•
LAW OF FINANCIAL INSTITUTIONS AND SECURITIES
BLO3405
• Lending: General principles
• Introduction
• Lending by the banker to the customer is usual subject to a written contract
• The RBA can make policy statements wrt lending practices however it is rarely used
• There are different types of lending practice, and different types of borrower
• General principles
• Types of Lending
• So what types of lending can a bank engage in?
• Traditionally, most lending by banks was in the form of an overdraft
• General principles
• Overdrafts
• An overdraft facility is a current account that allows the customer to overdraw the account
• Overdraft generally payable on demand
• May be a penalty interest rate if overdraft limit is exceeded
• Repayment on demand means that the customer must be given a reasonable period of
notice to repay the loan
• The banker has a right to charge interest on overdrafts, and this interest can be
compounded (National Bank of Greece SA v Pinos Shipping Co (1990)
• Note that there is no presumption that non bank lenders have a right to compound interest
(Stein v Torella Holdings Pty Ltd (2009)
• General principles
• Term loans
• Commercial Bills
• Bills of exchange allow banks to lend their credit instead of advancing funds directly to the
customer
• Commercial bills are usually for a period of 90 or 180 days and the bills may be rolled over to
extend the credit period
• General principles
• Standby credits
, • Standby letters of credit or performance bonds are discussed in the final lecture, but the
basic idea is that the banker promises to some third party that payment will be made under
certain circumstances
• For example, a foreign purchaser of Australian goods who may be issued a performance
bond by an Australian bank to pay a sum in the case of loss
• General principles
• Letters of comfort
• A letter of comfort is an assurance to a lender that the parent company is aware of the loan.
There are 3 types of letters of comfort (p408)
• Although not a guarantee, letters of comfort can have legal effect
• General principles
• Types of borrowers
• There are four main types of borrower and each can pose different legal problems for the
lender
1.Minors
• The common law position is that contracts with minors are voidable at the option of the
minor, except for contracts for necessaries
2. Unincorporated borrowers
It is prudent for banks to provide liability provisions when making loans to partnerships and
unincorporated associations (by making each partner or individual jointly and severally liable and
taking guarantees from each partner)
• General principles
3. Companies
• There may be problems in identifying which agents have authority to act for companies. It
may be prudent for banks to obtain guarantees from a companies putative agent
• 4. Consumers
• The National Consumer Credit Protection Act (2009) governs bank lending to consumers
• Under the code, the credit provider must provide a pre contractual statement to the
consumer setting out the nature of the loan agreement
• Secured lending: Real Property
• Securities
• Credit providers (banks) often take a security from the debtor along with the contractual
promise to repay
• Security for our purposes means a lender’s interest in property that may be realised if there
is default in repayment
LAW OF FINANCIAL INSTITUTIONS AND SECURITIES
BLO3405
• Lending: General principles
• Introduction
• Lending by the banker to the customer is usual subject to a written contract
• The RBA can make policy statements wrt lending practices however it is rarely used
• There are different types of lending practice, and different types of borrower
• General principles
• Types of Lending
• So what types of lending can a bank engage in?
• Traditionally, most lending by banks was in the form of an overdraft
• General principles
• Overdrafts
• An overdraft facility is a current account that allows the customer to overdraw the account
• Overdraft generally payable on demand
• May be a penalty interest rate if overdraft limit is exceeded
• Repayment on demand means that the customer must be given a reasonable period of
notice to repay the loan
• The banker has a right to charge interest on overdrafts, and this interest can be
compounded (National Bank of Greece SA v Pinos Shipping Co (1990)
• Note that there is no presumption that non bank lenders have a right to compound interest
(Stein v Torella Holdings Pty Ltd (2009)
• General principles
• Term loans
• Commercial Bills
• Bills of exchange allow banks to lend their credit instead of advancing funds directly to the
customer
• Commercial bills are usually for a period of 90 or 180 days and the bills may be rolled over to
extend the credit period
• General principles
• Standby credits
, • Standby letters of credit or performance bonds are discussed in the final lecture, but the
basic idea is that the banker promises to some third party that payment will be made under
certain circumstances
• For example, a foreign purchaser of Australian goods who may be issued a performance
bond by an Australian bank to pay a sum in the case of loss
• General principles
• Letters of comfort
• A letter of comfort is an assurance to a lender that the parent company is aware of the loan.
There are 3 types of letters of comfort (p408)
• Although not a guarantee, letters of comfort can have legal effect
• General principles
• Types of borrowers
• There are four main types of borrower and each can pose different legal problems for the
lender
1.Minors
• The common law position is that contracts with minors are voidable at the option of the
minor, except for contracts for necessaries
2. Unincorporated borrowers
It is prudent for banks to provide liability provisions when making loans to partnerships and
unincorporated associations (by making each partner or individual jointly and severally liable and
taking guarantees from each partner)
• General principles
3. Companies
• There may be problems in identifying which agents have authority to act for companies. It
may be prudent for banks to obtain guarantees from a companies putative agent
• 4. Consumers
• The National Consumer Credit Protection Act (2009) governs bank lending to consumers
• Under the code, the credit provider must provide a pre contractual statement to the
consumer setting out the nature of the loan agreement
• Secured lending: Real Property
• Securities
• Credit providers (banks) often take a security from the debtor along with the contractual
promise to repay
• Security for our purposes means a lender’s interest in property that may be realised if there
is default in repayment
