Published and draft legislation - Colombia

Encouraging the grant of home loans

Bill 143-C/2014

The purpose of this bill is to: i) Authorise entities to grant home loans; ii) Permit authorised entities access to the Reserve Fund for Mortgage Portfolio Stabilisation (Fondo de Reserva para la Estabilización de Cartera Hipotecaria or FRECH)¹; iii) Place all the entities under the oversight of the financial watchdog, Superintendencia Financiera de Colombia (SFC); and iv) Oblige the entities to earmark between 10% and 25% of their gross loan book to the financing of construction, refurbishment and acquisition of social housing (Vivienda de Interés Social or VIS) during the 15 years following the approval of the law.

The key aspects of the bill are related to the inclusion of new entities empowered to grant mortgage loans; and their obligation to include lending from their total available credit for construction, refurbishment and acquisition of social housing.

Allowing new entities to give mortgage loans may help to avoid regulatory arbitrage, but care should be taken to ensure that all the lenders meet the requirements for current lender institutions, eg, with regard to the risk management systems, in order to avoid uncertainty regarding the sustainability and fairness of home loan placement.

An obligation on lenders to earmark a minimum percentage of their loan book to funding VIS acquisition would seem to ignore the freedom of enterprise enshrined in the Colombian constitution. Under this principle, there are now several financial institutions in the country lending in very different niches. Some target micro enterprises, others the retail sector, etc. The have thus become experts in managing credit risk for those specific markets, but not necessarily for the housing market.

If the bill is to create another kind of lending that will be mandatory for the financial institutions, it will be important for it also to include other compensation to offset the obligation, such as mortgage bonds or mortgage warrants originating from the securitisation of the social-housing loan portfolio.

¹ The Fondo de Reserva para la Estabilización de la Cartera Hipotecaria (FRECH) is a fund created under express authority from the Colombian housing act, Act 546/1999. It provides an interest rate hedge intended to facilitate the funding of social housing in urban areas through loans for purchasing or renting homes. The hedge is a swap, calculated against the interest rate agreed for new loans or new home-rental contracts granted by lenders to borrowers meeting the legal requirements. The hedge will only be applicable during the first seven (7) years of the credit, counted from the date of disbursement or from the date on which the home rental contract came into forcé. FRECH is administered by the Colombian Central Bank,  Banco de la República