Loan collateral is a method of guarantee in which a customer's loan at a credit institution is secured by a type of asset. Therefore, this form of guarantee will reduce risks for credit institutions because credit institutions can establish rights to a certain asset, when the borrower violates the obligation to repay the debt, the credit institution has the basis to handle the secured asset to recover the debt. This is also a popular method of guarantee at credit institutions.
Guarantee is a method of securing a loan where the loan is not secured by an asset. Article 361 on “Guarantee”, Civil Code 2005 stipulates:
Guarantee is a commitment by a third party (hereinafter referred to as the Guarantor) to the entitled party (hereinafter referred to as the Guaranteeee) to perform the obligation on behalf of the obligated party (hereinafter referred to as the Guaranteed Party), if when the deadline comes, the Guaranteed Party fails to perform or improperly performs the obligation. The parties may also agree that the Guarantor shall only have to perform the obligation when the Guaranteed Party is unable to perform its obligation [30, Article 361].
Here, credit institutions can choose their borrowers based on many different factors to lend to them such as: Based on the borrower's reputation, the reputation of a third party, state guarantees, etc.
1.3. Mortgage of assets
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1.3.1. Concept of property mortgage
The type of relationship in which one person entrusts another person with a property as collateral for his commitment or covenant, and if he fails to fulfill it, the property automatically becomes the property of the other person, has existed for a long time in the history of civil relations. According to some researchers, the concept of “fiducia” in Roman law is one of the first legal bases to recognize this type of relationship, which we now call under the concept of property mortgage.
In some legal dictionaries, the concept of “fiduciary” also appears, with the understanding that a person entrusts his ownership or power for the benefit of another person.
In Vietnam, before the 1995 Civil Code was enacted, Clause 2, Article 2, Decree No. 17-HDBT dated January 16, 1990 detailing the implementation of the Economic Contract Ordinance stipulated mortgage as a measure to ensure the performance of economic contracts as follows:
2- Pledge is the transfer of personal property under one's ownership to a party to a contractual relationship to keep as a security and guarantee in case of violation of a signed economic contract. The pledge must be made in a separate document, with confirmation from a notary public or a competent business registration authority (in case there is no notary public).
The holder of the mortgaged property is obliged to guarantee the original value of the mortgaged property; ownership of the mortgaged property may not be transferred to another person during the time the mortgage document is still in effect.
Under the 1995 Civil Code, property mortgage is regulated as follows:
“Pledge of property is the act of the obligated party delivering movable property owned by him/her to the entitled party to secure the performance of civil obligations; if the pledged property has registered ownership, the parties may agree that the pledgor shall retain the pledged property or entrust it to a third party for safekeeping.” [29, Article 329]
The 2005 Civil Code stipulates in Article 326 on "Pledge of property" as follows:
after:
“Pledge of property is the act of one party (hereinafter referred to as the pledgor) delivering property
belonging to the other party (hereinafter referred to as the mortgagee) to secure the performance of civil obligations.” [30, Article 326]
Accordingly, it can be seen that the legal regulations on property mortgages over time are quite different, but basically, the outstanding feature that is kept intact in the above regulations is the transfer of mortgaged property from the mortgagor.
to the mortgagee; although the 1995 Civil Code also recognizes cases where the mortgaged property is not transferred to the mortgagee if that property is property subject to ownership registration.
1.3.2. Mortgaged assets
Presented in Section 2.1, Chapter 2.
1.3.3. Contents of property mortgage
1.3.3.1. Rights of the mortgagor
According to the provisions of Article 331 on "Rights of the mortgagee", Civil Code 2005, the mortgagee has the following rights:
- Request the mortgagee to suspend the use of the mortgaged property in the case specified in Clause 3, Article 333 of the 2005 Civil Code, if due to use, the mortgaged property is at risk of losing value or decreasing in value.
Clause 3, Article 333 of the 2005 Civil Code stipulates the rights of the mortgagee; in this Article, the mortgagee has the right to use and exploit the utility, enjoy the benefits and profits from the mortgaged property if the parties have an agreement. However, to ensure the rights of the owner of the mortgaged property, the law stipulates that even in the case of an agreement, if the mortgagee's use and exploitation of the property is at risk of losing value or decreasing in value, the mortgagee still has the right to request the mortgagee to stop using and exploiting the mortgaged property.
- The mortgaged property may be sold, if agreed by the mortgagee.
In principle, although the property is used as collateral, the mortgagor is still the owner of the property, so the right to dispose of the property still belongs to the mortgagor (except in the case of handling the collateral of the mortgagee based on the provisions of law).
However, because the mortgagee has also established his rights to the mortgaged property, in accordance with the principle of exercising ownership rights stipulated in Article 165 of the 2005 Civil Code, the mortgagee has the right to decide on the exercise of the mortgagor's right to sell the mortgaged property.
Article 165 on “Principles of exercising ownership rights”, Civil Code 2005 stipulates: The owner is entitled to perform all acts according to his/her will with respect to the property but must not cause damage or affect the interests of the State, public interests, rights and legitimate interests of others. [30, Article 165]
- The right to replace the mortgaged property with another property if there is an agreement. This right of the mortgagee is based on the principle of freedom, voluntary commitment,
agreement in civil transactions
- Require the pledgee holding the pledged property to return the pledged property when the obligation secured by the pledge terminates.
As analyzed above, the mortgage transaction is a secondary transaction, attached to the main transaction. At the same time, the scope of the mortgage is within the scope of the secured obligation, even if the value of the mortgaged property is greater than the value of the secured obligation.
One of the legal grounds for terminating a mortgage is that the obligation secured by the mortgage has ended. At that time, the mortgagee's rights are also terminated, the mortgagee's ownership rights are no longer restricted, so the mortgagee has the right to request the mortgagee to return the mortgaged property.
- Require the mortgagee to compensate for damage caused to the mortgaged property.
According to the principle of respecting and protecting civil rights in Article 9 of the 2005 Civil Code, when a subject's civil rights are violated, that subject has the right to self-defense according to the provisions of this Code or to request competent agencies and organizations to compel compensation for damages.
Therefore, when the mortgaged property owned by the mortgagor is transferred to the mortgagee, and the mortgagee is at fault for causing damage, the mortgagee's responsibility to compensate for the damage is established.
1.3.3.2. Obligations of the mortgagor
According to the provisions of Article 330 on "Obligations of the mortgagor", Civil Code 2005, the mortgagor has the following obligations:
- Deliver the mortgaged property to the mortgagee as agreed.
This is a necessary condition for mortgage transactions.
- Notify the mortgagee of the third party's rights to the mortgaged property, if any; in case of no notification, the mortgagee has the right to cancel the mortgage contract and request compensation for damages or maintain the contract and accept the third party's rights to the mortgaged property.
In order to best ensure the rights of the mortgagee in the mortgage transaction. The law stipulates the responsibility to publicly disclose all parties with legal rights to the mortgaged property. At the same time, the law also opens up the mortgagee the right to cancel the mortgage contract if the mortgagor fails to notify.
The issue of compensation may still arise.
- Pay the mortgagee reasonable costs for preserving and maintaining the mortgaged property, unless otherwise agreed.
From the principle of security by mortgage, the mortgagee does not use the mortgage transaction to replace the performance of the obligation of the obligated party, but only as a measure to enhance the responsibility of the obligated party in performing the obligation. Therefore, in terms of benefits, when accepting a mortgage, if there are costs of preserving and maintaining the mortgaged property, the owner of the property must of course be responsible for paying.
1.3.3.3. Rights of the mortgagee
Article 333 on “Rights of the mortgagee” stipulates that the mortgagee has the following rights:
- Require the person illegally possessing or using the mortgaged property to return that property.
This right is a fundamental right for the person who has the right to legally possess the property. Here, the mortgagee is the person who receives the right to legally possess the property from the property owner along with the transfer of the property.
- Request to handle mortgaged assets according to the agreed method or according to the provisions of law to fulfill obligations.
This right reflects the reserve nature of secured transactions in general and property mortgages in particular. When the obligated party fails to perform its obligations as committed, if all conditions for handling the mortgaged property are met, the mortgagee has the right to request the handling of the mortgaged property. Current law has provided for a number of methods for handling secured property.
- To exploit the mortgaged property and enjoy the benefits and profits from the mortgaged property, if agreed.
Regarding this right of the mortgagee, the law has opened a method for the two parties to agree on the mortgagee's ability to exploit the utility, enjoy the benefits and income from the mortgaged property. This is a provisional provision, in reality, there are some types of property that, if not used regularly, will lead to wear and tear, reduced operational capacity, thereby indirectly affecting the value of the property. Therefore, allowing the parties to agree on this content is appropriate, the parties can simultaneously agree specifically on the method of handling the benefits, income arising,...
- Be paid reasonable costs of preserving the mortgaged property when returning the property to the mortgagor.
Corresponding to the obligations of the mortgagor, the mortgagee has the right to request payment of reasonable costs of preserving the mortgaged property when returning the property to the mortgagor.
1.3.3.4. Obligations of the mortgagee
Article 332 on “Obligations of the mortgagee”, Civil Code 2005 stipulates that the mortgagee has the following obligations:
- Preserve and maintain the mortgaged property; if the mortgaged property is lost or damaged, compensation must be paid to the mortgagor.
This will clearly show its appropriateness when placed in relation to the right to be paid reasonable costs of preserving the pledged property when returning the property to the pledgor. It is because the law stipulates the obligation of the pledgee to preserve and maintain the pledged property, thereby ensuring the owner's rights to the property, that
The mortgagee has the right to request payment of costs incurred in connection with this preservation and maintenance.
- Not to sell, exchange, give away, lease or lend the mortgaged property; not to use the mortgaged property to secure the performance of other obligations.
The pledgee has the right to legally possess the pledged property. However, the above-mentioned acts all belong to the right to dispose of the property. Therefore, if performed, the pledgee will be determined to be in violation; then, the pledgor has the right to reclaim the pledged property, except for some cases as prescribed in Article 18 on “Responsibilities of the pledgee in case of selling, exchanging, donating, leasing, lending the pledged property, using the pledged property to secure the performance of other obligations”, Decree No. 163/2006/ND-CP on Secured Transactions.
Specifically:
In case the pledgee sells, exchanges, donates, leases, lends the pledged property, or uses the pledged property to secure the performance of other obligations contrary to the provisions of Clause 2, Article 332 of the Civil Code, the pledgor has the right to reclaim the property and request the pledgee to compensate for any damage caused; the pledgor does not have the right to reclaim the property in the following cases:
a) The buyer, the exchange recipient, and the donee shall have ownership rights established according to the statute of limitations prescribed in Clause 1, Article 247 of the Civil Code;
b) The buyer and the exchangee of the mortgaged property are movable assets that are not subject to registration of ownership and are in good faith as prescribed in Article 257 of the Civil Code. [13, Article 18]
Also according to the provisions of Article 18, Decree No. 163/2006/ND-CP on Secured Transactions, in case the mortgagor does not have the right to reclaim the mortgaged property, the mortgagee is still obliged to compensate the mortgagor for damages.
- Return the mortgaged property when the obligation secured by the mortgage terminates or is replaced by another security measure.
This is the natural obligation of the mortgagee to ensure the ownership of the mortgagor to the mortgaged property when the mortgage transaction terminates or is replaced by another security measure.
1.4. The role of collateral in the operations of credit institutions
As mentioned, credit granting is the core and basic business activity of credit institutions in general and banks in particular.
Clause 14, Article 4 on “Interpretation of terms”, Law on Credit Institutions 2010 stipulates:
“Credit granting is an agreement for an organization or individual to use a sum of money or a commitment to allow the use of a sum of money on the principle of repayment through lending, discounting, financial leasing, factoring, bank guarantees and other credit granting operations.” [36, Clause 14, Article 4]
The biggest risk to credit activities of credit institutions is the risk of capital loss. To limit this risk, and at the same time increase the ability to collect profits when customers use loans, when receiving each loan request, credit institutions must go through many professional steps to most accurately assess the loan usage plan, the efficiency of loan usage, etc., and identify risks to limit the possibility of capital loss due to customers not being able to repay loans. But in reality, all the work that credit institutions do before granting credit to customers is essentially guesswork based on calculations, algorithms, etc.; therefore, it is impossible to describe all the events that may occur in reality that affect the customer's ability to repay loans.
Faced with that reality, credit institutions need loan security measures as a last resort to enhance and limit the risk of capital loss.