‘Excessive’ security agreements by banks need investigating – lobby group

Banks’ general security agreements could come under scrutiny from the Commerce Commission.

It is a major area of concern raised by lobby group Banking Reform Coalition when it recently met with the commission.

Coalition head Kent Duston says in many cases the security agreements seem to extend well past the amount being borrowed and to cover assets that are beyond the immediate security.

“If a bank decides it doesn’t want to extend credit further to a borrower, the general security agreement has everything wrapped up making it exceptionally difficult to go to any other lender because there is nothing for them to work with.”

Decades ago, there was a vibrant market for second mortgages, Duston says. Borrowers could get a cheap mortgage up to a certain point from lenders, such as the Government, and then get a second mortgage.

After the 2008 financial crisis, banks became more risk averse and preferred to focus on first mortgages, claiming second mortgages are often more complex to manage and the costs associated with them make them less attractive. 

The coalition questions whether general security agreements and the way mortgage documents have been written have caused that market to collapse. “In other words, is there no market for second mortgages because the security has all be vacuumed up?” Duston says.

“In many cases the security the major banks are taking is in excess of both the amount a client has borrowed and also the amount of interest they would ever pay. So, the question has to be asked, why are they doing that?”

“In many cases the security the major banks are taking is in excess of both the amount a client has borrowed and also the amount of interest they would ever pay. “So, the question has to be asked, why are they doing that?”

The coalition believes this can be anti-competitive and a barrier to competition within the banking sector. Duston says, however, just because the coalition has this opinion doesn’t necessarily mean it is correct.

“It is a case of figuring out whether there are grounds for a complaint to be laid with the commission and whether it can do something about it.”

A good example of what can be done, he says, is the commission bringing the grocery industry to heel by banning major supermarkets from using land covenants to prevent competitors from opening stores nearby. This is part of a larger effort to address anti-competitive practices in the sector. 

“Obviously the supermarkets behaved in a way that raised complaints to the commission and at that point it was able to take action. We are looking at areas in the banking sector where we can do similar things.”

Abuse of market power

The coalition has also had initial talks with the FMA about why there is need for full recourse mortgages in New Zealand.

For instance, if a US borrower signs a mortgage document it is fully secured on the property they are loaning against. In New Zealand not only is it secured on the property but also the borrower’s personal guarantee.

Duston says the banks are in lockstep about this. “This would appear to be an abuse of market power. Banks are insisting on a level of security that in a competitive market they might not get.

“New Zealanders are being punished and having to give up too much security compared to overseas markets. It needs some further investigation.”

Keeping communication open

Although in last year’s report on its market study on competition in personal banking services, the commission identified the major banks as an oligopoly and far more profitable than they should be, there is nothing it can do about that. 

The coalition had initially wanted the commission to look at taking action against the banking sector’s record profits of $7.22 billion during last year’s recession. The coalition framed the ‘excessive’ profits as illegal and an abuse of market power at the expense of smaller New Zealand competitors, whose profits dropped on just about every metric.

However, as the commission points out it is a creature of statute, it has constraints on what it can do and nowhere in any legislation is it illegal for businesses to make profits.

Duston says it was told by the commission some of its other concerns about the sector are best investigated outside the organisation to see whether a complaint can be made to the commission and it can then take action as a regulator.

“It is keeping the lines of communication open and we have made suggestions to the commission about areas of banking that we see of concern.” It says it will reply to those within the next few weeks.