New Guarantee Framework
Last October 31, president Luiz Inácio Lula da Silva signed into law the so-called “Guarantee Framework,” Law No. 14.711 of October 30, 2023, which establishes new rules for the use of assets to guarantee loans.
The purpose of the new rules implemented by the Guarantee Framework is to simplify repossession of the guarantee by the lender in cases of default by the borrower, contributing to reduce loan costs.
The main innovations in real estate guarantees include the following changes:
1. Supervening Fiduciary Sale: Fiduciary sale is traditionally a mechanism that provides guarantee to lenders. Upon execution of the loan agreement, usually a real estate financing (although not exclusively in this modality), the client guarantees payment of the debt by means of fiduciary sale, which is the transfer of ownership to the lender.
In this process, the borrower only becomes the property owner upon payment of the last installment of the debt. In the event of default, the ownership of the property offered as guarantee is extrajudicially consolidated in the name of the lender (bank), by means of the register of deeds, without the need to go to court.
The Guarantee Framework introduced the supervening fiduciary sale, allowing the debtor to create successive fiduciary sales on the same property to guarantee new debts. This implies that after settling the debt, with the expectation to recover ownership of the property, the lender may use such property to guarantee a new debt. In this context, the fiduciary sale would be a “second degree of guarantee”.
Successive fiduciary sales shall only be effective after cancellation of the previous fiduciary sale, ensuring that, in the event of foreclosure, all lenders may benefit from the proceeds of the sale of the encumbered property, observing the anteriority order.
2. Mortgage Improvement: The Guarantee Framework introduced a significant change, permitting the extrajudicial foreclosure upon mortgages, which was previously limited to the fiduciary sale. This change may encourage a resumption of the use of mortgages as a form of guarantee in loan transactions, which was being largely replaced by fiduciary sale.
The difference from mortgage, which is a credit facility that also has real property as guarantee, is that the ownership remains in the name of the borrower, without transfer to the bank (lender), as occurs in fiduciary sale agreements. In the event of default, repossession of the guarantee by banks was more challenging.
The procedures for extrajudicial enforcement of loans secured by mortgage are similar to the procedures for the extrajudicial enforcement of fiduciary sale. If the borrower fails to pay the mortgage debt, the borrower and other involved parties shall be personally notified by the real estate registry official of the situation of the mortgaged property to cure the default within 15 days.
If the default is not cured within this term, the lender may initiate the procedure of extrajudicial foreclosure upon the mortgage guarantee by means of public auction, which shall be annotated in the property’s title record. After annotation, the lender shall carry out a public auction of the mortgaged property within 60 days, according to the applicable legal provisions.
Please note that the new law provides on one sole exception to the enforcement of the debt by means of this extrajudicial procedure. The option to extrajudicially enforce the mortgage does not apply to the financing of agribusiness activities.
3. No Automatic Extinguishment of the Debt after the Second Auction: In relation to debts incurred for the purchase of residential property by the borrower, the Guarantee Framework provided on the possibility of no automatic extinguishment of the debt secured by fiduciary sale, changing the previous rule. If the proceeds of the auction do not fully cover the debt amount, expenses, and charges set forth in the fiduciary sale agreement, the borrower will remain required to pay the remaining balance, which may be charged by means of an execution procedure and, if necessary, foreclosure upon other guarantees of the debt.
4. Same Guarantee for New Debts: An innovation introduced by the new legal framework is the possibility of using the same guarantee, be it fiduciary sale or mortgage, to guarantee a new separate debt agreed with the same lender. In this case, the “recharging” of the existing guarantee shall be limited to the amount of the previous debt actually amortized by the lender. Irrespective of that, in addition to observing the maximum amount of the initially secured debt, the new guarantee may not exceed the term of the original guarantee.
Before enactment of the law, a home could only be offered as guarantee in a single loan transaction, even if the loan or financing amount were lower. Now, the difference between the loan transaction price and the asset offered as guarantee may be used in other transactions, provided that they involve the same financial institution.
It is important to note that whenever more than one loan transactions is secured by the same property, when the extrajudicial enforcement procedures commence, the real estate registry official with competent jurisdiction shall simultaneously notify all lenders for them to qualify, and the official shall prepare a list with the claims and priorities according to the order in which the guarantees were created.
5. Regulation of the Collateral Agent: The law now regulates the activities of collateral agents (“Agents”), who shall be professionals designated by the lenders to act in their own name and to their benefit, including in lawsuits discussing the existence, validity, or effectiveness of the secured loan.
The Agents’ duties include to record the encumbrance on the assets, manage the assets, and foreclose upon the guarantees, using, if provided in the special law applicable to the modality of guarantee (e.g.: Law No. 9.514 – fiduciary sale of real property), extrajudicial execution.
Agents have fiduciary duties in relation to the creditors of the secured obligation and are liable to them for all their acts, and they may be replaced at any time by a decision of the sole lender or of the holders representing a majority of the secured credits.
After receiving the proceeds of the sale of the property offered as guarantee, the Agent shall pay the lenders within ten business days. While it is not transferred to the lenders, this amount shall represent a separate asset of the Agent and cannot be used to pay its obligations for up to 180 days.
Simultaneously to the agreement for the fiduciary management of guarantees, an Agent may have agreements with the lender to: (a) survey more advantageous credit offers among various providers; (b) assist in the procedures required to formalize loan and collateral guarantee agreements; (c) intermediate the resolution of disputes relating to loan and collateral guarantee agreements; and (d) other services not prohibited by law.
6. Electronic Notice: One of the main measures introduced by the Guarantee Framework is the adoption of electronic notice, waiving personal notice as is currently the case.
A recurring problem in proceedings is the difficulty to locate debtors who hide to avoid receiving notices, postponing enforcement of the debt and increase the costs to the lending banks, which incur significant expenses related to default.
In accordance with the new law, the debtor shall be electronically notified 15 days before the personal notice is served by the Court marshal.
After this term, if the debtor is not found at the address of the property offered as guarantee or at the last address provided by the marshal, the notary public may use an electronic means or multi-platform instant messaging applications and voice calls to send the notices.
An importance change is that the notice is deemed served upon confirmation of receipt by the electronic platform (as the confirmation of receipt presented by WhatsApp). With the Guarantee Framework, the procedure to foreclose upon the guarantee starts as from that time.
7. Loan by Legal Entities: Even though the Guarantee Framework has held some aspects between mortgage and fiduciary sale equivalent, a fundamental change remains in the case of properties offered as guarantee of loans by companies under judicial reorganization.
The judicial reorganization seeks to avoid the bankruptcy of a company that is undergoing a financial crisis, protecting members, employees, suppliers, service providers, customers, and all involved parties.
When a company files for judicial reorganization and has a loan with fiduciary sale, the bank does not have to participate in the process or in the negotiation with creditors. The financial institution only forecloses upon the guarantee and receives it, according to the legal and extrajudicial procedures.
On the other hand, if a company under judicial reorganization has an active mortgage, the bank participates in the negotiations and is required to await all phases of the procedure. In a judicial reorganization, labor debts have preference with respect to the receipt of amounts, followed by collateral creditors.
These are, in short, the main changes in real estate guarantees introduced by the Guarantee Framework, for the purpose of boosting the real estate credit market by rendering guarantees safer and more effective.
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This article is based on publicly available information and given for informational purposes only. It is not intended as legal advice foreign subsidiary as a comprehensive analysis of the matters referred to herein.