MORTGAGE PAWNSHOPS

Georgian legislation allows third  party lenders to operate with little oversight and few protections for the public. In a society with little concept of mortgages or collateral loans, private lenders are taking advantage of vulnerable Georgians.

Paul Rimple

In 2004, Khatuna Japaridze wanted money to start a small bakery. Because she felt she would not qualify for a bank loan, Japaridze consulted the newspaper and found a private loan broker agency, who would loan her money with her two room apartment in the Didube district of Tbilisi as collateral.

The brokers introduced Japaridze to a third party who would actually loan the money, while the agency took a cut and stepped out of the picture. Her loan would amount to 1/3 the value of her property, a sum determined by an appraiser both had agreed upon using. He valued her property at $15,000 and she was loaned $5,000. The creditor drew up a contract which effectively put her property in his hands, should she default on a monthly payment.

“A Georgian thing”

In Georgia, it is not uncommon for people to find ways around laws to save themselves money. The loan was for $5000 and the accumulated interest at 8% would have amounted to a total of $7000. The creditor didn’t want to pay taxes on $2000 and asked Japaridze to agree to say that he gave her a flat $7000 no interest loan. Her monthly 8% payment would be applied to that. They signed a contract, notarized and registered it at the public registry, according to law.

Unfortunately for Japaridze, the monthly payments were never recorded and she never asked for a receipt. When Japaridze missed her payment at the end of the fourth month, the creditor gave her an extra month before he petitioned the court to put the apartment on auction to get his $7000 back.

“We lost our apartment because we missed a payment. They said we didn’t pay anything at all and there was no proof to say otherwise,” Japaridze says. “It was our fault. We were too trusting... It’s a Georgian thing to do things like this.”

The creditor sold the apartment for $7000 at auction, although it was appraised at $15,000. He got his money back and made a $2000 profit. Japaridze lost her home.

A legal loophole

What happened to Japaridze continues to happen to people throughout Georgia. People desperate for money who do not qualify for bank loans or are financially uneducated, go to private creditors. Some people even trust these creditors more than banks. And unlike those seeking loans, these creditors are law savvy and some are well prepared to fleece unwitting clients – all within the framework of the law, which has been streamlined to make moving property easier.

“In the 90s, it was much harder for property to pass hands. Now the rules are more relaxed and a person can agree to pass property to a creditor,” states Sandro Bibilashvili, an attorney for BGI legal. Only until recently, Bibilashvili explains, has the concept of property for collateral become popular.

Mortgage issues are covered under a single chapter in the civil code. There are no laws which regulate how private lenders operate, nor laws to protect debtors. Depending on the type of contract they sign and register, if a person doesn’t pay, they may lose their home. 

In newspaper “Sitkva da Sakme” (Word and Business), one may find both property auction notices and ads for private creditors. One such advertisement states: “Loans - quickly and with quality. Agmeneshebeli Street 108. Call Neli or Marina.” The agency has no name.

Their procedure follows the pattern Japaridze described, only the interest on the loan is now 5%.

“We try to avoid situations where your house is sold,” Marina told journalist Magda Nowakowska on the phone. “But if you miss a payment, the interest rate goes up to nine percent.”

Marina goes on to say that if you default on your payment, the law stipulates they must notify you three times that your home will be put on auction. In this time, the debtor has a right to sell their property until it is auctioned off.

Going Once, Going twice, sold!

When a creditor moves to regain their loss by auctioning the collateral, they first must petition the court for permission to do so.  Once granted, the Ministry of Justice appoints an executioner, or “enforcement officer” to regulate the auction procedure. He may suggest the starting price of the auction, but has no influence in ascertaining its value, explains civil and administrative lawyer, Kakha Kozhoridze.

When the property is sold, the creditor regains his original loss, plus court and other expenses. Whatever profit is left over must go to the debtor. If the property is not sold, then it is auctioned again. Sometimes the property goes straight to the creditor, particularly when the debt is high and the house value is low, but private lenders like Marina and Neli cover themselves by only lending 1/3 of the estimated value of the house.

The entire process is not typically a swift one and can take up to two months to half a year or longer depending on the case. The civil procedure code states that the court must discuss and decide on the case in two months. Cases more complicated can be extended to five months. Eka Popkhadze, Legal Aid Center Director of the Georgian Young Lawyers’ Association (GYLA), says that in reality the courts are so backed up that they rarely fulfill this obligation.

“Sometimes a creditor will appeal to the court for an immediate execution, but they must persuade the court that a tardy decision will invoke suffering on their part. The court may refuse to execute a case until it is reviewed by the district court and court of appeals first. The Supreme Court may also have to discuss the case. This process takes a long time,” Popkhadze said.

For the debtor, this is good news, as it gives them time to find the funds to repay the loan. But if they had very little means to begin with, the increasing interest rates charged by the private creditors will all but crush their chances of not losing the property.

A good lender is a trusted lender

While Georgian legislation has made it easier for banks to repossess property, few big banks actually engage in the practice, according to Armen Mathevosyan, retail banking Head of Bank Republic.

“In the past four years I don’t recall a single case,” Mathevosyan says. The goal, he adds, is to allow people to pay back loans. “You don’t want a client to pay more than 40% of their monthly revenues on a loan when they’re only making 500 lari a month.”

Banks are not in the business of cashing in on defaults. For one thing, they are expensive as the time and effort it takes to go through all the litigation would require the bank to set up another department.

Today, Mathevosyan assures, the lending process is much easier than before. His bank, like others, even offer no collateral loans. “It’s pretty easy,” he says. 

Mathevosyan likens fly-by-night private lenders to pawn shops, a sentiment shared by Japaridze, who feels as if she was a victim of not just bad timing (she may have qualified for a loan today) but also her vulnerability.

“They (private lenders) don’t give money to everybody,” Japaridze declares. “When you come to the agency they look at what kind of person you are and the most suitable client for them is one that can’t pay and has a nice apartment. That’s their work.”

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