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EFSA Issues Three New Decisions Aff

EFSA Issues Three New Decisions Affecting Mortgage Finance
The Egyptian Financial Supervisory Authority ("EFSA") issued on 7 September 2015 three new decisions affecting the supervision of mortgage finance companies (the "Decisions"). The first one concerns the companies’ internal regulations, the second concerns the regulation of mergers and acquisition of mortgage finance companies, and the third determines the official indices which may be used in mortgage lending agreements. It is worth noting that the legal organisation of mortgage finance in Egypt and supervision there on have witnessed a number of developments and legislative innovations during last year. Following is a brief account of the main changes introduced during last year, followed by an analysis of the new decrees issued last week.
Previous Decisions
  • A decision by EFSA, in September 2014, determining the standards for the preparation and review of financial statements for mortgage finance companies (Egypt Legal Update October 2014).
  • The introduction of a new system for appealing against decisions by EFSA with regard to mortgage finance activities, issued in September 2014 (Egypt Legal Update November 2014).
  • Amending the orders of the mortgage finance guarantee and subsidy fund in November 2014 by granting it more independence, allowing it to undertake more activities and giving its board of directors the authority to determine the subsidy given to low income borrowers (Egypt Legal Update December 2014).
  • Redefining the criteria for low-income borrowers, in order to avoid duplication of benefits through other housing subsidies, issued in February 2015 (Egypt Legal Update March 2015).
  • A decree by the Prime Minister, in April 2014, to introduce a significant amendment to the Executive Regulations of the Mortgage Finance Law. This included the adoption of Islamic finance instruments, permitting companies to lend against a right of usufruct and not only ownership, allowing EFSA to determine the criteria for mortgage finance, clarifying the rules for transfer of future dues, ensuring that the valuation of assets upon repossession is fully under judicial oversight, amending capital adequacy requirements for companies, allowing them to undertake other non-banking financial activities, and amending the rules of operation for the Mortgage Finance Guarantee and Subsidy Fund  (Egypt Legal Update May 2015).
  • A decision by EFSA, in May 2015, relating to the statutes of the Egyptian Union for Mortgage Finance, which is similar to a mortgage finance companies civil society organisation (Egypt Legal Update June 2015).
  • The issuance by EFSA of criteria for real estate valuation, which have to be observed by companies undertaking mortgage lending, in June 2015 (Egypt Legal Update July 2015).
  • Amending the conditions for obtaining a mortgage finance license as well as mortgage refinance license, July 2015 (Egypt Legal Update July 2015).
  • And finally, EFSA’s issuance of capital adequacy standards for mortgage finance companies in August 2015 (Egypt Legal Update September 2015).
New Decisions
 The three recent Decisions referred to above meant that:
  1. Internal Bylaws

A recent decision[1] by EFSA’s board of directors requires mortgage finance companies to establish company bylaws that detail the company’s internal procedures, financing policies, risk management mechanisms, provisioning and write-off policies and technical requirements. The bylaws shall also explain how the company will deal with customer complaints and how it will structure its internal control/monitoring mechanisms. This will need to be provided in sufficient detail so as to guarantee that mortgage finance companies abide by modern governance requirements.

The decision also stipulated that mortgage finance companies must ensure that they are in compliance with the new decision within a period of three months, i.e. before 6 December 2015.

  1. Regulation of Acquisition, Merger and Liquidation

Another decision[2] enacted by EFSA’s Board of Directors in September requires prior approval of EFSA before any acquisition or merger between two mortgage finance companies is made. The same pre-approval is necessary if a mortgage finance company decides to suspend activities or liquidate its assets. EFSA will decide on the matter, taking into consideration market needs and freedom of competition, within thirty days of the date of filing the application.

The decision details the documents that must be attached to each application. It must be noted, however, that obtaining EFSA’s approval does not affect the need to comply with the general rules for mergers and acquisition detailed in the Company Law and the Capital Market Law, as well as EFSA’s general procedures on these matters.

  1. Regulation of Indices for Mortgage Finance Agreements

A further decision[3] by EFSA in September stipulated that mortgage finance agreements with no specified installments must include an equation that provides how the value of such installment will be calculated and set. This equation must rely on one of the following indices: the average return on treasury bills for three, five, seven or ten years, or the average lending and deposit rate for one night, as announced by the Central Bank.

Conclusion
 The legislative effort done by EFSA is evidence of its clear interest in the development of mortgage finance and the improvement of its legislative framework. The latest three decisions in September are another manifestation of this interest. Nonetheless, the multiple legislative developments also prove that there is a need for a holistic and comprehensive vision of mortgage finance, so that future legislative efforts are made in line with a clear policy that is declared to the market.   [1] EFSA Board of Directors Decision 87/2015, Egyptian Gazette, Issue No. 205, 7 September 2015. [2] EFSA Board of Directors Decision 88/2015, Egyptian Gazette, Issue No. 205, 7 September 2015. [3] EFSA Board of Directors Decision 89/2015, Egyptian Gazette, Issue No. 205, 7 September 2015.
The Egyptian Financial Supervisory Authority ("EFSA") issued on 7 September 2015 three new decisions affecting the supervision of mortgage finance companies (the "Decisions"). The first one concerns the companies’ internal regulations, the second concerns the regulation of mergers and acquisition of mortgage finance companies, and the third determines the official indices which may be used in mortgage lending agreements. It is worth noting that the legal organisation of mortgage finance in Egypt and supervision there on have witnessed a number of developments and legislative innovations during last year. Following is a brief account of the main changes introduced during last year, followed by an analysis of the new decrees issued last week.
Previous Decisions
  • A decision by EFSA, in September 2014, determining the standards for the preparation and review of financial statements for mortgage finance companies (Egypt Legal Update October 2014).
  • The introduction of a new system for appealing against decisions by EFSA with regard to mortgage finance activities, issued in September 2014 (Egypt Legal Update November 2014).
  • Amending the orders of the mortgage finance guarantee and subsidy fund in November 2014 by granting it more independence, allowing it to undertake more activities and giving its board of directors the authority to determine the subsidy given to low income borrowers (Egypt Legal Update December 2014).
  • Redefining the criteria for low-income borrowers, in order to avoid duplication of benefits through other housing subsidies, issued in February 2015 (Egypt Legal Update March 2015).
  • A decree by the Prime Minister, in April 2014, to introduce a significant amendment to the Executive Regulations of the Mortgage Finance Law. This included the adoption of Islamic finance instruments, permitting companies to lend against a right of usufruct and not only ownership, allowing EFSA to determine the criteria for mortgage finance, clarifying the rules for transfer of future dues, ensuring that the valuation of assets upon repossession is fully under judicial oversight, amending capital adequacy requirements for companies, allowing them to undertake other non-banking financial activities, and amending the rules of operation for the Mortgage Finance Guarantee and Subsidy Fund  (Egypt Legal Update May 2015).
  • A decision by EFSA, in May 2015, relating to the statutes of the Egyptian Union for Mortgage Finance, which is similar to a mortgage finance companies civil society organisation (Egypt Legal Update June 2015).
  • The issuance by EFSA of criteria for real estate valuation, which have to be observed by companies undertaking mortgage lending, in June 2015 (Egypt Legal Update July 2015).
  • Amending the conditions for obtaining a mortgage finance license as well as mortgage refinance license, July 2015 (Egypt Legal Update July 2015).
  • And finally, EFSA’s issuance of capital adequacy standards for mortgage finance companies in August 2015 (Egypt Legal Update September 2015).
New Decisions
 The three recent Decisions referred to above meant that:
  1. Internal Bylaws

A recent decision[1] by EFSA’s board of directors requires mortgage finance companies to establish company bylaws that detail the company’s internal procedures, financing policies, risk management mechanisms, provisioning and write-off policies and technical requirements. The bylaws shall also explain how the company will deal with customer complaints and how it will structure its internal control/monitoring mechanisms. This will need to be provided in sufficient detail so as to guarantee that mortgage finance companies abide by modern governance requirements.

The decision also stipulated that mortgage finance companies must ensure that they are in compliance with the new decision within a period of three months, i.e. before 6 December 2015.

  1. Regulation of Acquisition, Merger and Liquidation

Another decision[2] enacted by EFSA’s Board of Directors in September requires prior approval of EFSA before any acquisition or merger between two mortgage finance companies is made. The same pre-approval is necessary if a mortgage finance company decides to suspend activities or liquidate its assets. EFSA will decide on the matter, taking into consideration market needs and freedom of competition, within thirty days of the date of filing the application.

The decision details the documents that must be attached to each application. It must be noted, however, that obtaining EFSA’s approval does not affect the need to comply with the general rules for mergers and acquisition detailed in the Company Law and the Capital Market Law, as well as EFSA’s general procedures on these matters.

  1. Regulation of Indices for Mortgage Finance Agreements

A further decision[3] by EFSA in September stipulated that mortgage finance agreements with no specified installments must include an equation that provides how the value of such installment will be calculated and set. This equation must rely on one of the following indices: the average return on treasury bills for three, five, seven or ten years, or the average lending and deposit rate for one night, as announced by the Central Bank.

Conclusion
 The legislative effort done by EFSA is evidence of its clear interest in the development of mortgage finance and the improvement of its legislative framework. The latest three decisions in September are another manifestation of this interest. Nonetheless, the multiple legislative developments also prove that there is a need for a holistic and comprehensive vision of mortgage finance, so that future legislative efforts are made in line with a clear policy that is declared to the market.   [1] EFSA Board of Directors Decision 87/2015, Egyptian Gazette, Issue No. 205, 7 September 2015. [2] EFSA Board of Directors Decision 88/2015, Egyptian Gazette, Issue No. 205, 7 September 2015. [3] EFSA Board of Directors Decision 89/2015, Egyptian Gazette, Issue No. 205, 7 September 2015.