Predatory Lending

Predatory Lending (or “Equity Stripping”) can broadly be described as a scheme offered by a “company” that comprises an abusive set of lending practices targeting home owners in financial distress or default. The company offering the scheme will essentially provide assurances that, through the sale of the home owner’s property into the hands of the company, the home owner’s financial difficulties will be resolved, they will be able to remain in their property as a tenant and, in time, will have the option to re-acquire the property from the company.

Companies engaging in these predatory lending schemes will predominantly target home owners who have a fair degree of equity in their property, but due to their financial position, are unable to source additional financing from the formal lending institutions. Home owners will be approached by either the company or an agent of the company, or will approach the company directly as a result of advertising undertaken by these companies.

A number of schemes have recently been exposed by the Bank, with court rulings taken in favour of the Bank where legal action has been pursued and other matters still under investigation.

Modus Operandi

Agreement is reached between the home owner and the company to:
• Sell the home owner’s property to a “shelf” company, with the intent to set up a Trust, in favour of the home owner, as shareholder of the shelf company.
• Obtain a mortgage loan for the maximum amount of the property valuation (or maximum amount possible) in the name of the shelf company on the strength of the Directors that are appointed to the shelf company.
• Lease the property back to the home owner, who signs a lease agreement with the shelf company to rent the property, thus allowing the home owner to remain in their property with the rental payments being used to service the new mortgage loan.
• Use the proceeds of the loan to:
o Settle the home owner’s existing mortgage loan.
o Pay the costs associated with the raising the new mortgage loan.
o Retain an amount equivalent to 12 months instalments on the new mortgage loan in “trust” with the company running the scheme as a contingency.
o Settle the home owner’s other debt from the remaining funds.
• (Bridging finance is normally utilised to make the proceeds available immediately on approval of the mortgage loan finance.)
• Provide the home owner with an option to re-purchase the property in 18 months once their credit record has been cleared and they are financially capable of obtaining sufficient mortgage finance for the acquisition – the home owner will then takeover as sole Director of the shelf company.

Bank’s Findings

• The Trust in favour of the home owner is never set up and, in fact, the individuals behind the company running the scheme remained as shareholders of the shelf company, hence, owners of the property.
• Applications for mortgage loan finance by the shelf companies are normally routed through a specific originator/aggregator who is complicit in the scheme and receiving commission on the deals.
• The purchase price of the sale of the property from the home owner to the shelf company is inflated and supported by an external valuation of the property in order to secure more finance (willing buyer/willing seller principle).
• With regard to the Directors:
o They are invariably appointed purely as “jockeys” to secure the lending, i.e. credit worthy, sufficient income to demonstrate affordability and clear credit records.
o They are promised that the scheme is risk-free to them and receive an indemnity from the company running the scheme in terms of being called upon to repay the debt.
o There is never any intent from them to service the mortgage loan, notwithstanding that the Bank will take their surety and this is the basis for granting the mortgage loan.
o They receive a commission for the use of their name to obtain the mortgage loan.



• The home owner will no doubt agree to the rental agreement just to be able to stay in the property. However, it is extremely unlikely that the home owner would be able meet the rental payments under the lease agreement given that the new mortgage loan amount is substantially higher than the home owners original mortgage loan.
• The rental payments are aligned to the instalments on the new mortgage loan in order that the Directors would not be called upon to pay (their indemnity). The purpose of the funds held in “trust” is to supplement shortfalls by the home owner, but investigations into these schemes reveal that these funds are plundered by the individuals running the scheme who have free access to the monies.
• The proceeds of the new mortgage loan do indeed settle the home owner’s existing mortgage loan and cover all the associated costs, i.e. transfer duty, registration fees, etc.

However, the “equity stripping” aspect of these schemes is truly evident when one considers the costs, fees and commissions that are paid over to the individuals behind the scheme, the originator/aggregator, the Directors, the bridging finance providers (normally one and the same as the individuals behind the scheme), external valuers and the attorneys (instances found where the transfer duty charged was in excess of the SARS specified amounts and conditions of grant have been altered). These amounts can and do exceed 50% of the proceeds from the sale. Consequently, there are usually limited funds available to the home owner to settle/consolidate debt (the purpose of the original transaction).

• Given that the home owner never becomes the shareholder (i.e. the Trustee of the Trust), that they could never afford the monthly rental payment, that the contingent funds held in trust are no longer available and that the remaining proceeds are substantially lower than the equity originally existing in the property, the likelihood of the home owner being in a position to execute on the option to re-acquire the property is remote. Hence the property will be sold in order to defray the substantially higher bond and will, by this time, be completely beyond the financial means of the home owner.