The Brazilian Guaranteed Real Estate Bill

The Guaranteed Real Estate Bill (Letra Imobiliária Garantida - LIG) is a new credit instrument for long-term funding by financial institutions destined to real estate credit expansion, created by the Brazilian Federal Government by means of Provisional Measure (Medida Provisória) No. 656, of October 7, 2014 (MP 656/2014). This article analyses the relevant provisions of MP 656/2014 that regulate the issuance of the LIG.

1. Applicable Rules

   This new credit instrument is governed by articles 18 to 49 of MP 656/2014 but it must still be regulated in detail by the Brazilian Monetary Council (Conselho Monetário Nacional – CMN). The provisions of the legislation on bills of exchange and promissory notes are also applied to the LIG to the extent that they do not contradict MP 656/20141.

   The distribution and public offering of the LIG must follow the regulation of the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM).

2. Legal Nature

   The LIG is a registered, transferable and freely negotiable credit instrument, guaranteed by an Asset Portfolio subject to a fiduciary regime, to be issued by certain financial institutions. The issuing institution is responsible for the performance of all obligations under the LIG regardless of the sufficiency of the Asset Portfolio.

   It is a promise of payment in cash and will be issued exclusively in the book form, upon registry in a central depository authorized by the Central Bank of Brazil (Banco Central do Brasil - Bacen).

3. Features

   The relevant features of the LIG are the following: (i) the denomination "Letra Imobiliária Garantida" in Portuguese; (ii) the name of the issuing financial institution; (iii) the name of the holder; (iv) the order number, date and place of issuance; (v) the par value; (vi) the maturity date; (vii) the interest rate (fixed or floating). The capitalization of interest is admitted; (viii) other forms of remuneration, if any, including based on indexes or rates of public knowledge; (ix) the correction by the exchange variation clause, if any; (x) the form, periodicity and place of payment; (xi) the identification of the Asset Portfolio; (xii) the identification and value of credit loans and other assets that are part of the Asset Portfolio; (xiii) the imposition of the fiduciary regime on the Asset Portfolio, in accordance with MP 656/2014; (xiv) the identity of the trustee, stating its obligations, responsibilities and remuneration, as well as the assumptions, conditions and form of its dismissal or replacement and the other conditions of its performance; and (xv) the description of the real or personal guarantee, if any.

   As an extrajudicial execution instrument the LIG can be enforced, regardless of protest, based on an entire certificate content issued by the central depository. The LIG can also generate a redemption value lower than the issuance value, based of the remuneration criteria, and it can still be updated monthly by a price index, provided that it is issued with a minimum term of 36 months.

   If the LIG is issued with monthly update forecast for price index, the payment of appropriate monetary update figures since the issuance is forbidden, whenever the early redemption in whole or in part is scheduled to occur in a period of less than 36 months.

4. Centralized Deposit

   The LIG and the assets which form part of the Asset Portfolio must be deposited in an entity authorized by Bacen to exercise the centralized deposit activity, pursuant to Law No. 12,810, of May 15, 2013 (Law 12,810/2013). Should the assets do not qualify for the centralized deposit, then their records must be made at an entity authorized by Bacen or CVM, as the case may be, to engage in the activity of securities and financial assets registry in accordance with Law 12,810/20132.

   The centralized deposit, which is performed by qualified entities as central depositories, comprises the centralized guard of financial assets and securities, fungible and no fungible, the control of their effective ownership and the treatment of their events. These entities are responsible for the integrity of the systems and records they kept relating to the financial assets and securities under centered custody.

   For the purposes of centralized deposit, the financial assets and securities, in physical or electronic form, will be transferred in the fiduciary ownership regime to the central depository3. The effective ownership of the financial assets and securities object of the centralized deposit is presumed by the controls of ownership maintained by the central depository and the transfer occurs exclusively in accordance with the instructions given to the central depository.

5. Asset Portfolio

   The Asset Portfolio of the LIG can be formed by the following assets: (i) real estate loans; (ii) Brazilian Treasury bonds; (iii) derivative instruments contracted through the central counterparty guarantor; and (iv) any other assets as may be authorized by CMN. The assets which form part of the Asset Portfolio cannot be subject to any kind of burden, except those related to the rights of the LIG holders. CMN establish the modalities of operation of credit accepted as real estate loans for the purposes of MP 656/2014.

   The real estate loans can only integrate the Asset Portfolio if: (i) they are guaranteed by a mortgage or by fiduciary alienation of movable asset; or (ii) the real estate development that originates the credit operation is subject to the regime of affectation (regime de afetação) as referred to in article 31 of Law No. 4,591, of December 16, 1964, which provides for condominium buildings and real estate developments4.

   The Asset Portfolio must meet the requirements of eligibility, composition, sufficiency, liquidity and term established by CMN. These requirements must contain at least the...