Consumer Property Financing
Legal

When you apply to property financing through a bank, a legal instrument is needed to ensure that the bank can collect the outstanding payments in the case you default. MRTT coverage does not achieve that as it is only triggered in the events of death and permanent disability. Banks resort to two security measures: mortgages and charges.

With a mortgage, the ownership of the property is assigned to the bank, subject to the condition of transferring the ownership to you after settling the whole outstanding balance with the bank. Hence, though you can move to the house and live in it at the beginning of the financing term, you will actually own it by the end of this term.

Charges are the counterpart of mortgages, where no assignment of the property rights is made to the financier. A charge is a legal agreement signed between the chargor (customer) and the chargee (the bank). The charge agreement creates a legal claim over the property in favor of the bank, which enables the bank to proceed with a legal action aiming at selling the house and collecting the sale proceeds to settle your outstanding balance. The charge agreement is registered on the title of the property at the Land Office in order to inform potential buyers of the existence of the financing. That way, the bank will be the first in line to collect its monies. Once the charge is registered, the bank will have indefeasible interests in the property, meaning no past event can nullify or undo these interests.

Malaysian banks, Islamic and non-Islamic, adopt the charge system. With a charge, you live in the house and you own it from the first day, with some considerations to the financier as discussed below. Typically, you would not feel the charge as long as the payments are being made smoothly and punctually to the bank. Once the entire financed amount is paid off, the bank will remove the charge at the Land Office.

The following table summarizes the main differences between charges and mortgages:

• Declare that there is no mortgage, charge, pledge or lien over the property having priority to the charge with the bank;
• Seek the bank’s prior written consent before you sell the property, or you assign, transfer, or charge any of the property’s rights;
• Seek the bank’s prior written consent before you lease, or let out the property;
• Seek the bank’s prior written consent before you pull down or remove any building or fixture from the property;
• Use the property in compliance with the restrictions of the charge and the allowed category of use;
• Repair all defects in the property;
• Maintain and cultivate the property in a good manner, up to the satisfaction of the bank;
• Keep the property clean, weeded and free from lallang and other undergrowth;
• Pay quit rent and all taxes payable to governmental agencies; and
• Deposit documents of title of the property with the bank.

• “Understanding Charge as Security Instrument,” by Chris Tan, viewed at edgeprop.my, on Mar. 28, 2020.
• “Types of Security -- Overview,” by Lexis PSL, viewed at lexisnexis.com, on Mar. 28, 2020.

A four-part agreement that describes the terms that govern the property financing process offered by MBSB Bank to you.

• Part A provides a basic description of the integrals of the facility, the rights and responsibilities of each party, as well as the significant events such as disbursements, monthly payments, and default.
• Part B describes the Tawarruq arrangement, which is the Shariah instrument through which finance is made available.
• Part C describes in more details the financial and legal aspects of the facility, with some focus on the responsibilities of the customer.
• Part D is the Letter of Offer (LO) that you will receive upon approving your application.

This agreement is meant to be educational; many terms and processes are defined. If you need to look up a point, you should look there.

This is the agreement through which the ownership of the property is transferred from the developer/seller to the customer. The property title is issued by the Land Office based on this agreement. The customer usually pays the down payment on the spot out of his/her personal money, and seeks property financing for the remaining portion of the property price. SPA describes the rights and responsibilities of the seller and the purchaser, as well as the layout, dimensions, and structure of the property. Of particular importance are the schedule for completing the property, if under construction, and the associated schedule of payments by the purchaser.

This is the agreement through which the charge is executed. As you know, a charge does not transfer the ownership of the property to the bank, rather it creates a legal claim over it in favor of the bank, and establishes the bank’s legal interests in the property. The charge enables the bank to proceed with a legal action against a customer in default of 3 monthly payments, and concurrently with a foreclosure to sell the house and use the sale proceeds in settling the outstanding payments, as well as all other fees and service charges owed to the bank.

Since the charge is connected to the property title, a copy of this title comes by the end of the agreement, as you may have guessed.

An inclusive document that describes the rights and responsibilities of the customer and the bank under the facility before issuing the property title, including the execution of the charge in favor of the bank upon the issuance of the property title, appointing the bank as an attorney on behalf of the customer to take necessary legal actions, the financial and maintenance responsibilities of the customer towards the property, buying required Takaful policies, the bank’s responsibilities to make disbursements to developer/seller, the bank’s rights to collect proceeds to settle debts, and the bank’s right to commence foreclosure in case of default by the customer.

Why is the Deed of Assignment needed if a charge is used as the security instrument?

The reason is that the charge is connected to and registered on the title of the property. Since property titles, especially strata titles, take considerable time to be issued, the charge cannot be really implemented before issuing the title. Thus, another security mechanism is needed pending the issuance of the title. The Deed of Assignment plays that interim role as a security instrument. It transfers to the bank the same rights of the property, which are granted by the charge.

To bring the Deed of Assignment (DoA) into action, another agreement of executive nature is needed to enable the bank to exercise the legal powers given by the DoA. The Power of Attorney agreement lists the possible legal actions that may be exercised under the DoA. Subsequently, the Donor (chargor/customer) irrevocably appoints the bank to execute these legal actions when triggering events unfold.

As you already know, a guarantor may be required to make overdue payments on your behalf. In this agreement, the responsibilities of the guarantor are listed. As discussed in the section of security measures, there is no standard set of liabilities for the guarantor. Such liabilities vary from one bank to another and among different agreements. Hence, it is critical for the prospective guarantor to read and understand the agreement to sign, and to be clear about the extent of his/her liabilities.

This agreement establishes an additional venue for settling the indebtedness of the customer resulting from the facility (property financing) offered by the bank. In this agreement, the chargor (customer) entitles the bank to (1) combine all his/her current and deposit accounts in any currency, and to (2) set-off (deduct) the funds in these accounts against his/her financial liabilities to the bank.

The above description is meant to be a brief introduction of the main legal agreements of Property Financing. Careful reading and proper understanding of these agreements are essential before signing them.

As summarized in the Product Description Sheet of property financing (Par. 9), and discussed in more details in Annexure 1 of your Letter of Offer (LO), failing to meet your financial obligations, without agreeing with the bank on alternative payment arrangements, could result in the following consequences:

• Late Payment Compensation
  

  The bank has the right to charge you a compensation fee of 1% per annum on overdue payment(s), see LO, Annexure 1, Par. 5. This fee cannot be further compounded in proportion to the overdue amount or in proportion to the elapsed time after missing the payment.
  For example, if you miss a payment of RM10,000 for 2 years, the compensation fee will be RM100 for the first year, and RM100 for the second year. Since the compensation fee is charged on a monthly basis, you will be charged RM8.33 every month.



• Default Rate
  

  If you miss 3 consecutive payments, the profit margin of the bank will jump to 2.5%. You will thus be charged an EPR of BR + 2.5% (e.g. 3.9% + 2.5% = 6.4%) once the third “consecutive” payment becomes overdue, see LO, Annexure 1, Par. 6. The bank will continue to calculate the profit based on this rate until the overdue payments are less than 3.
  For example, you did not make the monthly payments of Mar., Apr., and May 2019. In Sep. 2019, you made one of the 3 overdue payments. In Nov. 2019, you made the other 2 overdue payments. Accordingly, the bank will calculate your profit using the rate of BR + 2.5% for the months of Jun., Jul., and Aug. 2019.



• Right to set-off
  

  The Bank has the right to set-off any credit balance in your account maintained with the Bank against any outstanding balance in your financing facility account, see LO, Annexure 1, Par. 14. The bank is going to issue a 7-day notice of the intended set-off. Of course, you should rectify the situation as soon as you receive this notice.



• Legal action leading to foreclosure
  

  Based on the charge agreement in observance of the legal interests of the bank over the property, the bank could proceed with a legal action in a civil court aiming at foreclosing (selling) your house, see LO, Annexure 1, Par. 20.
  Generally speaking, foreclosures take the following path:

  
  
  • Notices will be sent to you once you miss a single payment. Initially, there are just reminders. When you miss 3 payments, notices will be replaced with a “Demand Letter” formally and firmly demanding the payments. If no payment is made by the fourth month, your financing will be considered in default.
  • Legal action for ensuing foreclosure is taken by the bank. You will then receive a “Notice of Default” followed by a “Notice of Sale.”
  • Auction is arranged where the property is made available to the highest bidder.
  • Eviction notice is sent after the sale informing you when you need to leave the house.
  
  

  Apart from the social and psychological outcomes of a foreclosure, it does hurt your credit scores. The record of a foreclosure will stay on your credit report for 7 years. Poor credit scores mean a very limited chance to secure a financing.

• “Foreclosures Explained: How They Work and Why They Happen,” by Justin Pritchard, viewed at thebalance.com, on Mar. 28, 2020.