New law facilitates development of mortgage market
Published on:Introduction
The Dominican Republic recently enacted a law that is helping the country's mortgage market to develop while providing significant opportunities for investors, as well as a boost for the country's efforts to expand its housing stock.
The new law defines a number of key terms, including 'trust', 'settlor', 'trustee' and 'beneficiary'. A 'settlor' is a party which transfers property to a trust that is under the care of a legal entity (eg, a multiple-service bank or other financial institution or an investment fund manager), where such entity is authorised to act as a trustee for the benefit of a beneficiary.
Under the law, a trust may be established for any legal purpose or objective, including to promote the development of the country's housing market. The law presumes that a trust is irrevocable and provides that it may not be amended unless otherwise expressly stated in the document that created the trust. The trust document must be registered with the Mercantile Registry of the Chamber of Commerce and Production which has jurisdiction over the trustee; the transfer of the rights subject to registration is perfected after the change of ownership of the property in the trust is registered.
Significantly, under the new law, all property and rights that are part of a trust constitute a separate and independent estate – separate from both the settlor's property and from any other trust property that the trustee also manages. Also, creditors of a beneficiary of a trust may not seek to enforce their claims against trust property, although they can pursue revenues and profits generated by the trust that the trustee is required to deliver to the beneficiary. In addition, creditors of a settlor may not seek to enforce their claims against property transferred by the settlor to a trust unless their claims relate to the transfer of the property to the trust. A trust's creditors are permitted to enforce their claims against trust property, and trust property can be pursued where the trust has been fraudulently created.
Among the types of trust that the new Dominican law permits to be created are real estate investment or real estate development trusts. These trusts have the primary objective of investing in real estate projects in various stages of design and construction.
Another important kind of trust is a collateral trust, which is designed to secure compliance with certain obligations by the settlor for the benefit of a third party or third parties.
Securities offerings
The new law provides that a trust may issue securities. Moreover, the law specifically authorises a trust to issue securities to raise funds for mortgage financing for Dominican housing and the Dominican construction industry. The kinds of securities that a trust may issue include:
·mortgage notes;
·mortgage bonds;
·mortgage certificates;
·mortgage participation agreements;
·endorsable or non-endorsable mortgage loans;
·participations in closed investment funds and mutual or open funds;
·trust securities; and
·mortgage-backed securities.
Insurance for mortgage securities
The new law authorises mortgage insurance to provide coverage for mortgage loan losses as a result of default by a debtor. Financial institutions, at their discretion, may insure all or part of their mortgage loans. Similarly, financial institutions may obtain private insurance to cover financial losses generated as a result of a default by a debtor or debtors. These policies may be bought from insurance companies that are authorised to operate in the Dominican Republic.
In addition, the new law provides that financial institutions may enter into hedging arrangements designed to secure the payment and performance of loans, financial instruments or securities issued by a portfolio of loans, securities certificates that prove ownership over the collateral and those aimed to ensure the risk of inflation and exchange rate fluctuations.
Securitisation
The process of securitisation of a mortgage loan portfolio is subject to the Securities Exchange Law and, where applicable, the Monetary and Financial Law. There are minimum capital requirements for securitisation companies. Financial institutions may participate in securitisation transactions and may purchase these types of securities without the need to obtain regulatory approval where a transaction meets certain conditions.
In other cases, prior regulatory approval is required; however, the Banking Department has only 30 calendar days from receipt of an application and completion of all required documentation to decide whether to reject the applicant's request. The law contains an abbreviated approval process for specialised issuers under which the regulators have only 15 days to hear and issue a decision on an application. If they do not do so within that period, the application is deemed to be approved.
Similarly, the issuance of publicly offered mortgage-backed securities issued as a result of a process of securitisation of mortgage loans is subject to prior authorization and registration with the country's Securities Department, which has 30 days, beginning with its receipt of the request, to make a decision. For specialised issuers, Dominican law provides an abbreviated process of 15 days for the regulators to issue a decision. If the decision is not issued within that time, and if any other required approvals have been obtained, the Securities Department is deemed to have approved the issuance.
If a securitisation entity enters bankruptcy, compulsory liquidation or any equivalent process, this affects only its own assets and does not require the liquidation of the trust property. When a securitisation entity is declared bankrupt or undergoes a forced liquidation or any equivalent process, the representative or appointee of the investors shall temporarily manage the separate funds, subject to the procedure defined in the corresponding indentures, until they are finally transferred to another trustee.
Low-cost housing provisions
The new law also contains special provisions relating to the development of low-cost housing through public-private partnerships, which the government believes can help to solve the country's housing problems. To benefit from the incentives created by the new law, the low-cost housing projects must be duly authorised by the National Housing
Institute.
The new law states that trusts for construction of this kind of housing are exempt from the payment of the certain taxes, including any tax, duty, fee, charge, or contribution that may be applicable to bank transfers and the issue, exchange or deposit of cheques.
The new law provides that low-cost housing projects may be developed with investments from both the government and the private sector through the creation of trusts for the purpose of construction. The law provides that the real estate property
contributed to a trust for that construction may be subject to a conventional mortgage in favour of the entities financing the project.
The law also states that the document incorporating the trust for the construction must indicate the instructions regarding the duties of the appointed trustee, the scope of the trustee's administration and the sale and disposition of trust property. Finally, it creates a special foreclosure procedure for creditors (eg, local or foreign financial institutions), provided that the mortgage has been granted by a contract and regardless of the kind or nature of the debt that is secured. The foreclosure process begins with a formal request for payment, which is carried out pursuant to the terms and conditions specified in the law.
Comment
The new law creates a market for securitized mortgages that will significantly enhance the country's housing and construction industries, while offering institutional investors an important investment opportunity. This appears to be a win-win for all involved and interested parties.
Source: International Law Office
