Proposal to Improve Legal Regulations on Loan Contracts

HDCV. For example: The Supreme People's Court's Decision No. 15/2008/KDTM-GDT dated December 25, 2008, resolving the case of a dispute over a credit contract, ruled as follows: " Returning the lawsuit to DA Bank on the grounds that the statute of limitations has expired is illegal and a serious violation of procedural law " . However, in this case, the court only viewed the matter from the perspective of a contractual relationship that was continuously performed by the parties, and thus stated the reason that " the statute of limitations for this case has not expired" did not fully convey the meaning and did not fully apply the provisions on specific lending in banks.

From the analysis, according to the author, the limitation on the statute of limitations for initiating a lawsuit to resolve a dispute is set by law with the aim of protecting the stability of economic and civil relations, but does not apply in cases where credit institutions request repayment of principal and interest on loans, stemming from the principle of loan safety. At the same time, this provision also aims to raise awareness and responsibility for debt repayment of borrowers, avoiding acts of avoidance and delay in debt payment obligations to benefit from interest rates and exploit secured assets.

According to the author, this legal situation should be considered as a precedent in litigation activities, resolving disputes requiring repayment of principal and interest of loans in court and arbitration (because it is consistent with the criteria under Decision No. 74/QD-TANDTC dated October 31, 2012 regulating the project of developing precedents of the Supreme People's Court 179 ). If implemented, the precedent under the name: "Precedent on non-application of statute of limitations for lawsuits for requests for repayment of principal and interest of loans in the field of banking credit" will create consistency in the application of the law, creating trust for credit institutions when deciding to flexibly apply the mechanism of handling assets to recover debts, in accordance with the actual financial situation of the borrower, not dependent on the processing time.

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4.3. PROPOSAL FOR IMPROVING LEGAL PROVISIONS ON LOAN CONTRACTS

4.3.1. Supplementing regulations to ensure the borrower's right to enter into and perform loan contracts

4.3.1.1. Regulations on removing barriers to lending procedures

In the author’s opinion, simplifying lending procedures is the goal that lawmakers and credit institutions aim for, but the parties still comply with mandatory lending procedures to ensure the lending process is effective and safe. In particular, depending on the purpose of the loan, the lending object, the lending procedures are also different.

The previous and current banking laws have set out procedures for loan approval. This is a mandatory requirement for the effectiveness of the loan, so it is impossible to quantify the loan amount to bypass these procedures, even when lending to consumers.

179 Criteria for precedents according to Decision 74/QD-TANDTC dated October 31, 2012 on approving the Supreme People's Court's project on developing precedents, that is, precedents " contain explanations and arguments for one or several legal documents (Documents guiding the application of law) on a legal issue that has not been mentioned in a document guiding the application of law or is mentioned in a general way, lacking specificity or contradictory " (Article 1, Section I.3, point d).

(loans are usually small in value), but the borrower must also demonstrate financial capacity through his regular income. 180

There are many reasons for this, but mainly because the financial control mechanism for businesses and individuals in Vietnam is still limited, there is no effective financial control tool, so there is a lack of basis for quantifying the loan amount, as a basis for determining loan procedures. Notably, in assessing the actual financial capacity of the borrower before the credit institution's leadership decides to lend.

Circular No. 39/2016/TT-NHNN and Circular No. 43/2016/TT-NHNN both mention the simplification of some loan documents and procedures. Specifically, the following procedures: removing loan application forms from loan application forms; simplifying requirements on capital use plans for living expenses, etc. However, according to the author, banking law cannot specifically and fully list the procedures and documents in the law to eliminate and overcome limitations and complications in lending procedures in practice. In addition, lending relationships are inherently property relationships, loan conditions and procedures are closely linked to assets forming loan capital, collateral, etc., so there should be a general principle when applying this regulation.

To overcome limitations and move towards eliminating barriers in loan procedures, banking laws need to acknowledge and supplement the following provisions:

Firstly , supplementing administrative sanctions against credit institutions if they set up unnecessary and illegal loan procedures to delay lending, delay disbursement, and hinder borrowers' right to access legal credit.

Second , specify the regulation on secured property transactions that do not require notarization or certification, including in the real estate sector, in the spirit of Resolution No. 25/NQ-CP dated June 2, 2010 of the Prime Minister on simplifying 258 administrative procedures (This regulation was issued a long time ago, demonstrating the State's determination to cut down on administrative procedures but lacks implementation). Accordingly, mortgage contracts for land use rights, even when there is property attached to the land, need to abolish the mandatory regulation that must be notarized, instead, there should be agreements signed by the parties proactively, ensuring reliability in form, only need to be registered for secured transactions to be legal, in the right order of priority to perform the security obligation, which is meaningful. If this regulation is implemented, it will simplify loan applications, reduce many costs and credit approval time, helping credit institutions serve customers better.

Completing the law on credit contracts must aim at the above-mentioned goal, meeting the framework of criteria for the effectiveness of the law on credit contracts as mentioned. The recommendations that are realized are to ensure fair access to credit, bringing trust and convenience to customers.

180 For example, in Germany, for loans over 100,000 German Marks (DM), the credit institution requires the borrower to present economic relationships and annual financial statements (Article 18 of the German Credit Industry Law).

4.3.1.2. Regulations ensuring the borrower's right to complain and sue in case the credit institution refuses to lend without justifiable reason

The current law on credit contracts continues to recognize and promote the right of credit institutions to proactively lend (the state does not deeply intervene in lending relationships, only promulgates regulations on principles and conditions for safe and effective loans). To be autonomous in lending, credit institutions have the right to refuse loan requests from customers if they do not meet the prescribed requirements and conditions, but credit institutions must notify and clearly state the reasons (Clause 3, Article 17 of Circular No. 39/2016/TT-NHNN). However, from this provision, a legal issue arises: if the borrower meets the conditions for borrowing but is still refused a loan by a credit institution, how should it be resolved?

Point b, Clause 1, Law on Credit Institutions 1997 previously allowed borrowers to “ file a lawsuit for groundless refusal to lend ”. Credit institutions must be responsible for lending if the customer is qualified to borrow capital and has assets to secure the performance of debt payment obligations. Current banking law no longer specifically stipulates the right to complain if a credit institution refuses to lend. According to the author, the above provision does not create conditions for borrowers to have access to credit, which can easily lead to arbitrariness in lending. Therefore, organizations and individuals have the right to complain to state management agencies of the banking sector for resolution if a credit institution refuses to lend without a valid reason.

This provision is significant for preferential state loans, applicable to potential customers, ensuring the rights of subjects to have equal and fair access to credit capital. Similarly, the right to complain to credit institutions if they (credit institutions) do not disburse should also be considered a right arising from a breach of contract. However, the act of not disbursing by credit institutions can then cause certain material damage. In cases where credit institutions arbitrarily do not disburse without a legitimate reason, the law should empower the borrower to complain or file a lawsuit to request compensation for damages (if there is a causal relationship, actual damage occurs).

Decree No. 96/2014/ND-CP sets out sanctions in case borrowers have complaints that are not promptly resolved by credit institutions (Clause 1, 2, Article 23), with administrative fines of up to VND 30,000,000. However, compliance and compliance with the resolution of complaints and lawsuits by organizations and individuals are not mentioned in banking law. In particular, the resolution of complaints about lending, if implemented strictly and in accordance with procedures, will ensure that state agencies monitor violations by credit institutions, take timely and appropriate measures to protect the interests of borrowers. The object of protection in this case is also the stability and reputation of the banking system.

4.3.2. Legal responsibilities of the parties before signing the loan contract (pre-contractual stage)

The theoretical basis and significance of the relationship between the parties before signing the loan contract (pre-contract stage) have been mentioned and analyzed in the thesis (point a, section 2.2.2.1). This scope studies and proposes recommendations for establishing a legal mechanism before signing a loan contract. This mechanism includes legal bases and consequences if there is a violation:

4.3.2.1. Legal basis for pre-contractual stage responsibility

Banking law refers to the loan agreement as the only legal form of a loan transaction. Based on the principle of mandatory credit approval before lending (clauses 1 and 2, Article 94 of the Law on Credit Institutions 2010), this provision, instead of being the power of the credit institution towards the customer, with the new provision, is also a mandatory obligation for the credit institution before lending. In that legal relationship, the parties must bear many costs, time, and effort to reach the goal of signing a loan agreement.

If the concept that the lender has a need to lend, must bear the costs of finding customers, and this cost is included in the interest rate when lending is unreasonable. Because in reality, this will inevitably lead to cases where the borrower does not borrow capital for many subjective and objective reasons after the credit institution has decided to lend. Establishing a legal relationship in the pre-contractual stage in the loan contract relationship will solve this practical need, increase the responsibility of the parties (including the credit institution) for the commitments made before signing the loan contract, and compensate for damages caused by the violating party.

Banking law has codified the relationship between the borrowers before signing the loan agreement through: appraisal work, loan decision; the borrower's obligation to provide information (Clause 2, Article 16, Article 17 of Circular No. 39/2016/TT-NHNN). According to these regulations: The borrower is obliged to provide information, documents and vouchers in the loan application honestly, completely and in accordance with the law. If there is a violation, the lender has the right to terminate the loan and recover the capital before the due date. However, the regulations on the lender's responsibility have not been specified. Therefore, the basis for determining the responsibility of the parties in the pre-contractual stage is proposed by the thesis as follows: i) For the borrower : These are violations of providing documents and information that are not true, not signing the loan agreement after the leadership of the credit institution has decided to approve the loan; ii) For the lender : It is the act of refusing to sign a loan contract without a valid reason.

4.3.2.2. Legal consequences for violations of pre-contractual commitments

Current Vietnamese banking law does not specifically stipulate measures to handle if the parties violate the commitments in the pre-contractual stage. The law only stops at regulations on documents and customer information. If they are not true, the credit institution has the right to terminate the loan (Clause 1, Article 95 of the Law on Credit Institutions 2010). This means that sanctions for breach of contract only apply after the signing of the loan agreement, which does not fully demonstrate the meaning of responsibility. Because right from the time of receiving the loan application, the borrower must be honest about the accuracy of the documents and records he has provided. Even before signing the loan agreement, if the lender, through verification, discovers that the documents and records are not true, it has the right to request the borrower to compensate for damages for the costs incurred.

On the other hand, it is not appropriate to rely on the provisions of civil law to resolve the issue. The provisions on compensation for damages outside the contract as stipulated in Article 584 of the 2015 Civil Code only state the general principle of this responsibility. Meanwhile, credit relations are inherently a series of intertwined and mutually binding transactions that are freely agreed upon by the parties.

The parties' responsibility for unfulfilled commitments in this relationship, according to the author, should be set out in both stages before and after signing the contract as follows:

- Stage before signing the contract:

The process of examining and evaluating loan applications results in a decision (or document) approving the loan. If the parties do not sign the loan agreement, they must compensate for damages, which applies to both the credit institution and the borrower. Damages in this case are: costs of preparing the application, appraisal costs, and loan provisions. However, it is necessary to distinguish the scope of costs and efforts that the credit institution has spent to compensate for damages because at that time the parties have not officially signed the loan agreement. In the case where the credit institution has decided to lend but then does not sign the loan agreement without a valid reason, it must also compensate the customer in the same way.

- Stage after signing the contract:

The responsibilities of the parties after signing the loan agreement are based on the commitments in the pre-contractual stage, the contract agreement and the provisions of the law. Current law has specifically stipulated sanctions for the borrower if it provides incomplete or inaccurate credit information. This issue has been specifically mentioned and analyzed in the thesis (even if this information is provided by the borrower before signing the loan agreement).

In short, establishing a relationship of responsibility in the pre-loan contract stage is an objective need, a factor that ensures that the loan contract is implemented properly and effectively. If this recommendation is implemented, it will form a legal mechanism, positively impacting business order, enhancing the responsibility of the parties right from the time of receiving loan applications (including the borrower must be aware of providing complete and honest loan information and documents), avoiding the situation where credit institutions compete unfairly, attract customers, and arbitrarily refuse to lend without justifiable reasons.

4.3.3. Consensus mechanism and legal responsibility of the lender in the co-financing loan contract relationship (syndicated loan)

The regulations on syndicated lending contracts have inherited the advantages of previous regulations. However, credit institutions include many entities with unequal capacity and status, the legal relationship between the lending parties in practice is still fragmented, lacking a strict legal mechanism to protect the rights of members (credit institutions) when participating in syndicated lending relationships.

4.3.3.1. Amending and supplementing the responsibility mechanism of the lender in the syndicated credit contract relationship with customers

The law stipulates that credit institutions are a mandatory party to the syndicated credit relationship. The rights and obligations arising for the borrowing enterprise are based on this contract, not depending on the syndicated contract signed and implemented between credit institutions. However, determining the control mechanism and responsibilities between one party being the

The credit institution is not recognized, and the responsibility of the syndicated lender to the customer is not clear. Although in theory, the parties can agree to record in the contract the terms of this relationship, but with the characteristics mentioned above, the law needs to have regulations in case the parties do not have an agreement to balance the interests, making this type of loan contract safer.

Firstly , in terms of legal responsibility, a syndicated credit contract for a customer that does not depend on the syndicated contract agreed upon by the credit institutions will increase the risk. It is especially important for the lead credit institutions that are inherently required by law to have good reputation, financial potential, and directly participate in the implementation of the syndicated credit contract.

According to current legal regulations, these two contracts are independent and not dependent on each other because the contents of the syndicated loan agreement are not binding on the borrower. Therefore, the role of the credit institution as the focal point, as the person signing the syndicated loan contract for the customer, must be responsible when risks occur or vice versa.

Second , when a contracting party is a subject consisting of many legal entities, the roles and responsibilities towards the borrower, if not clearly stated, will not ensure the general principles of the contractual relationship as set out.

The law recognizes that the focal credit institution enjoys benefits from credit fees and benefits corresponding to the credit capital contribution ratio. Determining and clarifying the legal relationship of these two types of contracts according to the above orientation will bind the responsibilities of the parties, ensuring the interests of each member participating in credit granting.

4.3.3.2. Amending and supplementing the consensus mechanism between lenders when participating in a syndicated credit contract relationship

The principle of joint appraisal, joint decision on granting credit to customers and joint responsibility for the results of credit granting activities (Clause 1, Article 3 of Circular No. 42/2011/TT-NHNN) clearly shows the nature of this special type of contract: Credit institutions can combine and jointly participate in lending large loans according to the principles of equality and mutual benefit. However, the mechanism of consensus appraisal, loan decision, and responsibility is almost left open, not mentioned by law. The only regulation that unifies the form of appraisal for syndicated credit granting projects is in the form of direct participation, through authorization or hiring an independent appraisal from a third party (Clause 1, Article 10 of Circular No. 42/2011/TT-NHNN), partly demonstrates this consensus.

According to the author, the regulations on syndicated credit granting are only of relative significance, and have not promoted the capacity of the subjects (credit granting members) when detecting violations to handle them in accordance with the regulations and agreed content in each syndicated credit granting contract for customers. Even the regulations on resolving disagreements between credit institutions set out by law do not have a specific implementation mechanism. If we only rely purely on the granted credit ratio to decide on material responsibility and handle any violations,

According to the usual practice in capital contribution activities of enterprises, 181 will inevitably have the following shortcomings:

Firstly , in lending transactions, the interests of credit institutions are linked to the responsibility of preserving the loan. The interests of credit institutions when participating in legal relations of syndicated loans are not reserved for any credit institution. What is necessary now is to balance the interests of the parties participating in the syndicated loan. In particular, the proposals and recommendations of credit institutions participating in the syndicated loan with the function of supervision and the right to request the use of appraisal and supervision tools if there are violations (regardless of the credit ratio) must be guaranteed by law.

Second , although credit institutions participating in the joint venture relationship do not establish a new legal entity, the above principle has put pressure on lawmakers: to build the most optimal consensus mechanism to solve the stated goals.

The current regulation allowing the lead member to arrange syndicated credit is evidence of the concentration of too much power in the lead member, lacking a unified mechanism to ensure the activities of the participating members. The parties participating in this contractual relationship can completely negotiate and establish their own implementation mechanism based on the principle of freedom of contract. However, it can be seen that due to the different capacity and status of the lenders, due to the complexity of the syndicated loan relationship, not any credit institution can fully perceive, evaluate, and predict all possible developments, and record them in the syndicated contract.

From the analysis of the loose legal relationship between the syndicated capital contract and the syndicated credit contract, as well as the evidence that there is still a lack of a consensus mechanism to ensure equal rights of banking entities, the thesis recommends amending and supplementing the following regulations:

Firstly , legalize the relationship between the syndicated loan contract (signed between credit institutions) and the syndicated loan contract for customers. Accordingly, the provisions on the content of the syndicated loan contract must demonstrate the responsibilities of the syndicated lender, including the legal mechanism for resolving any disagreements that arise therein, and the work of checking and supervising loans must clarify the mechanism for resolving conflicts between members participating in syndicated loans.

Second , supplementing regulations to ensure the right to participate in credit control of the syndicated lender. Accordingly, members have the right to make requests and recommendations when discovering risks and risks of unsafe loans. The consensus principle under current regulations only stops at the role of the focal bank, this principle has not yet shown the role and responsibility of members participating in syndicated credit granting. This will create risks for the focal credit institutions, as well as lack an effective, continuous, multi-dimensional monitoring mechanism.

181 See more: Clause 3, Article 60 of the 2014 Enterprise Law provides detailed regulations on voting ratio, decisions on resolutions, decisions, and charters in enterprises.

In summary, implementing these recommendations will contribute to answering the research question about a legal mechanism to improve management capacity for syndicated loan contracts, identify, prevent, and limit risks arising when signing and implementing syndicated loan contracts.

4.3.4. Proposal to add some regulations to protect the rights of borrowers when borrowing capital for consumption purposes

The current situation of regulations on consumer credit contracts has made new progress compared to before, but still reveals many shortcomings in the law-making perspective, as well as not showing clear characteristics compared to other common loans as analyzed and evaluated in the thesis. 182 The thesis studies the experience and regulatory standards on consumer lending that have developed strongly for a long time in countries around the world, and makes recommendations to improve the law according to the following points:

4.3.4.1. Expanding the scope and subjects of regulation of consumer loan contract relations

Some experiences according to the laws of other countries:

- The laws of some countries follow the civil law system : Regulations on consumer credit contracts are subject to the provisions of the Civil Code: In Germany , this issue is regulated in Section 491, Chapter 2 of the German Civil Code; In Thailand , it is regulated in Chapter II, Thai Commercial and Civil Law. 183 In France , consumer lending is also considered a form of civil transaction, specifically regulated in the French Civil Code (Title X, Chapter II, from Article 1892 to Article 1914).

- Laws of some countries under the common law system : Regulations on consumer credit contracts have developed strongly, are widely recognized in court decisions, and are then compiled into consumer credit laws. For example:

i) In the UK : Consumer lending is regulated by the Consumer Credit Act 1974, amended in 2006. Article 1 of this Act defines: Consumer lending applies to individuals and organisations borrowing less than £25,000 (originally £5,000, then this limit increased to £15,000 in 1985 and £25,000 in 1998). 184

The regulations in these countries quantify a specific amount of money to determine the consumer lending relationship, so it is difficult to confuse when applying, instead of just relying on the purpose (borrowing needs) as the usual classification in contractual relationships as in countries with a statutory law system. According to this regulation: " The purpose of this law is to protect the interests of consumers - including individuals, partners and unincorporated bodies for transactions involving amounts not exceeding £25,000". 185

182 See also: point d, section 2.2.1; point a, section 3.3.1; point b, section 3.3.2.1 of the Thesis

183 Thai Civil and Commercial Code, National CTN Publishing House (1995)

184 EP Ellinger, Eva Lomnicka and Richard Hooley, Modern Banking Law , 3rd ed ., Oxford University, p. 76

185 EP Ellinger, Eva Lomnicka and Richard Hooley, ibid (183), p. 76