Abstract
Much of the discussion in this chapter deals with the concept of “true sale”. Provided that the “alchemy” of asset securitisation lies with the bankruptcy-remoteness of trust assets, a true sale is supremely important for the healthy life of a securitisation programme. A number of features that may decide a true sale have been discussed in this chapter. Among them, account standards, including Financial Accounting Standards Board Statements, and a number of court cases, from common law jurisdictions including United States, Canada, and United Kingdom, pertaining to true sale have been taken into consideration. The latter part of the discussion is forced on current Australian regulatory provisions, especially Consumer Credit Code, affecting various aspects of the residential mortgage securitisation in Australia.
This is a preview of subscription content, log in via an institution.
Buying options
Tax calculation will be finalised at checkout
Purchases are for personal use only
Learn about institutional subscriptionsNotes
- 1.
Commonly referred as Special Purpose Entity (SPE) or Financial Vehicle Corporation (FVC) or Trustee. In some jurisdictions, different names are used to refer to the same. For example, in Japan, the term Special Purpose Association (SPA) or Special Purpose Company (SPC) is used. See Roy B True, ‘Risk and Insolvency Issues in Japanese Asset Securitization’ (1996) 28 New York University Journal of International Law and Politic 505. Also called single purpose entity (SPE), see Pearce Forrest, ‘Bankruptcy-Remote Special Purpose Entities and a Business’s Right to Waive its Ability to File for Bankruptcy’ (2012) 28 Emory Bankruptcy Developments Journal 507.
- 2.
Referred as a “clean sale”, especially in overseas literature. Also, the term “Clean sale” has been used in the APRA Capital Adequacy Guidelines. A “true sale” is one which will prevent the property becoming part of the seller’s bankruptcy estate in a bankruptcy subsequent to the sale. A true sale is at the very heart of legal issues in securitisation. Provided a securitisation programme is based on a true sale, the investors get a legal right over the receivables. In contrast, if it is not a true sale, investors may be either at par with unsecured lenders, or even worse. Schwarch, Steven L, ‘Structured Finance: The New Way to Securitize Assets’ (1989) 11 Cordozo Law Review 607.
- 3.
Schwarcz, above n 2. See also Joseph C Shenker and Anthony J Colletta, ‘Asset Securitization: Evolution, Current Issues and New Frontiers’ (1990) 69 Texas Law Review 1369.
- 4.
See, e.g. the discussion on “true sale” made in Schwarcz, above n 2.
- 5.
On the one hand, courts exhibit ambiguity in determining factors of a true sale, while on the other hand, courts depict lack of uniformity in “re-characterizing” a sale contract.
- 6.
In determining authorities, we have confined to common law jurisdictions—namely, the United States, Canada, and United Kingdom.
- 7.
Following articles have been taken into consideration in order to make the above classification. Steven L Schwarcz, ‘Structured Finance: The New Way to Securitize Assets’ (1990) 11 Cardozo Law Review 607; Schwarcz, above n 2; Peter V Pantaleo et al., ‘Rethinking the Role of Recourse in the Sale of Financial Assets’ (1996) 52 The Business Lawyer 159; Kravitt J Brown and M Platt, Securitization of Financial Assets (vol. 1) (Aspen Publishers, 2006). Pelma Rajapakse and Naomal Gunawardena ‘Assignment of mortgage loans to a special purpose vehicle in securitisation in Sri Lanka: With some reference to Australian Securitisation Programs’ (2013) 28 Banking and Finance Law Review 475; S. Senarath., ‘Securitisation and the global financial crisis: can risk retention prevent another crisis?’, (2017) 18 International Journal of Business and Globalisation, 153; Senarath, S. and Copp, R., Credit default swaps and the global financial crisis: reframing credit default swaps as quasi-insurance (2015) 8 Global Economy and Finance Journal, 135; S. Senarath (2016)., Not so “‘Bankruptcy-Remote’: An insight into Sri Lankan Securitization Practices in a Post_GFC Context” (Paper presented at the MAC-MME conference, Prague, Czech Republic); Senarath, S. ‘The Dodd-Frank Act doesn’t solve the principal-agent problem in asset securitisation’ (2017) blogs.lse.ac.uk (11 November 2018).
- 8.
For a detailed description, see Major’s Furniture Mart v Castle Credit Corp, 602 F 2d 538 (3rd Cir, 1979). A detailed discussion on the validity of recourse provisions and also the validity of investor agreements on not to seek recourse provisions has been discussed in Chap. 5.
- 9.
Pantaleo, above n 7.
- 10.
Re Grand Union Co, 219 F 353 (2nd Cir, 1914) Major’s Furniture Mart v Castle Credit Corp, 602 F 2d 538 (3rd Cir, 1979).
- 11.
Re Sprint Mortgage Bankers Corp, 164 BR 224 (Bankr EDNY, 1994).
- 12.
Merchants’ Transfer & Storage Co v Rafferty, 48 F 2d 540 (2d Cir, 1931).
- 13.
Schwarcz, above n 2.
- 14.
Evergreen Valley Resort, Inc, 23 B.R. 659, 661–61 (Bankr. D.Me.1982); Re Nixon Mach Co, 6 BR 847, 854 (Bankr ED Tenn, 1980).
- 15.
Home Bond Co v McChesney, 239 US 568 (1916); Dorothy v Commonwealth Commercial Co, 116 NE 143 (1917).
- 16.
Schwarcz, above n 2.
- 17.
In a securitisation programme, the originator would be appointed as the collection agent in most cases, especially for practical convenience. Mere appointment of the originator as the collection agent would not jeopardise the “sales treatment” given to the transaction. If the originator acting as the servicer acts as the same as other servicers, receives a fee for her services, and the transferee (in this case, the SPV) has the right to remove the originator from the position of the servicer to make sure that the appointment of the initial originator as the collection agent would not pose a threat to the true sale nature of the transaction. Schwarcz, above n 2. See also Lloyds & Scottish Fin Ltd v Cyril Lord Carpets Seles Ltd [1979] 129 NLJ 366; People v Service Inst Inc, 421 NY Supp 325 (1979).
- 18.
Brown and Kravitt, above n 7.
- 19.
This has been discussed in a number of authorities including in Major’s Furniture. However, exceptions are not rare. Metropolitan Toronto Police Widows and Orphans Fund v Telus Communications Inc [2003] 30 BLR 128. Adopting a literal interpretation, the Supreme Court of Ontario decided all agreements with clear written evidence of intention of parties to have a true sale as “true sales”. For a discussion on the emphasis paid by courts for the language used, see, generally, Stephen I Glover, ‘Structured Finance Goes Chap. 11: Asset Securitization by Reorganizing Companies’ (1992) 47 The Business Lawyer 611.
- 20.
Rajapakse and Gunawardena, above n 7.
- 21.
Rajapakse and Gunawardena, above n 7. However, it should be noted that mere “notice to borrower” would not constitute a true sale. Yet, such notice would be an indication of the parties and would be evidence of a true sale.
- 22.
Ibid.
- 23.
Vinod Kothari, Securitization: The Financial instrument of the Future (John Wiley & Sons, 2006).
- 24.
If the asset is de-recognised, the transferor will have no further involvements with the transferred asset.
- 25.
Katherine Schipper and Teri Lombardi Yohn, ‘Standard-setting Issues and Academic Research Related to the Accounting for Financial Asset Transfers’ (2007) 21 Accounting Horizons 59.
- 26.
Ajay Adhikari and Luis Betancourt, ‘Accounting for Securitizations: A Comparison of FASB 140 and IASB 39’ (2008) 19 Journal of International Financial Management & Accounting 73.
- 27.
Raymond E Perry, ‘Accounting for Securitizations’ (1993) 7 Accounting Horizons 71.
- 28.
Adhikari and Betancourt, above n 26. Some scholars have identified the financial component paradigm as a significant improvement compared to the risk and reward approach, as far as accounting for securitisation is concerned. See, for example, Jason Kravitt, ‘Introduction to Securitization’ (1988) (Working paper) http://www.securitization.net/knowledge/accounting/fas125.asp
- 29.
In scholarly literature, consolidation has been identified as a critical consideration in securitisation. See Eugene A Imhoff Jr ‘Asset Securitization: Economic Effects and Accounting Issues’ (1992) 6 Accounting Horizons 5. A detailed discussion on devastating effects of consolidation on securitisation has been discussed in Chap. 5: Insolvency considerations for securitisation (see Sect. 5.6 Re General Growth Properties Inc).
- 30.
See Kothari, above n 23.
- 31.
Statement of Financial Accounting Standards No. 13, (November 1976), Financial Accounting Standards Board.
- 32.
Financial Accounting Standards Board Statement No. 77, (1983) Financial Accounting Standards Board [5(a)].
- 33.
See Ibid, [5(b)], where it states:
Lack of experience with receivables with characteristics similar to those being transferred or other factors that affect a determination at the transfer date of the collectability of the receivables may impair the ability to make a reasonable estimate of the probable bad debt losses and related costs of collections and repossessions. A transfer of receivables shall not be recognized as a sale if collectability of the receivables and related costs of collection and repossession are not subject to reasonable estimation.
- 34.
Ibid, [5(c)].
- 35.
See Kothari, above n 23, 770.
- 36.
Kothari, above n 23, 765.
- 37.
See the summary of the Financial Accounting Standards Board Statement No. 125 (1983) Financial Accounting Standards Board.
- 38.
Ibid, [9(a)].
- 39.
Ibid, [9(b)].
- 40.
Ibid, [9(c)].
- 41.
Ibid, [12].
- 42.
Ibid, [119].
- 43.
Kothari, above n 23, 770.
- 44.
Financial Accounting Standards Board Statement No. 140, (September 2000) Financial Accounting Standards Board.
- 45.
Refer to the discussion on financial components approach at the beginning of the chapter.
- 46.
According to this statement, a liability can be derecognised if and only if either (a) the debtor pays the creditor and is relieved of its obligation for the liability or (b) the debtor is legally released from being the primary obligor under the liability either judicially or by the creditor.
- 47.
This section has been drawn from the actual FASB 140.
- 48.
Financial Accounting Standards Board Statement No. 140, (September 2000) Financial Accounting Standards Board [Para 9(a)].
- 49.
Ibid, [9(b)].
- 50.
Ibid, [9(c)].
- 51.
Adhikari and Betancourt, above n 26.
- 52.
Financial Accounting Standards Board Statement No. 140, (September 2000) Financial Accounting Standards Board [Para 36].
- 53.
Ibid, [37]–[38].
- 54.
Ibid, [39]–[45].
- 55.
[1990] BCLC 925.
- 56.
Welsh Development Agency v Export Finance Co Ltd (1992) BCLC 148.
- 57.
Re George Inglefield Limited [1933] Ch. 1, 23.
- 58.
Orion Finance v Crown Financial Management [1996] 2 BCLC 78.
- 59.
Welsh Development Agency vs. Export Finance Co Ltd; CA 1992.
- 60.
Kothari, above n 23, 588. Also see Anne-Marie Neagle, ‘Re-characterisation Risk in Securitization and other Structured Finance Transactions in Expansion and Diversification in Securitization’, cited in Jan Job de Vries Robbé, Securitization Law and Practice: In the Face of the Credit Crunch (Kluwer Law International, 2008).
- 61.
[2003] OJ No 128. (ONSC) http://www.canli.org/on/cas/2003 (20 January 2004) paragraphs [40–41].
- 62.
[1992] BCLC 148.
- 63.
602 F 2d 538 (3rd Cir 1979).
- 64.
602 F 2d 538 (3rd Cir 1979). See also J. Lindsay and C Thomson, (1997) 21. A similar approach was adopted in Re Evergreen Valley Resort 23 BR 659 (1982).
- 65.
67 F3d 1063 (1995).
- 66.
[2003] O.J. No 128 (ONSC) paragraphs [50–51]. Indeed, in the English decision of Welsh Development Agency discussed earlier, the court found that although no real risk had passed from the seller to the purchaser, the transaction was nonetheless one of sale. Dillon LJ in that case emphasised that there was no clear touchstone for determining whether an agreement is really a sale or a secured transaction. For further discussion, see S. L. Schwarcz, Structured Finance: A Guide to the Principles of Asset Securitization (New York: Practising Law Institute, 1994) 28. In addition, see the Canadian decision of Metropolitan Widows’ Fund, also noted earlier.
- 67.
See, for example, Welsh Development Agency v Export Finance Company Ltd [1992] BCLC 148; Metropolitan Toronto Police Widows and Orphans Fund v Telus Communication Inc [1996] 2 BCLC 78.
- 68.
R.D. Aicher and W.J. Fellerhoff, ‘Characterisation of a Transfer of Receivables as a Sale a Secured Loan Upon Bankruptcy of the Transferor’ (1991) 65 American Banking Law Journal. 181,183. For further discussion on the preconditions for a “true sale” of mortgage assets, see T. E. Plank, ‘The True Sale of Loans and the Role Recourse’ (1991) 14 George Mason University Law Review 287, 315; M. Oates, ‘RBA Guidelines on Funds Management and Securitisation’ (1994) 10 (3) Australian Banking Law Bulletin 23.
- 69.
See I. Plater, ‘Accounting and Tax for Off-Balance Sheet Financing’ IIR Conference, Sydney, September 1992, 6–12; and M. J. Cohn, ‘Asset Securitization: How Remote is Bankruptcy Remote?’ (1998) 26 (4) Hofstra Law Review 929.
- 70.
AASB, ‘AASB Adoption of IASB Standards by 2005’, August 2004, http://www.aasb.com.au
- 71.
Contractual rights, being choses in action as opposed to things in possession, were not assignable at common law without the consent of both parties to the original contract. The courts of equity, however, did give effect to assignments of choses in action. Perhaps the most significant feature of the division between the common law and equity was the almost complete refusal by the courts of law to recognise equitable rights, titles, and interests. Each system, law, and equity devised its own procedural rules and remedies, resulting in substantive differences in the approaches of the two jurisdictions. For a discussion of the divisions between, and subsequent fusion of, the courts of common law and equity, see R.P. Meagher et al., Equity Doctrines and Remedies (4th edition, Sydney: Butterworths, 2002) 36–41.
- 72.
In other words, the assignment of mortgagee rights should not be by way of a charge.
- 73.
Jones v Humphreys [1902]1 KB 10; Forster v Baker [1910] 2 KB 636 (CA); In re Steel Wing Co Ltd. [1921] 2 Ch 349. A legal assignment operates from the date on which notice is given to the underlying debtor to transfer (a) the legal right to the debt, (b) the legal and other remedies for the same, and (c) the power for the assignee to give a good discharge for the debt without the concurrence of the assignor. For more detail, see H. Saban, Corporate Debt Securitisation (Singapore: Butterworths, 1994) 42; M. Ono, ‘Unique Aspects of Japanese Securitization Relating to the Assignment of Financial Assets: A Comment on Raines and Wong’ (2002) 12 (2) Duke Journal of Comparative and International Law 469.
- 74.
See sections 199–200 of the Property Law Act 1974 (Qld). Difficult and unresolved issues may arise as to whether consideration is necessary for the effectiveness of an equitable assignment. However, a detailed discussion of these issues is not only beyond the scope of this book, but would be entirely moot since, in an RMBS context, the SPV as equitable assignee does provide consideration: it pays the originating mortgagee a sum equal to the present value of the mortgagee’s rights and obligations.
- 75.
See also Newfoundland Government v Newfoundland Rly Co (1888) 13 App Cas 199 (PC); Smith v Parks (1852) 16 Beav 115; Re Tout and Finch Ltd [1954] 1 All ER 127; [1954] 1 WLR 178.
- 76.
Thereby effecting a novation. In the context of securitisation, a novation involves a tripartite arrangement whereby the two parties to an original contract, the originator and the debtor, agree with an SPV that the SPV shall become a substitute for the originator, and thus assume the originator’s rights and obligations under that contract and in the creation of a new contract between the SPV and the debtor.
- 77.
See Tolhurst v Associated Portland Cement Manufacturers Ltd [1902] 2 KB 660, 668 (CA). Neither at law nor in equity could the burden of a contract be shifted from the shoulders of a contractor onto those of another, without the consent of the contractee: per Lord Collins MR. In an Australian context, see also B. E. Salter, An Overview of the Legal Issues Relevant to Securitisation in Australia (Sydney: Clayton Utz, February 2000) 5.
- 78.
Strictly, it is the mortgagee’s “rights, title and interest” that are assigned.
- 79.
Encyclopaedia of Forms and Precedents, v 4, 566. This is the case in all Australian jurisdictions except Western Australia: see section 20(3) of the Property Law Act 1969 (WA). In the other Australian jurisdictions, however, an assignment of part of a loan is recognised in equity: see Williams v Atlantic Assurance Co [1933] 1 KB 81 and Re Steel Wing Co [1921] 1 Ch 349.
- 80.
Standard and Poor’s, Structured Finance Australia and New Zealand (1999) 40; and B. Taylor, ‘Assignments of Securities in Corporate Re-Financing’ (1998) 13 Australian Banking and Finance Law Bulletin 141–155. In some jurisdictions, the giving of notice to the underlying mortgagors will be a necessary formality in the transfer of mortgages. In most European systems, for example, the Spanish Civil Code provides compulsory notice to the debtor in order to effect the transfer. Similarly, in France, Luxembourg, Italy Japan, South Korea, the giving of notice to the debtor is a formal requirement: J. Borrows, ‘Legal and Regulatory Issues’ in D. C. Gardner (ed.), Securitisation (London: Euromoney, 1997) 15; P. R. Wood, Title Finance Derivatives, Securitisation, Set-Off and Netting (London: Sweet & Maxwell, 1995) 53.
- 81.
Holroyd v Marshall 11 ER 999 (HL 1862); and Howard v Miller [1915] App Cas 318 (PC). Like a legal or absolute assignment, an equitable assignment does not operate to transfer obligations from the originator to the issuer. An equitable assignment will, however, transfer all rights of the originator in the loan or part thereof to the issuer, since a transfer of part of a right or chose in action is permissible under an equitable assignment: see Jones v Humphreys [1902] 1 KB 10 and Williams v Atlantic Assurance Co Ltd [1933] 1 KB 81. This in effect gives the SPV/assignee recourse to the borrower in equity, albeit only to the extent of the beneficial interest in that part of the loan assigned, and only when the originator/assignor (or the owner of the legal title) is joined as a party to a claim. See Derham Bros. v Robertson [1898] 1 QB 765 (CA); William Brandt’s Son and Co v Dunlop Rubber Co Ltd [1905] App Cas 454; L. B. Klein, ‘Legal Issues Relating to Participation in Bank Loans’, in J. Lederman (ed.), The Commercial Loan Resale Market (Columbus, Ohio: McGraw-Hill Education, 1991) 357, 385. Issues relating to sub-participations are not discussed here as they are beyond the scope of this book.
- 82.
The assignment of equitable interests has historically been regulated by statute. For example, section 9 of the Statute of Frauds 1677 required all “grants and assignments” inter vivos of “any trust or confidence” to be in writing, signed by the assignor. For any assignment to be valid, it had to be in writing from the beginning. See H. A. J. Ford and W. A. Lee Principles of the Law of Trusts (Sydney: Law Book Company, 2004) Ch. 3.
- 83.
Norman v Federal Commissioner of Taxation (1963) 109 CLR 9, 29.
- 84.
Re Ward (1984) 55 ALR 395.
- 85.
This is not to say that notice of the assignment to the debtor is unimportant. It could be highly significant in at least two situations in practice—first, where there are competing assignments of the same mortgage (in effect, this boils down to a priority problem, already discussed in Chap. 4); and second, where the borrower purports to pay off his or her loan to the assignor/originator, unaware that its mortgagee rights have been assigned, and obtaining the originator’s purported discharge of the debt: Stocks v Dobson [1853] 43 ER 411. If a borrower were to pay the originator, which then became insolvent immediately after receiving the payment but prior to paying the SPV, the SPV would have no recourse against the debtor: see R. Derham, Set-Off (2nd edition, Oxford University Press, 1996); The SPV would then need to either claim that the originator received the payment in trust for the SPV, or claim against the originator’s estate, in common with other creditors. (This might occur, for example, if the SPV was unable to establish a proprietary right to the payment received, or trace its proprietary interest in the payment into the hands of the originator).
- 86.
Indeed, there would seem to be an appreciable future risk of litigation against the banks, IMPs, and/or sponsors for contravention of the “unconscionable conduct” provisions of the Competition and Consumer Act 2010 (Cth).
- 87.
(1993) 31 NSWLR 246, 254; and (1993) ASC 56227, 58354.
- 88.
These potential problems tend to exist in all common and civil law jurisdictions. See generally, Wood, above n 80, 52–53.
- 89.
E. Cousins, The Law of Mortgages (2nd edition, London: Sweet & Maxwell, 1989) 384–386.
- 90.
Williams v Sorrell (1799) 4 Ves 389, 31 ER 198; Norrish v Marshall (1821) 5 Madd 475, 56 ER 977 [1814] All ER Rep 587; Re Lord Southampton’s Estate [1880] 16 Ch D 178; Parker v Jackson [1936] 2 All ER 281.
- 91.
Master Information Memorandum, PUMA Fund P-7 (2000) paragraph 5.2.
- 92.
The lack of notice to borrowers also exposes the banks to the risk of litigation. Nor should the banks be unaware of this risk. For example, the foreign currency lawsuits of the early 1990s were largely a result of management in the major banks failing to inform their borrowers of the potential risks involved in non-traditional borrowing. See, for example, Clenae Pty Ltd and Ors v ANZ Banking Group Ltd [1999] VSCA 35 (9 April 1999); David Securities Ltd v Commonwealth Bank [1990] 23 FCR 1; Chiarabaglio v Westpac Banking Corporation (1989) ATPR 40–971; and Leitch and Ors v Natwest Australia Bank Ltd and Anor (unreported, 12 October 1995, Federal Court of Australia) per Cooper J.
- 93.
Dawson v Great Northern and City Railway Co [1905] 1 KB 260 (CA 1904); and Re Harry Simpson and Co (1964) NSWLR 603, 605.
- 94.
Under general law, once notice of assignment has been given, the debtor cannot do anything to take away or diminish the rights of the assignee as they stood at the time of the notice Roxburghe v Cox [1881]17 Ch D 520, 526 (CA); see generally Derham, above n 85.
- 95.
Business Computers Ltd v Anglo African Leasing Ltd [1977] 1 WLR 578 (Ch).
- 96.
For a detailed discussion, see M. Wormell, ‘Securitisation and Set-Off’ (1998) 9 Journal of Banking and Finance Law and Practice 181.
- 97.
Or, for example, in the context of US law, once contractual privity is established between the borrower and the SPV.
- 98.
Diesel Motors Co v Kaye 345 NYS 2d 870, 875 (1973): S. L. Schwarz (1993) 30–31; T. Frankel, (1991) paragraph 7.23.
- 99.
Government of Newfoundland v Newfoundland Railway Co [1888] 13 App Cas 199 (PC).
- 100.
Borrows, above n 80.
- 101.
See generally, Wood, above n 80. Because of the competing claims that could arise and which could be set off against each other, it is clearly prudent for mortgages in favour of the originator’s employees to be excluded from the pool of mortgages that make up the backing for an issue of RMBS. The same argument can be made for the exclusion of mortgages in favour of persons who are depositors with the originator. However, an originator that is authorised to take deposits (e.g. a bank or building society) might find it difficult to implement this, especially if its general policy is only to grant mortgages in favour of its own depositors. Moreover, a mortgagor who is originally unconnected to the originator might become one of its employees or depositors. When considering the seriousness of this risk arising from the operation of equities, however, it is important to bear in mind that equities exercisable by individual mortgagors are likely to give rise only to isolated problems in specific cases. Since such isolated incidents are unlikely to undermine the value of the trustee-issuer’s earnings to any significant extent, they can therefore be viewed as being relatively limited importance in practice.
- 102.
It is difficult to see, in the absence of ineptitude and perhaps negligence, how commingling of funds could occur in a conduit programme. There would appear to be more scope for this to occur in a bank programme where the trustee-issuer is essentially a subsidiary or other entity related to the originating bank.
- 103.
Standard and Poor’s, Structured Finance in Australia and New Zealand (Melbourne: 1999) 73.
- 104.
It is interesting that, as discussed earlier, in Australian RMBS programmes, the originator’s mortgagee rights are assigned in equity to an SPV. In this way, the originator as the holder of a legal (and initially equitable) interest in residential mortgages purports to vest an equitable interest in those mortgages in the SPV by assignment. However, purely from the perspective of trust law, the equitable interest could equally well be vested in the SPV by the originator, at law, making a declaration of trust. The difference between the two mechanisms would be that while both would convey an equitable interest to the SPV, the equitable assignment would result in a constructive trust, whereas the declaration of trust would create an express trust. See Ford and Lee, above n 82, paragraph 3180. The reason why most RMBS programmes in Australia utilise the equitable assignment route, rather than an express trust, is that it is perceived to be simpler and less costly.
- 105.
Standard and Poor’s, Structured Finance in Australia and New Zealand (1999) 73.
- 106.
See Borrows, above n 80.
- 107.
See, for example, Macquarie Securitisation Ltd’s PUMA Master Fund P-7, in Master Information Memorandum, PUMA Fund P-7 and Master Information Memorandum, PUMA Sub-Fund Series 2014, p 58.
- 108.
I.e. those beneficiaries that hold units representing an interest in the capital of the trust, and those that hold units representing an interest in the net income of the trust up to a maximum, after all interest and principal payments have been made to the RMBS investors.
- 109.
Macquarie Securitisation Ltd in the context of Macquarie Bank’s PUMA Master Fund P-7, in Master Information Memorandum, PUMA Fund P-7, paragraph 4.6.
- 110.
Such as interest obligations on the RMBSs, and fees and expenses.
- 111.
E.g. the bondholders, or the interest rate risk manager.
- 112.
For further discussion, see Chap. 6.
- 113.
Section 5, NCC. The NCC does not apply to certain loans, including: low-cost, short-term credit (less than 62 days), insurance premiums paid by instalments, bill facilities, and staff loans.
- 114.
See especially, sections 14–16 of the Code.
- 115.
See sections 33–36 of the Code.
- 116.
See also A. Duggan and E. Lanyon, Consumer Credit Law (Sydney: Butterworths, 1999) Ch. 11.
- 117.
See section 72. Debtors who are unable to meet their repayment obligations because of substantial hardship caused by circumstances such as unemployment or illness may apply to the credit provider for extensions of time, or postponement, or reduced payment arrangements. These provisions apply only if the debtors can reasonably expect to meet their obligations if these variations are granted. A debtor may apply to a court if the provider refuses to agree to a variation.
- 118.
See sections 76. A debtor, mortgagor, or guarantor may apply to a court for a determination on whether a credit contract is unjust: sections 76–78. If this is proven, the contract may be reopened and appropriate remedies granted. The meaning of “unjust” is very wide. Under section 204, it includes “unconscionable, harsh or oppressive” credit contracts, and could go further. For example, it is not inconceivable that a credit contract might be found to be unjust if it breaches the moral standards that the community expects from business operators. The court must consider “the public interest”, and all the circumstances of the case, in a manner reminiscent of the factors considered under the unconscionability provisions of the Competition and Consumer Act 2010 (Cth). The court also has wide powers to reopen an unjust transaction. Those orders include relieving the debtor or guarantor of his or her payment obligations.
Section 81 of the Code enables the court to join as parties to proceedings, additional persons who have an interest in the profits of the mortgage or a beneficial interest in a mortgage, and to make orders affecting the persons if the court holds the mortgage to be unjust: Crocco v Esanda Finance Co Ltd (1993) ASC 56, 223. It is conceivable that, if the court holds the residential loan contracts in an RMBS programme to be unjust, the court could join the trustee of the SPV as a party to the proceedings, and make an order concerning the trustee which, while not explicitly, could indirectly impact adversely on the interests of bondholders in the sense that the trustee would seek indemnification from the trust fund. It is also conceivable that an originating lender might join the trustee of the SPV and seek a contribution from it for compensation payable. For further discussion, see T. Robinson, ‘Securitisation Update’, Seventh Annual Credit Law Conference (Melbourne: BLEC, 1997) 4.
- 119.
In practice, an application fee is generally payable by the mortgagor to the Originator/Servicer. Section 78 of the Code provides that upon the application of a debtor or guarantor, the court may declare an establishment fee or charge to be unconscionable and annul or reduce the fee or charge. Section 78(3) provides: “In determining whether an establishment fee or charge is unconscionable, the Court is to have regard to whether the amount of the fee or charge is equal to the credit provider’s reasonable costs of determining an application for credit and the initial administrative costs of providing the credit or is equal to the credit provider’s average reasonable costs of those things in respect of that class of contract.” While there is no formal definition of “establishment fee or charge” in the Code, section 78(3) indicates that it is the fee imposed for determining the application, together with the initial administrative costs of providing credit. While section 78(3) does not strictly compel credit providers to ensure that their establishment fees or charges exceed the credit provider’s costs, it plainly creates considerable incentive for the credit provider to do so when read together with the other provisions in section 78. Under these other provisions, credit providers who do not relate establishment fees to reasonable costs run the risk of actions by debtors and guarantors for court orders. Section 19 of the Code also gives the debtor the right to terminate the credit contract before credit has been provided.
- 120.
See Pt. 5 of the Code.
- 121.
A debtor or guarantor in a relevant residential mortgage loan may apply to court regarding a possible breach of any of the key requirements of the Code: sections 112–114. If the breach is proven, the credit provider may lose all the interest charges owing on the mortgage loan. Alternatively, if it is a continuing credit contract, the credit provider could lose all interest charges for the period ordered, which could be significant if the interest is compounded, for example, on a monthly basis. Where the debtor’s or guarantor’s loss is greater than the amount of outstanding interest charges, the credit provider may be ordered to pay compensation to the actual loss.
The extent of any civil liability might even depend upon who makes the application for the imposition of these civil consequences. If it is the debtor, then the size of the penalty can be significantly greater than that would be the case if the credit provider or the “State Consumer Agency”—i.e. in Queensland, the Office of Fair Trading—brought the application. The credit provider is subject to a maximum fine of $500,000 for each key contravention under the Code.
In terms of other forms of civil liability, Division 1 Pt. 6 of the Code provides that a court may order the credit provider to make restitution or pay compensation to any person affected by a contravention, other than one for which a civil penalty is specifically provided for in the Code. This could conceivably extend to securitised bondholders. In addition, a credit provider’s failure to comply with certain requirements in connection with a mortgage or guarantee may result in the mortgage or guarantee (or particular provisions of those documents) being ordered void or unenforceable.
- 122.
The commission of an offence under the Code exposes the credit provider, and officers of a corporate credit provider who aid and abet the commission of that offence, to monetary penalties. The level of penalty varies with the contravention, but the maximum penalty currently provided for in the Code is $10,000.
- 123.
In terms of the liability of such a linked credit provider, a credit provider may become “linked” to a loan contract if a supplier of goods and services regularly refers its customers to that credit provider or has a contract, arrangement, or understanding with the credit provider. For example, an agent for a bank often arranges home mortgage finance for clients of a building company, which sells house and land packages. The bank might be classified as a linked credit provider to the building company on the basis of these dealings. This linked credit provider might become liable under sections 127–128 for misrepresentations or breaches of contract by the supplier, if it is not commercially worthwhile to sue the supplier (e.g. because it is insolvent or in liquidation).
- 124.
See Schedule 1 of the Code.
- 125.
According to section 3(2), the amount of credit is the amount of the debt actually deferred, excluding interest and certain other charges under the contract.
- 126.
For further discussion of the mechanics of mortgage origination, see the preceding chapters, or Robinson, above n 118.
- 127.
In the case of those IMPs that effectively act as “spotters” for the banks or larger mortgage providers (see Chap. 3), the initial lender, not the IMP, will normally be the credit provider for the purposes of the Code. After assignment, the issues relating to who is the relevant “credit provider” for the purposes of the Code—i.e. the initial lender or the SPV—are the same as set out below.
- 128.
Section 188(2); Robinson, above n 118. Borrowers/mortgagors would also acquire the usual rights under general law against the equitable assignee that result from equitable assignment: see Meagher, above n 71, paragraphs 699, 6100, 6101; and A. J. Duggan, Regulated Credit: The Sale Aspect (Sydney: Law Book Company, 1986) paragraph 12.32. For example, if the originating bank or IMP (assignor) imposed excessive charges on the mortgagor in contravention of the Code, the mortgagor would be able ex facie to assert a right to recover the amount of the excess from the SPV (assignee). Similarly, the mortgagor may potentially have rights, actionable directly against the SPV (as assignee), in respect of misrepresentations or misleading conduct by the originating bank or IMP, either at common law or under legislation such as the Competition and Consumer 2010 (Cth).
- 129.
In short, they may sue the trustee-issuer of the SPV as assignee of the originating mortgagee’s rights. By itself, section 188(1) is plainly a statutory gloss on the equitable rule that obligations cannot be assigned: see Chap. 4 for more detail.
- 130.
By virtue of section 188(3) of the Code.
- 131.
A counter-argument is that, in this situation, while the borrowers are continuing to make post-assignment repayments to the bank or IMP as credit provider from the borrowers’ perspective, the bank or IMP is receiving the repayments as agent from the SPV’s (assignee’s) perspective. However, the problem with this counter-argument is that the borrowers are not given notice of the assignment, so that the bank or IMP would appear to be acting as agent for an undisclosed principal. According to the doctrine of the undisclosed principal, it is arguable that the originating bank or IMP remains liable as the credit provider, not only on the basis of section. 188(3), but also at common law. See, for example, Keighley, Maxted and Co v Durant [1901] AC 240, 261; Vital Finance Corporation Pty Ltd v Taylor (1993) ASC 56–205, 58,179–58,182; D. W. Greig and J. L. R. Davis, The Law of Contract (Sydney: Law Book Company, 1987) 1001–2; and S. Fisher, Agency Law (Sydney: Butterworths, 2000) Ch. 10.
- 132.
The effect is more likely to be of intellectual curiosity than of practical significance since, if borrowers are never notified of the assignments to the SPV, in the normal course of events they will continue making repayments on their loans to their originating lender until the loans are paid off. After that point, there should, in general, be no practical concern with whether the SPV or the originator is the relevant “credit provider” under the Code.
- 133.
Section 192 of the code states;
-
(1)
An indemnity for any liability under this Code is not void, and cannot be declared void, on the grounds of public policy, despite any rule of law to the contrary.
-
(2)
The liabilities to which this section applies include the following:
-
(a)
a liability for any criminal or civil penalty incurred by any person under this Code;
-
(b)
a payment in settlement of a liability or alleged liability under this Code;
-
(c)
a liability under another indemnity for any liability under this Code.
-
(a)
-
(3)
This section is subject to subsection 191(2).
-
(4)
This section does not derogate from any other rights and remedies that exist apart from this section.
In short, the section allows any stakeholder who is potentially liable under the Code to obtain an indemnity from another person, who may themselves in turn obtain an indemnity from anyone except the borrower or guarantor. In general, rights and remedies under general law are preserved. Section 192 allows a credit provider to contract out of liability for a criminal penalty under the Code. At common law, such an agreement would be void as contrary to public policy, but section 191(2) displaces this rule. It provides that an indemnity from any person for any liability under the Code is not void on the ground of public policy. The provision also validates indemnities obtained retrospectively.
-
(1)
- 134.
See the foregoing discussion in relation to unjust loan contracts.
- 135.
See, for instance, in the context of Macquarie Bank’s RMBS programmes, Master Information Memorandum, PUMA Fund-P7, paragraph 5.3 (c) and 8.3 (c) and Master Information Memorandum, PUMA Sub-Fund Series 2014, pp 102–105. Perhaps interestingly, the APRA does not regard this as a contravention of its prudential regulatory guidelines in relation to the assignment being a “true sale”, presumably because indemnities in respect of liability under the National Credit Code are not regarded as granting the SPV recourse back to the originator in respect of its primary debt obligations (which is the main thrust of the prudential requirements).
- 136.
For example, under the Management Deed of the Macquarie Securitisation Program PUMA Fund P-7, the Fund Manager has agreed to indemnify the trustee-issuer against any civil liability under the Code up to a maximum of $500,000: see, Master Information Memorandum, PUMA Fund-P7, paragraph 5.8.3.
- 137.
See, for instance, Master Information Memorandum, PUMA Fund-P7, paragraph 5.8.2, and 8.10.
- 138.
Duration, in this context is defined in a financial engineering sense, as a measure of the average time at which payments are made, weighted by the size of the payments: see B. Hunt and C. Terry Financial Institutions and Markets (3rd edition, Melbourne: Thomson Publishing, 2002) 192; and T. Valentine, G. Ford and R. Copp Financial Markets and Institutions in Australia (Sydney: Pearson Education, 2003) 173–182.
- 139.
The issue here is the fact whether an early termination or prepayment fee can take in to account not only the administrative costs of the SPV, but also of other parties. E.g. servicer. To the extent that these costs are generally reflected in those of the SPV itself, the answer would appear to be in the affirmative, for reasons similar to those set out here.
- 140.
Section 78 states, upon the application of a debtor or guarantor, a fee or charge payable on early termination of a credit contract, or for a prepayment of an amount under a credit contract, can be declared unconscionable and be annulled or reduced. s 78(4) states: “For the purposes of this section, a fee or charge payable on early termination of the contract or a prepayment of an amount under the credit contract is unconscionable if and only if it appears to the court that it exceeds a reasonable estimate of the credit provider’s loss arising from the early termination or prepayment, including the credit provider’s average reasonable administrative costs in respect of such a termination or prepayment.”
- 141.
See, for example, in the context of Macquarie Bank’s PUMA Fund, Master Information Memorandum, PUMA Fund-P7, 40–41 and Master Information Memorandum, PUMA Sub-Fund Series 2014, p 74.
- 142.
In fairness to the banks and other IMPs, home loan borrowers are often also entitled to redraw on previously prepaid principal amounts (generally, without penalty): see, for example, Master Information Memorandum, PUMA Fund-P7, paragraph 8.3 (f).
Bibliography
Books and Book Chapters
Aicher, R. D. and Fellerhoff, W. J., ‘Characterisation of a Transfer of Receivables as a Sale of Secured Loan upon Bankruptcy of the Transferor’ (1991) 65 American Banking Law Journal 181.
Brown, J. Kravitt and Platt, M., Securitization of Financial Assets (Aspen Publishers, 2006).
De Vries Robbé, Jan Job, Securitization Law and Practice: In the Face of the Credit Crunch (Kluwer Law International, 2008).
Derham, R., Set-Off, 2nd edition, Oxford University Press, 1996.
Duggan, A. J., Regulated Credit: The Sale Aspect, Sydney: Law Book Company, 1986.
Fisher, S., Agency Law, Sydney: Butterworths, 2000.
Ford, H. A. J. and Lee, W. A., Principles of the Law of Trusts, Sydney: Law Book Company, 2004.
Greig, D. W. and Davis, J. L. R., The Law of Contract, Sydney: Law Book Company, 1987.
Kothari, Vinod, Securitization: The Financial Instrument of the Future (John Wiley & Sons, 2006).
Meagher, R. P., Gummow, W. M. C. and Lehane, J. R. F., Equity: Doctrines and Remedies, 4th edition, Sydney: Butterworths, 2002.
Saban, H., Corporate Debt Securitisation, Singapore: Butterworths, 1994.
Salter, B., Legal Changes Affecting the Structure of Securitisation Programmes, Discussion Paper, Sydney: Clayton Utz, 1993.
Schwarcz, S. L., Structured Finance: A Guide to the Principles of Asset Securitization, N.Y.: Practising Law Institute, 1993.
Valentine, T., Ford, G. and Copp, R., Financial Markets and Institutions in Australia, Sydney: Pearson Education Australia, 2003.
Journal Articles
Adhikari, Ajay and Betancourt, Luis, ‘Accounting for Securitizations: A Comparison of FASB 140 and IASB 39’ (2008) 19 Journal of International Financial Management & Accounting 73.
Borrows, J., ‘Legal and Regulatory Issues’ in D. C. Gardner (ed.), Securitisation, London: Euromoney, 1997.
Forrest, Pearce, ‘Bankruptcy-Remote Special Purpose Entities and a Business’s Right to Waive its Ability to File for Bankruptcy’ (2012) 28 Emory Bankruptcy Developments Journal 507.
Klein, L. B., ‘Legal Issues Relating to Participation in Bank Loans’, in J. Lederman (ed.), The Commercial Loan Resale Market, Columbus, Ohio: McGraw-Hill Education, 1991.
Lindsay, J. and Thomson, C., ‘Accounting and Tax Issues’ in D. C. Gardner (ed.), Securitization, London: Euromoney, 1997.
Oates, M., ‘RBA Guidelines on Funds Management and Securitisation’ (1994) 10 (3) Australian Banking Law Bulletin 23.
Ono, M., ‘Unique Aspects of Japanese Securitization Relating to the Assignment of Financial Assets: A Comment on Raines and Wong’ (2002) 12 (2) Duke Journal of Comparative and International Law 469.
Pantaleo, V Peter, Edelman, Herbert S., Feldkamp, Frederick L., Kravitt, Jason, McNeill, Walter, Plank, Thomas E., Morrison, Kenneth P., Schwarcz, Steven L., Shupack, Paul and Zaretsky, Barry, ‘Rethinking the Role of Recourse in the Sale of Financial Assets’ (1996) 52 The Business Lawyer 159.
Perry, Raymond E., ‘Accounting for Securitizations’ (1993) 7 Accounting Horizons 71
Plank, T. E., ‘The True Sale of Loans and the Role of Recourse’ (1991) 14 George Mason University Law Review 287.
Plater, I., ‘Accounting and Tax for Off-Balance Sheet Financing’, IIR Conference, Sydney, September 1992.
Rajapakse, Pelma and Gunawardena, Naomal, ‘Assignment of Mortgage Loans to a Special Purpose Vehicle in Securitization in Sri Lanka: With Some Reference to Australian Securitization Programs’ (2013) 28 Banking and Finance Law Review 475.
Schipper, Katherine and Yohn, Teri Lombardi, ‘Standard-setting Issues and Academic Research Related to the Accounting for Financial Asset Transfers’ (2007) 21 Accounting Horizons 59.
Schwarcz, Steven L., ‘Structured Finance: The New Way to Securitize Assets’ (1989) 11 Cardozo Law Review 607.
Senarath, S., ‘Securitisation and the global financial crisis: can risk retention prevent another crisis?’ (2017) 18 International Journal of Business and Globalisation 153.
Senarath, S. and Copp, R., ‘Credit default swaps and the global financial crisis: reframing credit default swaps as quasi-insurance’ (2015) 8 Global Economy and Finance Journal 135.
Shenker, C. Joseph and Colletta, Anthony J., ‘Asset Securitization: Evolution’ Current Issues and New Frontiers’ (1991) 69 Texas Law Review 1369.
Taylor, B., ‘Assignment of Securities in Corporate Refinancing’ (1998) 13 (10) Australian Banking and Finance Law Bulletin 141.
True, Roy B., ‘Risk and Insolvency Issues in Japanese Asset Securitization’ (1996) 28 New York University Journal of International Law and Politic 505.
Working Papers, Magazines, Newspapers and Reports
Senarath, S., ‘The Dodd-Frank Act doesn’t solve the principal-agent problem in asset securitisation’ (2017) blogs.lse.ac.uk (11 November 2018).
Senarath, S., Not so “Bankruptcy-Remote’: An insight into Sri Lankan Securitization Practices in a Post-GFC Context’ (Paper presented at the MAC-MME conference 2016, Prague, Czech Republic).
Kravitt, Jason, ‘Introduction to Securitization’ (Working paper, 1988) http://www.securitization.net/knowledge/accounting/fas125.asp
Imhoff Jr, Eugene A., ‘Asset Securitization: Economic Effects and Accounting Issues’ (1992) 6 Accounting Horizons 5.
Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 13 (November 1976).
Financial Accounting Standards Board, Financial Accounting Standards Board Statement No. 77 (December 1983).
Financial Accounting Standards Board, Statement of Financial Accounting Concepts No. 6 (December 1985).
Financial Accounting Standards Board, Financial Accounting Standards Board Statement No. 125 (June 1996).
Financial Accounting Standards Board, Financial Accounting Standards Board Statement No. 140 (September 2000).
Standard and Poor’s, Structured Finance Australia and New Zealand, Melbourne, 1999.
Macquarie Securitisation Ltd, The PUMA Fund P-7: Master Information Memorandum, Sydney, February, 2000.
Macquarie Securitisation Ltd, The PUMA Sub-Fund Series 2014, Master Information Memorandum, Sydney, July, 2014.
Robinson, T., ‘Securitisation Update’, Seventh Annual Credit Law Conference, Melbourne: BLEC, September 1997. http://blogs.lse.ac.uk/businessreview/2017/04/21/the-dodd-frank-act-doesnt-solve-the-principal-agent-problem-in-asset-securitisation/
Web Sites
Superior Court of Justice (ONSC), http://www.canli.org/on/cas/2003
AASB Home Page, http://www.aasb.com.au
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
Copyright information
© 2019 The Author(s)
About this chapter
Cite this chapter
Rajapakse, P., Senarath, S. (2019). The Legal Process for Transferring Mortgagee’s Rights to the Special Purpose Vehicle. In: Commercial Law Aspects of Residential Mortgage Securitisation in Australia. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-00605-1_5
Download citation
DOI: https://doi.org/10.1007/978-3-030-00605-1_5
Published:
Publisher Name: Palgrave Macmillan, Cham
Print ISBN: 978-3-030-00604-4
Online ISBN: 978-3-030-00605-1
eBook Packages: Economics and FinanceEconomics and Finance (R0)