Very few individuals pay more than little attention to anything other than the money when they are in urgent need of it. Due diligence would require a borrower to have a proper understanding of the terms of the agreement, but not every term receives the attention it deserves. Commercial realities and short-term needs often take the borrower’s heart and mind. The terms of the agreement itself receive little attention, let alone the law that governs the transaction.
Yet the law does not leave the borrower entirely at the mercy of the agreement. The Borrowers and Lenders Act, 2020 (Act 1052) contains a number of protections and obligations that can become important once the loan has been taken. Some concern what the lender must disclose before the agreement is signed. Others become relevant when payments are made, when a borrower falls into default, or when property given as security is about to be realised.
For anyone about to borrow, particularly the small business owner or individual taking a relatively modest loan, these are some of the provisions worth knowing before signing on the dotted line.
1. Pre-Agreement Disclosure
Before entering into a credit agreement, a lender is required to provide the borrower with clear, comprehensive and accurate information about the proposed agreement and the borrower’s rights and responsibilities. This usually includes a pre-agreement disclosure statement which must state, among other things, the principal amount, the interest rate, the total amount involved, the repayment schedule, the basis of costs that may arise from a breach, any fees applicable to prepayment and any insurance for the loan.
The consequences of non compliance with this requirement is dire. A charge or fee that was not disclosed in the pre-agreement disclosure statement before the agreement was executed is not payable and, if it has already been paid, it must be refunded with interest at the prevailing rate.
2. Access to loan account information
A borrower is entitled to know the state of the loan account. Upon request, the lender must provide, within five days, a statement showing matters including payments made, the outstanding balance, fees and interest.
This can be particularly useful where a borrower is unsure how payments have been applied or how much remains outstanding. The borrower is entitled to a clear picture of the account rather than relying on memory, informal calculations or whatever figure happens to be communicated by a lender or its agent.
3. Application of Penal Interest
The way interest is calculated can make a considerable difference to the cost of borrowing. Section 55 of Act 1052 provides that a credit agreement shall impose an interest rate calculated on an annual basis. More importantly, where the agreement provides for penal interest because of a delayed repayment, the agreed penal rate is to be applied to the amount of the delayed payment, and not to the total outstanding loan.
So, if a borrower has a larger outstanding balance but only a particular payment has been delayed, the provision does not permit the penal rate to be applied indiscriminately to the entire outstanding amount.
4. Early Settlement of Credit
A borrower may decide to clear the loan earlier than originally contemplated. Under the Act, this is subject to the notice requirements and other conditions contained in the agreement. Unless otherwise agreed, the amount payable on early settlement may include the principal, accrued interest, any agreed prepayment charge and other charges payable up to the date of settlement.
Where payment is made before the due date, the lender must accept it, subject to the applicable requirements, and credit the payment as of the date it was received.
5. Notice following default
Default does not automatically give a lender an unrestricted right to immediately realise a borrower’s collateral. Where an event of default occurs and the lender decides to realise the security, section 60 requires the lender to give the borrower a written notice demanding payment within 30 days of receipt of the notice.
There is also an exception where the collateral is perishable, in which case the notice period does not apply and immediate payment may be demanded. The Act also regulates how the notice may be delivered and even requires the demand notice to be served between 6 a.m. and 6 p.m., including weekends and holidays.
6. Enforcement of Security
After the statutory requirements for default have been satisfied, the Act permits a lender to enforce registered security without first obtaining a court order. The lender may also sue on the debt or, in appropriate circumstances, appoint a receiver or manager.
This does not mean that a lender can disregard the statutory process. For example, where a lender intends to realise registered security without a court order, the Act provides for registration of a notice with the Collateral Registry and the issue of a Memorandum of No Objection. The Act also gives a lender certain rights to take possession of or render collateral unusable after the enforcement requirements have been met.
7. Notice of Sale of Collateral
Where collateral is to be sold following default, the Act generally requires the lender to give at least seven days’ written notice before the sale to the borrower and other persons entitled to notice. The sale may take the form of an auction, public tender, private sale or another method permitted by the Act or the agreement.
There are exceptions where, for example, the collateral is likely to perish, its value may substantially decline, or immediate disposal is otherwise permitted under the Act. The ordinary position, however, is that the borrower should have notice before the collateral is sold.
8. Accounting for Proceeds of Sale
Suppose a borrower’s vehicle, equipment or other property is sold after default. What happens to the proceeds? The sale of collateral does not bring the matter to an end without an account being given. Within 15 days after the sale, the lender must provide the persons entitled to notice with a statement showing the sale proceeds, reasonable expenses and legal costs, and the resulting balance.
The Act also regulates how the proceeds are distributed. After the permitted costs, prior interests and secured debt have been dealt with, any remaining proceeds are ultimately payable to the borrower, subject to the statutory arrangements for subordinate interests.
9. Redemption of Collateral
Even after default, the borrower may still have an opportunity to recover the collateral. Before the collateral is sold or validly retained by the lender in satisfaction of the debt, a person entitled to notice may redeem it by settling the debt and the other amounts permitted by section 73, including reasonable actual expenses associated with seizure, holding and preparation for sale.
The Act expressly gives the borrower’s right of redemption priority over the right of any other person to redeem the collateral.
10. Protection against discrimination
A lender must not discriminate against a person in relation to credit on grounds such as gender, race, colour, ethnic origin, political opinion, religion, creed, social status or economic status. The prohibition applies not only to the decision whether to grant credit, but also to matters such as the cost and terms of the credit and the exercise of the lender’s rights.
The Act separately protects persons with disabilities and requires information relating to credit to be accessible, clear and accurate. A person who believes they have been discriminated against may complain to the Bank of Ghana for redress.
Conclusion
A borrower does not need to become a banking lawyer before taking a loan. But knowing the rules that govern the transaction can make a significant difference.
Before signing, know what you are borrowing and what it will cost. Know what happens if you pay early. Know what happens if you default. And if property is being used as security, understand how and when it can be realised, what notice should precede its sale, what happens to the proceeds and when you can still redeem it.
The Borrowers and Lenders Act does not remove the borrower’s obligation to repay. It places that obligation within a framework of rights, procedures and protections. Going for a loan then, knowing those rules may be just as important as knowing how much money is being offered.
