Bank loans and court rulings

A story came out in Mongolia just before the end of 2015 that the Constitutional Court had ruled a program of 8% mortgage loans as unconstitutional. The Court found that the loans violate Articles 171 and 171.2 of the Mongolian Civil Code as well as the Constitution.

Civil Code

Article 171. Non-restriction of owner transaction right

 171.1. Transaction, obligating the owner not to use the immovable property serving as a hypothec, not to transfer it to ownership of others, and not to otherwise entitle rights to it to third party, shall be invalid.

 171.2. Validity of the transaction concluded by hypothec owner with a third party shall depend on the creditor’s permission.

After checking the dictionary, I learnt that hypothec means:

A mortgage or security held by a creditor on the property of a debtor without possession of it, created either by agreement or by operation of the law

However, neither the laws, nor the definition of hypothec were enough for me to understand why the 8% mortgage loans were deemed illegal/unconstitutional. It would seem that there are provisions in the loan scheme which I don’t know about and which run afoul of the law.

But the story doesn’t just end with people being denied cheap mortgage loans. It seems that the State Housing Corporation has built some apartment blocs on the basis that they would be able to offer people the 8% loan to buy new apartments. The sale of the apartments would then cover the construction costs. However, with the denial of the 8% loans, this whole scheme has collapsed and the State Housing Corporation can’t afford to pay for the construction.

(picture source)

In response to this set back the Speaker of the Parliament, while attending the official opening of the apartment blocs, announced that the government would annul the Court’s ruling and continue as planned without changing the law. Its unclear how he will do that in practice since all banks offering the loan scheme suspended them on the basis of the court ruling. Annulling the law would also, presumably, involve convincing the banks to offer the loan in violation of the court ruling.

The tussle between judicial and legislative powers could heat up, especially as we have just entered a parliamentary election year. Combined with the approved amendments to the election law, protests over the use of voting machines and the slump in economic growth, tensions are already running high.

Mongolia generally has peaceful elections. Although there is thought to be some amount of election mismanagement and fraud in each elections, most election pass without too much controversy. The exception was the 2008 parliamentary election which led to a violent protest, the first state of emergency declared since the transition to democracy and 5 people were killed. Nobody is expecting anything like that but we could be heading for a very feisty election period.



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