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The Forum > Article Comments > Contractual certainty - banks need to play by the rules as well > Comments

Contractual certainty - banks need to play by the rules as well : Comments

By Mirko Bagaric, published 18/11/2010

Could many bank loans be void for uncertainty?

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I totally agree with you. It is my understanding that any financial contracts are an agreement between two or more parties creating obligations which are enforcable or recognisable at Law. In January 2009 I entered into a mortgage contract with the Commonwealth Bank. At the time of signing the contract even though variable intrest was at a lower rate I elected to fix the interest at a higher rate for the first three years of the contract.I believed that by doing this the bank could not add any extra interest increases to my mortgage until after the expiry of the fixed term,which ends in February 2012. Each time the intrest rates rise the bank also increases my interest. In my opinion the Commonwealth Bank failed to fully disclose the terms of contract. I do not have the money to contest the terms not disclosed to me in a court of Law. The banks mortgage contract is nothing short of fraud, theft and an injustice on all the people with a mortgage.
Posted by gypsy, Thursday, 18 November 2010 8:44:38 AM
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A fashionable sort of a rant, Mr Bagaric. It is bank-bashing season, after all.

>>...banks, like all essential services must be regulated by the government.<<

Ok, let's assume for the moment that I accept that essential services are the government's responsibility.

"The greed displayed by the four majors in nearly doubling the latest Reserve Bank hike makes regulation of bank interest rates imperative."

This assumes that the Banks' lending money to the public is "an essential service".

An interesting position.

I'm also puzzled with your take on the legal status of loan agreements. Since you are a highly-qualified legal eagle, I have to defer to your knowledge, of course. Perhaps it is just that you express it badly...

"...banks assert a contractual right to change at their whim the interest rate on loan products. Thus, after a bank and customer have entered a contract the stronger contracting party supposedly gets to unilaterally change the most important term of that contact. This is probably illegal."

As I see it, if I enter into a contract in which the Bank has asserted its right to change interest rates, how does it become illegal when they do so? It was either a condition of the agreement, or it was not, surely?

Your "solution", by the way, can only guarantee higher interest rates than would otherwise be necessary. The Banks would re-structure their products to absorb the additional risk inherent in allowing the government to dictate their interest rate changes. Their cost of funds could, of course, be affected by circumstances other than those managed or contemplated by the government of the day.

Not clever.

>>Any action less than this by the government is an abdication of its responsibility to community<<

That only works if you consider lending to be an "essential service".

So what action would you suggest to cover a situation where the Banks decided they could not, under their own governance model, reasonably lend money to the public, because their interest rates had been inappropriately set by the government?

Bring in the army, and force them at gunpoint?
Posted by Pericles, Thursday, 18 November 2010 10:15:02 AM
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Gypsy, perhaps you should have read the fine print of the contract. I would have thought that a fixed interest rate meant just that and if it doesn't, then there must be a get out clause in there somewhere which works in the favour of the bank. Don't just sit there complaining, do something about it, see Slater & Gordon or some other law firm which specialises in this sort of thing.

Mirko, there is always the option of a fixed loan, always with an eye on the above comments.

David
Posted by VK3AUU, Thursday, 18 November 2010 10:22:42 AM
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The rates at which banks lend are based on their marginal rate of funding and not their average rate. If the government enforced a certain maximum lending rate, the consequence would simply be that if the marginal rate of funding exceeds the rate at which they can lend, the banks will simply stop lending, or foreclose on their riskier loans, and business would simply shudder to a halt.

This has occurred pretty much every where anyone has been stupid enough to try and regulate rates, rents, or prices of any nature.

The issue has always been about the competition that Labor destroyed with their selective bank guarantees.
Posted by Shadow Minister, Thursday, 18 November 2010 12:00:08 PM
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To Pericles

We are all bankers; whoever crosses the threshold of a bank door is a banker. Non bankers can be counted on the fingers of one hand.

In the game of banking there are winners and losers.

It is the law of the jungle and I do not know why we call ourselves civilized.

To Mirko Bagaric

Are the banks alone in the game of moving the goal post? All the privatized utilities do.

It seems that Anarchy would be a paradise compared with the chaos we live in.

We watch hordes of charlatans on three tiers of governments constantly talking their way out of responsibility with clever slogans.

If politicians were made to mortgage to us their possessions against blunder, would we have many aspirants willing to have a go to governing?

We have to think a bit deeper before accusing institutions for our troubles.
Posted by skeptic, Thursday, 18 November 2010 12:16:28 PM
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If you want to finish up ahead, or at least somewhat less behind, only pay off the interest on your loan. Use your spare money to buy shares in the bank. With the annual share price increase of better than 15 percent and a good dividend to boot, you can't lose. As they say in the classics, "If you can't beat them, join them."

David
Posted by VK3AUU, Thursday, 18 November 2010 9:30:35 PM
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Lets see who can do without banks make the first move!
Posted by Dallas, Thursday, 18 November 2010 11:50:21 PM
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I think banks should offer a tracker loan, where the interest rate is set a fixed margin above the reserve rate. It would give some confidence to the consumer that the bank that originally gave them a rate 1% above the cash rate would stay at that level above the cash rate. Sort of like a mix between a fixed rate and a variable rate.

I don't think they would need to be forced, I have seen it elsewhere and someone will do it soon to negate the disgruntled customers. It should coexist with variable rate and fixed rate loans. Then you could sign up with the bank with a variable rate with the confidence the bank cant double your interest rate overnight if it feels like it.

People used to be comfortable that when the reserve upped interest rates, they would be slugged 25 basis points, and signed their deal with the bank under the assumption that the margin the bank lent above this rate was fixed. Wrong, but banks never did raise outside the reserve until the last few years. The GFC was like a game changer.

So now there is much less clarity about what discount from the standard variable rate (which nobody pays) people are really getting and the margin above the reserve rate is very rubbery.

I think taking away exit fees is good. If the bank can change the interest rates on a whim, the customer should be able to change banks on a whim.
Posted by Houellebecq, Friday, 19 November 2010 9:38:02 AM
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The fractional reserve system of money counterfeiting by the private banks must end.They create money from nothing in their computers to equal the inflation they create and our increases in GDP.They take possession of our GDP and loan it back to us at interest.It is double theft. http://secretofoz.com/
Posted by Arjay, Friday, 19 November 2010 5:58:52 PM
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Uh oh. There goes the neighbourhood.
Posted by Pericles, Friday, 19 November 2010 6:07:22 PM
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*They create money from nothing in their computers to equal the inflation*

Sheesh, I must get me one of those magical computers that Arjay
keeps mentioning. Sadly Westpac don't yet have one, or the
dividend might be a bit better.
Posted by Yabby, Friday, 19 November 2010 10:00:13 PM
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Banks have never played by the rules.They have always made their own.
Posted by Arjay, Saturday, 20 November 2010 10:17:55 PM
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Soon people will be complaining about lawyers and drug dealers.
That's what happens when you deal with the devil.
Posted by Troposa, Sunday, 21 November 2010 3:38:02 PM
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