Easing of banking regulations to facilitate the acquisition of residential real estate

Current housing shortages and the existing difficulties for potential buyers to acquire residential real estate encouraged the Argentine Government to seek approval of a series of new measures that attempt to alleviate such a situation and increase the stock of residential real property. Such actions include the relaxation of regulation related to credit ratings and the modification of the parameters for guarantees in the form of mortgages or financial leases established by the Argentine Central Bank (the “CB”).

With this aim in mind, the CB passed Communication “A” 4559 (dated August 17, 2006), introducing certain regulatory changes related to the above-mentioned subject. Its first innovation is the authorization for the employment by financial entities of certain alternative risk assessment methods in loan granting procedures. These new methods complement the previously established system which was based exclusively on proof of income.

The new methods, applicable to the granting to individuals of mortgage-backed loans of up to 200.000 pesos and personal loans of up to 15.000 pesos, are:

(i)           “screening”, which is described by the CB as a set of steps and rules brought together from the financial entity’s accumulated experience in the granting of loans, the previous behavior of debtors and the financial entity’s credit policy; and

(ii)          “credit scoring”, defined as an array of mathematical or statistical-econometric methods employed to assess risk and/or the probability of default of the potential debtors.

Additionally, the CB has provided that both techniques shall be based on parameters that the financial entities consider relevant in order to assess the default risk of each debtor and type of credit. The CB also affirmed that the collected information must be complemented by information on the debtor’s credit record.

In connection with the regulation of mortgages and financial leasing transactions over real property constituting the sole and permanent family residence, the CB increased the maximum percentage for financing (loan to value) by interpreting such transactions as being secured by class “A” preferred guarantees.

Accordingly, with regard to first mortgages over real property (or whatever the ranking preference may be where the financial entity is the creditor in each and every rank of mortgage) or financial leasing transactions, in the case of new financings of up to 200.000 pesos agreed and effective as from August 1, 2006, the financing may be equivalent to up to 100% of the appraisal value of the asset.

In the case of new financing transactions ranging between 200.000 pesos and 300.000 pesos agreed and effective as from August 1, 2006, the financing may be of an amount of up to 90% of the appraisal value of the asset.

In connection with the remainder of residential real estate financing transactions, the CB has maintained the previous limit of up to 75% of the appraisal value of the asset while, for other types of real property, the maximum financing amount continues to be up to 50% of the appraisal value of the asset.

Finally, the CB has also modified the regulatory risk-weighted ratios related to minimum capital requirements of financial entities.