures Act banks are liable for failure to make the required disclosures to the customer. The corporation is expected to be given compensation by the bank in the form of rescission, damages and equitable relief. The law provides the real estate settlement procedures Act that governs the disclosure requirements for the banks to its customers. This Act enables the corporation to be to be paid damages if there is error in the disclosure. In violating the discovery of truth in lending act may enable the rescission for damages. The truth in lending disclosures detail how much the corporations are paying for the loan, the percentage rate and APRs, and the amount owed at the end of the loan. The corporation can review the contract to determine if there are prepayment penalties that lock it into the loan for a pre-determined period of time. This will enable the customer to get away from predatory lending. (Cap 461), describes that if the borrower chooses not to bring his action within one year the period fixed by the statute within which an action to enforce the penalty must be commenced to waive his right to a treble recovery. Hence he may do so and still retain the right to maintain an action for money received, to recover back the excess actually paid, at any time within the period prescribed by the statutes of limitations. The remedy given by the statute is cumulative and not exclusive as it has been frequently been decided in other States where similar statutory remedies have been given. According to (Money Lenders Act 1900 cap 51), the statutes makes it legal to pay and receive any rate of interest because a penalty imposed by statute is regarded as a substitute for the common law remedy or because the statute is taken to mean to mean that contracts for usurious interest are merely unenforceable as to such interest and not illegal or void and the right to restitution is denied.. The law protects the corporations in the time of failure by the bank to provide a correct notice of the right to rescind. This gives the customer to have up to three years time after the closing date to rescind the loan. The loan may be rescinded any time before the three year or the corporation may consider that the loan never existed (Olney, 1991). The bank is then expected to refund all interest paid, the closing fees, broker fees and the customer’s attorney fees. This regulation is imposed for the purpose of helping corporations who fall into predatory lending. The law also regulates the relationship between the customer and the corporation through the home ownership and equity protection Act. This Act is imposed to govern high cost refinance loans. Any breach of contract by the lender reduces the corporation’s ability to pay a mortgage. This problem gives the courts a challenge when deciding if the loan should be voided or changed. The banks are required by the law to have good methods of collecting debts form their customers. The fair debt collection practices Act is a federal law that requires banks who obtain the mortgage after default to follow a specific protocol in collecting debts. Failure of this the bank is required by the law to enforce statutory damages and attorney fees. In addition, there is the fair credit reporting act that governs the banks ability to report information about the mortgage. Accurate reporting is necessary here and violations of this act also enable damages and attorney’s fees to be paid. Punitive damages may be available under this act (Seligman, 1927). Advantages of legal statutes that were used in banks in the 1900’s up to now The customer was mostly favored by the regulations imposed. The reason is that most of the responsibilities were left to the bank when processing the loan. Rosenthal 1988 advocates that the bank has the responsibility of proving clear and correct information of the past financial periods. The customer waits for all the steps to be undertaken by the bank after which they are infirmed to collect the loans. The customer is deprived his possession of the security property by the bank. This means that the customer can always reclaim the security for the loan from the bank. Loans that have illegal terms and conditions can never be enforced. This ensures that the parties to the loan are faithful to one another. Disadvantages of legal statutes that were used in banks in the 1900’s up to now The statutes do not give penalties to banks with fraudulent transactions. The banks may give a false statement of income or history. This brings difficult when blaming the bank because the borrower took the precautions given before signing the application for the loan. It is evident that violations of state and federal laws concerning the advancement of loans can make a person face stiff penalties and consequences for the bank. Borrowers are required to make a thorough scrutiny of the banks status before taking a loan from it. The customer cannot claim any compensation in future if the bank defaults and there was no enough investigation by the customer. The bank can on the other hand face a refund to the customer if the violation is on its side. The loan was not met due to the problem with the bank. The customer may claim for all the interest that has been paid to date. This gives a big loss to the bank (Heath, 1991). Despite the great strengths that are associated with the current banking regulations, these regulations are found to be rigid with demanding labor laws. They are also associated with high factor costs and lack of property title. There is lack of transparency for the public procurement and a significant reduction in local commercial bank liquidity. The regulatory decisions are highly influenced by political considerations and non transparency. Securities in that were required by banks as security for the payment of loans by customers in the 1900’s Credit Securitization According to Randall 1990, credit securitization was used during this period by customers for the purpose of securing borrowed loans from banks. Credit secularization involves gathering of outstanding credit instruments and other receivables. These are repackaged in the form of securities which to the loans are similar to closed-end mutual funds. Underwriters sort the credit instruments into homogenous groups such as maturity, purpose and interest rates as well as market participation in the cash flow generated by the debt instruments backing these securities. According to the banking act a debt of a mortgage is secured by a real estate. Credit securitization supports the viability of financial intermediaries by spreading the risk over a broader range of investors who purchase the securities. It also ensures that there is increasing liquidity through an immediate cash infusion for the securitized debt. This process is always considered beneficial to investors and borrowers alike. The huge size and competence of the system puts downward pressure on interest rates. The pooling of loans into large, standardized securities makes it possible for the actuarial and monetary analyses of their risks. Government stocks In 1900’s the banks were using government stocks as loans that could be advanced to their customers. Government stocks are more reliable securities in the banking sector. Corporate bonds which are lump sums invested in a stock issued by a company for a fixed term at a fixed interest rate. At the end of the term which is the redemption date, the original value is repaid in full. The stock can be bought temporarily and sold at any time at the market price. Some stocks are issued by foreign companies, public authorities or governments in which case they are called Euro sterling. The yearly return that the corporation gets is known as net redemption yield. This amount can be used by the corporation as security since they have to gain from it. The running yield is the return ignoring any gain or loss which can also be used as security for long term loans. Some stocks would show no gain to redemption as they currently stand above the nominal value of 100. Definitely many guarantees suffer an immense loss if held to recovery. From time to time redeployment can result in raising the interest rate being raised, the stock can be repaid early or a loan stock could be converted to a debenture. There is also Convertible Loan Stock or Bonds which in addition carry the right to be converted into Ordinary Shares at a fixed price and date in the future although these conversion rights often turn out to be worthless (Altman et al, 1997). Different stocks are good for different rate taxpayers. Investing directly in stocks with a fixed redemption date may be safer than investing in a fund of such stocks. Compare with stock government fixed interest for a lower yield but possibly with less risk. Stock maturing in 10 and more years not recommended although in the past these generally had a higher running yield and can eventually be expected to do so again. Conclusion The legal statutes governing the lending by banks and the securities that are associated with the loans in Australia between 1800’s and 1900’s seems to be a wide topic. It is based on the English law and defines the existence of law that governs loans in the world. The regulations that govern lending of loans in the 1800’s differ from that o 1900’s up to now. 1800’s is seen to be the ancient day while 1900’s involves the current regulations that are being used up to now in the lending fraternity in Australia. However, the current regulations are found to have more problems than the ancient regulations of lending. The 1800’s loan regulations are fewer compared to the current regulations on loans. The Australian government imposed more lending regulations to banks in the 1900’s. This came with more diversifications in the bank industry in lending loans. Many forms of loans were found to be emerging hence the need to regulate more during this time. Bibliography Altman, E. I., Caouette, J.B & Narayanan, P. (1998). Credit Risk Measurement and Management: The Ironic Challenge in the Next Decade." Financial Analysts Journal. Barron, B. J & Paul J. Miranti, P.J. (1997). A History of Corporate Finance: Cambridge, U.K.: Cambridge University Press. Board of Governors of the Federal Reserve System. (1957). Consumer Installment Credit.Washington, D.C.: Board of Governors. Lendol, C. (1999). Financing the American Dream: A Cultural History of Consumer Credit. Princeton, N.J.: Princeton University Press. Lamoreaux, N. R. (1994). Insider Lending: Banks, Personal Connections, and Economic Development in Industrial New England. New York: Cambridge University Press. Lewis, M. (1990). The Credit Card Industry: A History. Boston: Twayne Publishers. Juster, F.T. (1966). 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