| ผู้เขียน | Wirot Poonsuwan |
|---|
Car-Pledge Microfinancing Charges 50% Interest amid Uncertain Repossession Right
Car-pledge credit is worth billions of dollars in Thailand, with thousands of operators and the ability of lenders to charge 50-60% interest and fees. Who cares how many borrowers default when you can command interest that high? The level of interest will render any lender highly profitable, despite some loss from default. The authorities have been keeping a close look at the industry and are on the brink of regulating it, but the curb is unlikely to dampen the growth.
Security of the credit is a car registration book, a car itself, or a motorcycle it funds. The lender will hold on to and keep in its custody the original vehicle registration book and a blank vehicle transfer form signed by the borrower, with other necessary particulars all left in blank.
In an event of default by the borrower, the lender hopes to fill in the blanks and transfer the vehicle to a third party, receive the sale proceeds and use it to pay off the borrower’s loan debt. This type of security is commonly called a pledge of car registration book or simply a pledge of car. People outside the industry have no idea that the registration book as an ordinary document, the car or motorcycle as movable properties are incapable of being pledged and that without the consent of the borrower or with the borrower’s consent withdrawn, the lender will have no right in the registration book or the vehicle whatsoever.
Lender’s right to keep registration book in custody
The only right the lender has is to hold onto the registration book as security until the entire borrower’s debt is fully paid. The borrower cannot withdraw this lender’s right as it is the quid pro quo for the credit given. The keeping by the lender of the vehicle registration book in its custody, besides being a tool in implementing the blank vehicle transfer form, serves as a deterrent to any arbitrary transfer of the vehicle by the borrower to others and to any further pledges with other lenders. In the eye of the lender, the legal strength of this type of security is shaky, but its tremendous earning power is so invaluable to the business.
“Shaky” in the sense that the fate of the security hinges on the consent of the borrower for the lender to complete the blanks in the car/motorcycle transfer form. If the borrower refuses to give consent, or has given consent but later withdraws it, the security becomes worthless. In such dire circumstances, the blank vehicle transfer form cannot be used, and the lender will be barred from repossessing the car or motorcycle as the ownership of the car and motorcycle remains with the borrower. The ownership point is distinctly different from a hire-purchase contract, under which the lender/hire-purchase company has always been the owner of the vehicle since the beginning, and if the borrower/purchaser defaults, the lender/hire-purchase company will simply be able to lawfully repossess and take back its own car and motorcycle.
Consent of borrower always withdrawable
Documentation for a pledge of car-registration book typically contains consent of the borrower for the lender to fill in the blanks, upon the borrower’s default, with the name of the transferee, date of transfer, price of transfer and other details in the form signed in blank by the borrower. Under Thai law, this consent can be withdrawn at any time. And after the borrower has withdrawn its consent, it means that the borrower does not agree to have the lender complete the vehicle transfer form. It follows from this that the lender cannot transfer the vehicle to anyone in its enforcement of the security. The ownership in the car or motorcycle remains with the borrower. If the lender repossesses the car or motorcycle by force, it runs the risk of being sued by the borrower in criminal cases for theft or robbery. And the completion of the blank vehicle transfer form without the consent of the borrower could land the lender in another criminal case on a charge of forgery.
Problem that has not come to a head
How come does this business turn out to be so popular among financiers without much legal problem then? It’s the psychology of the borrower. Thais are not litigious. They tend to shy away from legal disputes or exercising their rights if that can lead to a legal controversy. In case of default when the borrower runs out of cash, they will blame themselves for a breach of contract and will acquiesce to allowing the lender to enforce the security arrangement they have agreed to. The public tend not to think about the legality of things and are not inclined to go so far as to withdraw their consent.
Statistically, the lender has not experienced much legal trouble from borrowers, and the rate of litigation is very low. Lenders are not worried. The past 20 years has seen exponential growth of the car-pledge industry, compared with prior era during which banks and financial institutions did not pay attention to car pledge credit, stuck with the legal theory that cars cannot be pledged, security is weak, and the reality that low-income grass-root borrowers can become a substantial source of non-performing loans.
Car registration book is not a right instrument
A car or motorcycle registration book exists not for registration of ownership purpose. Nothing like a land title deed. The registration is for the purpose of control—control by the authorities of the borrower’s use of the vehicle. The registration book is issued under the regulation of the Land Transportation Department under the Automobiles Act of 1979 for the purpose of controlling and monitoring use of cars and motorcycles, for example, in search of the guilty party in an accident or in case of annual tax liability.
True. A transfer of car or motorcycle ownership generally is recorded in the registration book, but only a few realize that you do not need a registration book to consummate a sale legally. A sale of a car and motorcycle can successfully be completed by the seller and the buyer executing a sale and purchase agreement, the buyer making full payment of the price, and the seller delivering the vehicle.
In the event where the borrower transfers the car to a third party who acts in good faith, with a promise that registration in the car registration book will be done later, followed by the borrower’s default on the car loan, the third party may have a better right in the car than the lender, who in dismay finds that it does not have the right to repossess the car.
Lender has no priority right over other creditors
A pledge would give priority right as a secured creditor to the lender/pledgee. After the borrower/pledgor is in default, the lender/pledgee would have the right to auction the pledged property without having to go through courts and use the sale proceeds to pay off the borrower/pledgor’s debt in a higher priority than other creditors of the borrower. If it is a pledge of right that is represented by an instrument, such as a pledge of a promissory note or bill of exchange, the lender/pledgee can claim the full payment of the pledged instrument when due without an auction.
A car registration book is by no means a right represented by an instrument. Therefore, it cannot be pledged in the way that a promissory note or a bill of exchange can. The so called “pledge of a car registration book” is in effect not a pledge. It’s merely a right of the lender to keep the registration book in custody as security for the car loan. Such right does not grant the lender a priority right as a secured creditor to get paid out of a transfer of the registration book before other creditors. Legally, that right of the lender does not offer much of a value.
By way of an example, if the borrower loses a court case, the judgment creditor of the borrower can go after the car and have it seized for auction and get paid from the sale proceeds. The lender with the right to hold on to the car registration book cannot stop the judgement creditor from executing the court judgment against the car. The lender in fact has to hand over the car registration book to the judgment creditor so that a car transfer to the winning bidder in the auction can be made.
Prosperity in good markets
In practice, the lender is not nervous about other judgment creditors seizing the car registration book or the car itself—again statistically such case is rare. The lender is more concerned that the borrower may not perform its financial obligations, leading to a non-performing loan and that there might be a problem enforcing from the security. The fact that the borrower himself is likewise afraid that he may lose his car to the lender acts as a deterrent to prevent default. Enforcement problems are few and far between. Thus, whether or not a car registration book can actually be pledged does not bother lenders.
The lender is well aware that it is even impossible for the borrower to pledge a car or motorcycle, as there is a legal requirement for the borrower/pledgor to physically deliver the pledged property to the lender/pledgee for safekeeping as security. However, the car and the motorcycle cannot be delivered because the borrower/pledgor practically has to use it in their everyday life. When the car or the motorcycle is in the possession of the borrower/pledgor, the pledge is required to come to an end, according to the Civil and Commercial Code. As a result, a pledge of car or motorcycle can never take place.
Although a pledge of car or motorcycle has never happened and the pledge agreement signed between the lender and the borrower is really not a pledge, these legal issues do little to stall growth of the business. The car-pledge industry flourishes for marketing reasons, namely the borrower psychology and lenders’ favorable experience and soars high past the security shortcomings.
Wirot Poonsuwan is a practicing attorney and can be reached at [email protected].
