The cost of transferring loans and mortgages from one bank to another is set to come down under a proposed new law establishing a central depository for loan securities. Treasury secretary Henry Rotich said the new depository for collateral will be modeled on the Central Depository and Settlement Corporation (CDSC) that is used to secure and transfer shares in public listed companies.
Typically, transfer of a loan or mortgage requires removal of the charge granted by the Ministry of Lands which is then re-instated in the new bank. Lenders ordinarily charge a property a fresh when processing a loan for which the property is the collateral, irrespective of whether another bank had executed the same charge — with the borrower bearing the related transaction costs. Difficulties with the transfer of collateral have been seen to work in favour of banks because the ultimate impact is to lock in customers from moving to competitors once a loan is agreed.
Banks ordinarily factor in the cost of managing collateral when pricing the loans, meaning that a central depository could also lead to lower interest rates in the long run. Some of the costs incurred when taking up mortgage include stamp duty, charged at 4.2 per cent, transaction, valuation and legal fees, which can add up to 10 per cent of the total loan amount and must be paid up front.
Centralising the loans securities custody away from individual banks will spare borrowers the agony of charging a security afresh for a loan or mortgage whenever they seek to move a loan to a new lender. The decision should also help resolve a long-standing complaint that the difficulties consumers face in transferring securities have reduced competition for borrowers among banks.