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Repossession of Collateral and Secured Assets

A repossession of collateral and secured assets means when a borrower, before applying for a loan, sometimes has to keep collateral against the loan to the concerned lender as security; in case a borrower fails to repay the said loan amount, a lender may take control over such collateral or a secured asset of the debtor.

Managing Default: A Guide to Repossessing Secured Assets

Repossession of collateral and secured assets is when a lender or a creditor company takes control over the property of the debtor that has been put up as collateral in the loan agreement before a loan is sanctioned. It is an authority given to the concerned financial institution to take up the property of the borrower when his loan amount becomes defaulted.

Every state has its specific jurisdiction, and thus, the creditor has to comply with the state’s rules and regulations. A creditor cannot walk into the privacy of the house of the defaulter without due permission or an order from the concerned court. In case the creditors do not have a security interest over the debtor’s property or an asset, a creditor has no right to claim such property unless a court order is issued from the concerned court jurisdiction.

Creditors usually want an assurance that they will be repaid by the debtor. This repossession of collateral and secured assets is to be obtained by the creditor company through an agreement before lending the loans. Such agreement comes in three major types: a) personal property security, b) suretyship, and c) mortgage of real estate.

Definition of repossession of collateral and secured assets

Repossession of collateral and secured assets is a method where the bank or a creditor takes back the property that has been kept as collateral by the borrower on the property that has been defaulted, such as motor vehicle loans or business assets. For example, when a person takes a home loan and is not able to repay the home loan amount, the concerned creditor will take away the home that has been built on such loans and thus repay the debt amount.

Thus, when a borrower defaults in repayment of the loan amount, a creditor’s right to repossession of collateral and secured assets comes into the picture.

What amounts to default?

Except for an agreement on loan says otherwise, if a borrower fails to make one payment to the loan amount, they shall be considered a defaulter. In most collateral security agreements, the creditors can obtain repossession of collateral and secured assets if a borrower fails to make a loan repayment and thus accordingly declare a defaulted loan and obtain the said collateral asset to repay the default loan amount.

 There are certain situations when a creditor can declare the borrower a defaulter despite paying the loan amount. This situation may occur when the borrower sells off the collateral assets if such collateral assets are damaged or stolen and in case the collateral value substantively goes down, when a borrower becomes insolvent, etc.

What do you understand by Collateral?

A collateral is a system where the borrower, before the loan is sanctioned, offers his assets, both tangible and intangible, to the creditor as a security for the said loan amount. Such assets are put as collateral with the intention that whenever a borrower defaults in making a repayment of the said loan, then creditors shall take over such assets to cover the defaulted loan amount.

Repossession of collateral and secured assets can be obtained by creditors when a security asset has been put as collateral before a creditor on the loan amount. Often, loans that are secured with collateral carry lower interest rates than unsecured loans. Collateral conditions are indeed mentioned in the loan agreement by the creditors before sanctioning the loan to the borrower.

A collateral agreement is a security interest and not a property interest on the debtor’s collateral assets for the loan amount.

What are the types of Collateral?

Given below are the types of Collateral loans:

Residential Mortgages

Residential mortgages are loans that are applied for by the borrower by keeping the house as collateral. If the borrower fails to pay the loan amount according to the terms and conditions, the concerned bank can start taking legal proceedings, which can eventually lead to the repossession of collateral and secured assets, i.e., the debtor’s house.

Home Equity Loans

A loan that is available to the borrower against the equity of the property. Some of the famous equity loans are consumer debt and home equity loans.

Margin Trading

Collateral loans play a key role in margin trading. When an investor borrows money from the concerned shares broker to buy shares in the market, the investor’s brokerage account is kept as collateral for such a loan. The more shares are bought by investors, the more potential gains in such values are added to the broker’s account.

How to calculate a Collateral

Whenever a creditor provides a loan to a borrower, it considers the loan as an asset because it is an asset that has been provided as collateral, and all its benefits are with the lenders if the borrower fails to make the repayment of the said loans. The eye of the lender is on the loan amount and not on the collateral asset. This collateral asset interest is only claimed when the loan is unpaid.

While calculating the loan amount of the borrower, the security collateral provided has to be measured and evaluated to identify the risk involved with the borrower’s loan amount. It is the responsibility of the financial institution to disclose the risk involved with financial instruments and their nature to the borrowers, and if any collateral has been attached and how it is monitored, it shall be intimated to the borrower.

What are the types of Secured assets Loans?

The types of secured assets loans are mortgage loans, nonrecourse loans, car loans, home loans, business loans, loans against insurance, bad credit loans, gold loans, etc. These secured assets loans are sanctioned based on the repossession clause that should generally benefit the borrower, but most of the time, it goes in favour of the creditor or a financial institution.

Creditor Notification on Repossession of collateral and secured assets

Depending on the terms and conditions issued by the creditors before lending a loan to a borrower, a notification on repossession of collateral and secured assets may or may not be required before taking possession of the secured collateral assets. Most often, a creditor shall send a notification to the borrower or a debtor on a loan that is to be due within a stipulated time. Such notification works like a warning to the debtor to make a plan and repay the said loan amount.

However, there are certain agreements where the right to get a notification is waived off or removed; in such a situation, a debtor can challenge the waiver clause before the concerned authority with the help of a lawyer.

Defaulter rights on repossession of collateral and secured assets

There are several laws and regulations in states and countries where the rights of the debtors and borrowers are safeguarded, making it mandatory for creditors to send a notice before the repossession of collateral and secured assets. Such rights have to be taken by the debtor before the repossession of collateral and secured assets.

Usually, a time frame is given to the debtor to repay the said loan amount by repaying the missed payments and interest or correcting the situations when a default has occurred.

Does creditor always Repossess of secured assets?

Few states prohibit creditors from repossession of collateral and secured assets without obtaining an order from the concerned court. In India, a creditor has to follow certain laws and regulations before obtaining a repossession of collateral and secured assets, except for motor vehicles.

How to calculate repossession of collateral and secured assets

A repossession of collateral and secured assets shall be calculated by the creditor from the time of possession of the collateral asset and its fair value in the market trend. A creditor shall consider collateral assets as a debit and loans as an asset. If the asset shall be subjected to the fair market price or a historical cost valuation, it shall depend on the type of account standard on the specific asset. Hence, any changes in the value or market price of the said collateral asset will affect the creditor or an entity and not the borrower.

Role of the SARFAESI Act in Repossession of Collateral and Secured Assets

In India, a law has been introduced where a bank can take action directly on the NPA or non-performing asset accounts of the borrower without approaching a court by following the laws and regulations under the said act. This act has helped various banks and financial institutions in India in repossession of collateral and secured assets, reducing the level of non-performing assets. This act allows the financial company and banks to conduct an auction of the collateral assets, such as residential and commercial properties, when a borrower of a loan becomes a defaulter or if he fails to make a repayment on his loans.

The main objective of the SARFAESI Act is for rapid and efficient recovery of the NPA account of the borrower and to sell and auction the assets or properties of a borrower’s defaulters without any intervention from the court.

Benefits of Borrowers through the SARFAESI Act

A SARFAESI, or Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, not only empowers the creditors or lenders but also provides various benefits to the borrowers. Borrowers can approach DRT (Debt recovery tribunals) if they are found redressed in an independent forum.

Borrowers have a right to appeal against the action taken by the creditors through a SARFAESI Act, which ensures transparency between the borrowers and lenders and an opportunity for borrowers to defend themselves before repossession of collateral and secured assets of the concerned loan.

Conclusion

Thus, a financial institution or lender can take steps to take over the collateral assets of the borrower if the borrower fails to repay the loan amount at a stipulated time. Repossession of collateral and secured assets by a lender can proceed according to the various laws and regulations. A collateral asset provided by the borrower may be a tangible or intangible asset owned by them as a security guarantee on their loan amount. In India, the SARFAESI Act provides banks and various other financial institutions with the right to recover loan amounts without approaching the traditional court. Overall, repossession of collateral and secured assets provides a balance between the creditor’s rights and borrowers.

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