Two years after the Law Reform Commission sought the views of stakeholders and the public on whether foreclosure practices in Cayman needed to be reformed, it has now submitted a bill for public review.
The Registered Land (Amendment) Bill 2020 introduces a Lending and Pre-action Protocol supported by a Financial Circumstances Assessment Questionnaire, which the commission says aim to facilitate fairness and reasonableness between lender and borrower when resolving a default relating to a charge over land.
Essentially, the protocol and questionnaire encourage greater engagement between the lender and the borrower before any foreclosure action is taken, the commission said in a press release.
In December 2018, the commission released a discussion paper which cited the public debate about the hardship caused by home repossessions. It concluded that the current law should be reformed because it does not strike the best balance between the interests of lenders and borrowers.
The number of foreclosures increased significantly after the 2008 global financial crisis. While in 2011 only 30 properties were repossessed, 116 owners lost their homes at the peak in 2016.
Although the number declined significantly over the past two years, the current economic crisis caused by the coronavirus pandemic, should it continue, makes the reform of foreclosure practices timely.
The Law Reform Commission said the proposed bill had taken into account the submissions it received in response to its discussion paper, ‘The enforcement of mortgage-type security over real estate: Is reform of the law necessary?’.
The commission said it had placed a particular focus “on the provisions dealing with the form of charges over land; the remedies of the chargee (lender) when the chargor (borrower) defaults in payment; the manner in which the chargee’s power of sale is exercised; and the variation of the powers under the legislation”.
Under Cayman law, the use of the term foreclosure is technically incorrect. Foreclosure means that the title over a property is simply taken over by the new registered owner.
In Cayman, however, the rights of the lender are protected by the Registered Land Law by creating a charge over a mortgaged property.
This means, for instance, that a lender cannot take possession of a mortgaged property until it is sold. The law instead defines the circumstances under which a lender can force the sale of a property.
In its discussion paper, the commission noted that it is not clear if most borrowers understood the measures that a lender can take in the case of a default under the law.
The proposed amendments to the Registered Land Law therefore aim to ensure that borrowers are fully aware of all the risks before they enter into a loan agreement.
The suggested “Lending and Pre-action Protocol” sets to make changes to the way a lender and borrower interact before an agreement is struck, what they must do after a default before any action is taken and how a forced sale is carried out.
The changes prescribe the type of information that a lender must provide, at a minimum, before entering into an agreement. This includes the typical loan conditions such as borrowing rate, duration of the loan, factors that could increase the amount to be paid and pre-payment penalties, as well as the chargee’s, or lender’s, rights over the land and the period of default before a sale can be enforced.
In addition, the lender should notify the borrower that there is no obligation to sign the agreement and that the borrower, or chargor, could lose the land and money invested in the case of a default.
The lender should also advise the borrower to retain legal advice and give the chargor five days after signing to cancel the agreement.
Before the lender can force a sale after a default, the chargee should in good faith consider alternative repayment options for the borrower to satisfy the unpaid amounts.
Under the protocol, lender and borrower should discuss the circumstances that led to the default, the borrower’s financial situation and if these circumstances are going to persist in the short, medium or long term.
The discussion should also cover whether the borrower can sell the property or whether the repayment terms can be altered to satisfy the amount owed.
A lender cannot force a sale if the borrower has submitted an insurance claim and there is evidence of a reasonable expectation of payment.
If the chargee forces the sale of the property, the sale must also be adequately advertised and the property must be sold at the best market price after using independent valuators. This should take into consideration the rights of the borrower to any surplus sale proceeds.
Once the sale is concluded, the lender has to inform the borrower promptly of the sale price, related costs, and any outstanding debt after the sale and the applicable interest rate on the remaining balance.
Stakeholders and members of the general public are invited to comment on the proposed Registered Land (Amendment) Bill, 2020, until 16 Oct.
Submissions should be forwarded to the director of the Law Reform Commission, 4th Floor Government Administration Building, Portfolio of Legal Affairs, 133 Elgin Avenue.