Why banks like mediation

Catchwords: Property law, banks, Farm Debt Mediation Act, cheap foreclosure

Farmers facing foreclosure of their farms in tough times can halt bank enforcement action of debt under a farm mortgage until after a bond fide mediation has taken place.

They can invoke the Farm Debt Mediation Act (1994) NSW.

Under this, the bank cannot take enforcement action until after 21 days of giving a s8 notice to the farmer, advising of the availability of a mediation.

A further 21 days is allowed for the farmer’s reply, requesting the mediation. Then the Rural Assistance Authority (RAA) has to issue a s11 certificate, normally after the mediation has taken place.

If the farmer fails to respond – doesn’t mediate within three months of the notice, declines to do so, delays or fails to respond to an invitation to mediate – then the Act protection is taken away from the farm mortgage for three years by a s11 certificate.

This certificate can also be obtained on application of the bank, if there is a “satisfactory” mediation to the bank, even though it is completely unsatisfactory to the farmer (e.g. because no reasonable agreement was reached. There is nothing to make a bank agree to anything at all).

The RAA issued the Altobelli/Francis report on farm debt mediation and wants farmers to be aware of their rights to obtain mediation.

A central finding in the report was that mediation resulted in 72 per cent of cases ending in settlement, but while many farmers were satisfied with the outcome, a significant 43 per cent weren’t.

This was explained in the report by farmers preferring mediation to the cost and outcome of going through the courts. There had been more than 640 mediations from 1994 to 1999.

The outcomes of medication included producers refinancing debt in 37 per cent of cases and the lenders allowing more time to pay in 27 per cent.

According to representatives of farmers at mediations, 21 per cent of lenders use mediation as a mechanism for foreclosure, 29 per cent say that lenders are inflexible and 21 per cent that there is a power imbalance between lenders and farmers.

As to the continuing relationship, 55 per cent of representatives said mediation did not help it.

Aren’t these results consistent with banks insisting on obtaining an upfront agreement to possession, plus a power of attorney for sale, if the new deal is broken?

The power gap results because the farmer simply cannot afford to take on the bank in legal proceedings. The way out for most is to settle on a new deal, then refinance and leave the banks in droves.

When asked the question, would they have been better off going to court, 58 per cent of farmers said no. 100 per cent of lenders also said no.

So the banks are very, or absolutely, convinced against such a course of action.

Could this be because mediation represents cheap foreclosure over a farmer’s land and that many banks think farmers have legitimate causes of action against banks?

In the report, farmers estimated an average saving of $28,235 by avoiding legal costs in using mediation. But how do you estimate the cost of something you have completely avoided?

The reality is that you could probably double or triple that figure on legal costs; the banks know this and that is why they are so sure to mediate.

Why not, if farmers waive their rights? The object of mediation is resolution, but the banks force levitation.

Jonathan de Vere Tyndall

Updated 2 April 2015, originally published in The Land on 27 May 1999

Editors note: The articles published contain comment only and not legal advice, for which you should retain a solicitor. No responsibility is accepted for the accuracy of the contents.