Watching the banks

28 January 2004 - Business Day

SA's ombudsman for banking services does plenty of good work, but its profile has tended to be low. A recent ruling by the ombudsman, though, should serve to remind borrowers and banks that they must watch the pennies carefully.

The ruling concerns the dreaded "Pips", as the are known in banking parlance - properties in possession. No bank wants these in its portfolio. Repossessing properties is the last resort when home loan borrowers go into default; holding onto Pips is costly and troublesome; and they often end up being sold at a loss, with the sale price falling short of the value of the outstanding loan on the property. More often than not, banks have to take write offs on their Pips portfolios.

But clearly they do not always make losses when they sell properties ion execution, and this is the subject of ombudsman Neville Melville's ruling. He says any profit a bank makes on the sale of a Pip must go to the borrower to help settle the outstanding debt.

None of the banks will admit to pocketing the profits and to their credit, the big retail banks that grant nearly all SA's home loans have come out in support of Melville's approach. He is not suggesting the banks have pocketed profits on a large scale, but he had received enough complaints to justify action.

It may well be that profits on the Pips has become an issue only now because after four years of low increases in house prices, the banks now finally have some chance of selling the houses which are often pretty run down at a profit.

Banks failure to credit the original owners with the profits does not appear in any way corrupt or malicious. As Melville discovered, the problem arose when a bank put a house up for auction, failed to get the reserve price, bought the house itself for a nominal amount and only later sold the house for a much higher price. There could be long delays between the first sale and the second, so the issue is not nearly as simple as it might first appear. And there may in some cases be practical problems in finding the original owner / borrower to hand over the profits on the second sale.

Melville's ruling should bring certainty to banks and affected borrowers. One questions whether customers to which this happened years ago now have claims off the banks.

It is unlikely that this is a big problem. But it does no harm for the banking watchdog to issue a reminder that big brother is watching.