Published and draft legislation - Colombia

Importance of Mortgage Loans for the Agricultural Sector

Draft Bill 105-C/2014

A bill has been put before the Colombian Congreso de la República that would add two paragraphs to article 2455 of the Civil Code in order to facilitate access to mortgage loans for livestock and arable farmers.

The proposed legislation aims to make it possible to constitute more than one mortgage against the same property asset, without needing to divide it up or break it down prior to the constitution and / or filing of the encumbrances.

This is a novel initiative that would allow farmers to have easier access to finance, even when the property asset has already been mortgaged, without the earlier mortgage encumbrance discouraging potential lenders willing to put up the finance.

To understand the background to this, it is important to understand that in Colombia, although it is possible to take out more than one mortgage against the same property asset, mortgages are ranked by seniority, which reflects the order in which they were filed. This means that the first-degree lenders, ie, those that granted the first mortgage, have more senior claim to repayment than the subsequent mortgagers. The other lenders may only pursue what is left over once the first-degree lender has received repayment in full.

In tackling this situation, the proposed legislation benefits both lenders and borrowers in the agricultural sector. For the lenders, the initiative would mean de facto elimination of the senior versus the more junior ranking.  No one mortgage lender’s claim would be any “better” or “worse” than the others’. Lenders could thus make a better assessment of the mortgages, so that they are better placed to increase their offer of finance accordingly. For the farmers, it would mean greater access to finance, especially when they need to request several loans for smaller sums than the value of the asset they are using as collateral.

Another key aspect is the possibility to realise the collateral without, in principle, prejudicing the other mortgage lenders. In effect, if the Congress of the Colombian Republic passes this law, it will allow a lender whose borrower has not repaid their debt, to realise their collateral by dividing up the mortgaged asset for a sum equivalent to the amount used to underwrite the loan.

This, then, is an initiative that will encourage greater access to finance for farmers, as the financial institutions will have more interest in offering them credit once they have more guarantees that collateral on loans to this sector will be realisable. Likewise, the farmers will be able to take out loans from more than one financial institution when they need to do so