Correction Program for the Key Operational Activities of the Banking Industry

Correction Program for the Key Operational Activities of the Banking Industry

Chinese Taipei

Case:

Correction Program for the Key Operational Activities of the Banking Industry

Key Words:

Suretyship, discharging, offset, insufficient credit, acceleration clause, mortgage, inequality in responsibilities, registration fee, handling of overdue deposit certificates, revolving credit, retained amount, construction factory

Reference:

Fair Trade Commission Decision of January 4, 1995 ( the 169th Commission Meeting); Letter of Kung Yi Tsu 00500

Industry:

banking industry (6510)

Relevant Law:

The Fair Trade Law, the Civil Code, the Land Law, and the Bankruptcy Law

Summary:

1. The major operational activities of the banking industry are the acceptance of deposits and the lending of money. The banking industry's trading counterparts include business operators and the consumers. Whether the business of the banking industry is soundly and reasonably operated has a significant impact on depositors' rights and interests, the obtaining of operating funds needed by enterprises, the competitive power of enterprises, and the development of the banking industry. However, after the establishment of the Fair Trade Commission, the Commission frequently received the public's complaints against financial institutions concerning their practices and operations. Most of the disputes involved were related to the standard contracts adopted by the banking industry. After screening some standard contracts collected by this Commission, it has been discovered that there are only minor differences in the contents of those contracts. Those standard contracts have been adopted by the banking industry for decades, and few amendments of the contracts have been made. Although more than ten new banks were established around 1991, those new banks continued to adopt the contents of those standard contracts commonly used in the industry and added little changes to them.

2. Since the end of 1992, this Commission has engaged in classifying and sorting out deposit contracts and loan contracts, and has screened out operational activities unfavorable to the banking industry's trading counterparts pursuant to the relevant provisions of the Civil Code. Those operational activities were reported to the Commission Meeting. The Commission Meeting then resolved to correct those operational activities beginning on July 1, 1995 based on following principles:

(1) The liability of a surety shall always not exceed the liability of the principal debtor. Suretyship contract shall not contain any provisions excluding the right of ordinis beneficium provided by the Civil Code. However, the provisions governing deferred repayment under the Civil Code contained in industrial or commercial loan contracts may be subject to the negotiations between banks and industrial or commercial enterprises.

(2) A bank shall not exercise its right to offset if any of the following three situations exist:

(i) Offsets are prohibited by law or regulation;
(ii) The parties have agreed that no offset shall be made; or
(iii) Based on the management of affairs without mandate or under a transaction agreement between the borrower and a third party, the bank is appointed to make payment to the borrower.

(3) If the proceeds a bank receives from the disposition of collateral and/or the offset amount is insufficient to discharge all of the borrower's obligations, the obligations shall be discharged pursuant to the relevant provisions of the Civil Code, unless the discharge sequence and method the bank prescribes are more favorable to the borrower than those set forth in the Civil Code.

(4) In case a debtor's credit is insufficient, his deadline privilege shall be compulsorily waived and his creditor(s) will be exempt from any responsibility for notification as follows:

(i) If a contractor's obligations to a bank falls under any of the following circumstances, the bank may, at any time, reduce the amount of loan extended to the contractor, or shorten deadline for repayment, or deem the whole loan immediately due and payable without any prior notice or payment demand: (a) the principal of any debts is not repaid pursuant to the relevant contract; (b) the contractor has filed an application for a settlement, an adjudicated bankruptcy, or a corporate reconstruction in accordance with the Bankruptcy Law, or his account has been notified by the clearing house to be a dishonored account, or he has wound up his business, or has cleared up his debts; (c) the contractor does not furnish the security which he is obliged to furnish; (d) upon the death of the contractor, his heir declares a limited succession or waives his right of inheritance; and (e) the contractor's substantial properties are declared confiscated due to a criminal action.

(ii) If a contractor's obligations to a bank falls under any of the following circumstances, the bank may, by giving a payment notice or payment demand, reduce the amount of loan extended to the contractor, or shorten the deadline for repayment, or deem the entire loan and payable due: (a) the interest accruable on any debts is not paid pursuant to the contracts; (b) the furnished collateral is attached by court or destroyed, or the value which is decreased or insufficient to secure for the creditor's right; (c) the actual use of the funds the contractor borrowed from the bank does not correspond with the use approved by the bank; and (d) the contractor is subject to a compulsory execution, or a provisional seizure, or a provisional disposition, or other precautionary proceedings which threaten the bank's receipt of the repayment.

Besides the nine causes for the exercise of the acceleration clause set forth in the preceding two Items, if it is necessary to preserve creditor's rights, a banking enterprise may add other causes through negotiations with individual contractors. Those added causes shall be conspicuously written in the relevant contract in bold type or in a different color. Moreover, the effect of the expiration of the accelerated deadline (with or without payment notice) shall be expressly specified. However, whether any of those causes negotiated with individual contractors constitutes a violation of the Fair Trade Law shall be decided on a case-by-case basis.

(5) Any matters not provided for in the master and/or in the addendum (or addenda) of a loan contract, shall be subject to the negotiations of the parties.

(6) The scope of creditor's rights secured by the line of a mortgage shall be properly specified according to the added terms contained in the initial draft of the amendments to Book III: Rights over Things of the Civil Code so that the maximum secured amount shall be equal to the amount of obligations incurred from credit extension in any mortgage contract executed thereafter. However, before the amendments of the said legal provisions are promulgated, it is suggested that the bank personnel in charge of extending credit explain to mortgagors in details which parts of the creditor's rights are secured by the line of the mortgage or mark the secured part in red or in big black bold type (or underline) to call the mortgagor's attention thereto and to allow the mortgagor to negotiate with the bank for incorporation of the part into the secured scope.

(7) Equality in Responsibility: Banks shall prescribe the responsibilities of banks and borrowers from the viewpoint of competition and service. For example, as soon as the borrower repays the debts secured by the mortgage, the bank shall cooperate in applying for the cancellation of the relevant mortgage registration.

3. Shift of the fee incurred from the registration of the creation of a mortgage: From March 1, 1995, if a financial institution shifts its responsibility for the registration fee payable under Article 76 of the Land Law pursuant to special provisions in the loan contract, the provisions governing the shift shall be subject to the separate negotiations between the parties and shall be expressly set forth in a special clause of the contract.

4. Disclosure of information when handling overdue savings deposit slips: From March 1, 1995, a financial institution shall expressly set forth the provisions governing the handling of overdue time savings deposit slips and inform a depositor of the relevant information in the contract or similar written materials to allow the depositor to make appropriate choices.

5. Calculation of revolving credit interest accrued on credit cards: To make transparent financial institutions' calculations of interest, the value date of the revolving credit shall, after January 1, 1995, not be earlier than the actual appropriation date. Moreover, the method of charging interest and the interest rate shall be explained in the contract in simple words attached with case examples.

6. Transparency of the information concerning the retained amounts of check deposits: If, after June 1, 1995, a financial institution requests that a certain amount should be retained in a check deposit account, the following particulars shall be set forth in the contract: (1) outstanding deposit, notice of adjustment, and effective time; and (2) the effects of insufficient outstanding deposits such as the withholding of a certain amount of fees or the suspension of the issuance of checks.

7. Requiring construction companies to waive their legal mortgage during the processing of construction financing requests: In order to protect construction companies' rights and interests, maintain financial order, and respect the competent agencies' authority, the Ministry of Finance should require, pursuant to the financial laws and regulations, that when examining the flow directions of construction companies' funds as part of the operations of financing appropriations to construction companies, the banking industry should ask the construction companies to provide documents certifying receipts of the preceding installment or other proofs, and that when conducting financial examinations, the Central Bank of China should keep an eye on the performance made by the banking industry and if necessary, handle cases in accordance with the Fair Trade Law, depending on the results of the examination of the industry's performance.

Summarized by Wu, P. J.
Supervised by Hu, K. Y.

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