Lately emails have been doing the rounds advising consumers to check with their credit providers whether their debt has been securitised or not.
It was thanks to a similar email which he received about two years ago, that Johannesburg business owner Damon Greville was able to score a small victory in the South Gauteng High Court.
This, after he allegedly discovered that despite his loan was securitised, litigation papers sent to him were in the name of the credit provider instead of the securitisation company.
The securitisation of debt was also cited as one of contributing factors to the 2008 Global Financial Crisis.
So, what is securitisation and what do you, as the consumer, need to know about it?
Small Business Connect spoke to law firm ENSafrica’s executive of banking and finance, Professor Angela Itzikowitz.
“Securitisation happens when a credit provider – bank or non-bank – bundles some of its loans together and then sells it to a special purpose vehicle (SPV),” says Itzikowitz.
A SPV, in layman’s terms is basically a securitisation company and is just a shell used to buy loans by getting investors to fund the sale of these loans.
On the flip side, the credit provider is able to get readily available cash and transfer the risk by selling the debt.
“In terms of South African law, there is no requirement for the credit provider to notify the debtor of the sale,” says Itzikowitz.
Despite this and though it’s not obligatory, most loan agreements contain a “cession clause” which advises the debtor that the debt could possibly be sold.
“But where a debtor requests information on whether a loan has been securitised, it is the debtor’s right to be provided with this information,” she says.
Itzikowitz advises business owners not to be concerned should their loan be securitised as this is standard industry practice.
It is also standard practice for the credit provider to sign an agreement with the SPV to collect the debt as the agent on behalf of the SPV, once the debt has been sold.
Despite this it will still be “business as usual” for the debtor, who will continue making the repayment as stipulated by the loan agreement.