Effects of illegality on loan recovery in mortgage transactions by commercial banks

Abstract

This study aimed to investigate the effects of illegality on loan recovery in mortgage enforcement by commercial banks in Uganda. The study examined the loan recovery options available to banks and the aspects of illegality that affect these alternative recovery options. Uganda’s legal frameworks governing loan transactions is split and different for every loan transaction. There is a high cost of noncompliance and illegality on financial institutions which encounter significant challenges in enforcing recovery due to procedural and substantive illegalities. These issues frequently result in unenforceable contracts, prolonged mortgagor litigation, and substantial financial losses. The study is grounded in legal doctrinal method and qualitative approaches, examining the effects of illegality on loan recovery and exploring available options for mortgage enforcement. The study analyzes 27 Ugandan court case decisions from Uganda Legal information institute exposing mortgage disputes involving commercial banks, supplemented by key informant interviews with banking and legal experts. Key findings illustrate those procedural illegalities, such as improper notice of default and invalid collateral registration, often render mortgage agreements unenforceable, with courts nullifying recovery actions in a notable percentage of cases. Additionally, substantive illegalities, including fraudulent loan documentation and unlawful sales, can lead to civil forfeiture, loss of the right to realize the security and significantly increase recovery costs. The study found that there is a strict interpretation and application of compliance requirements, particularly under Sections 19 and 22 of the Mortgages Act cap 239, where even minor procedural breaches can invalidate entire loan recovery processes. The study also finds that there are alternative loan recovery mechanisms, such as receivership and out-of-court settlements. The study concludes with recommendations for consolidation of loan recovery laws in Uganda by way of passing a Loan Recovery Bill to enhance regulatory reforms, enhanced legal risk mitigation strategies, and capacity building within the judicial and banking sectors to improve compliance and efficiency in loan recovery outcomes. Strengthening regulatory oversight and dissemination of loan recovery information to borrowers is crucial to addressing the systemic illegalities that undermine the effectiveness of mortgage enforcement in Uganda.