On November 14, 2012 the Board of Directors (Diretoria Colegiada) of the Central Bank of Brazil (Banco Central do Brasil – Bacen) approved Circular No. 3614 of the same date (Bacen Circular 3614/2012), establishing new conditions for the issuance of the Real Estate Credit Bill (Letra de Crédito Imobiliário – LCI) and authorizing investments banks (bancos de investimento) to also issue LCI. The purpose of this decision is to improve the mechanisms for monitoring the issuance of LCIs and credits used to fund those assets.

The LCI is a security pegged to real estate loans guaranteed by mortgage or by the property´s deed of trust issued by commercial banks (bancos comerciais), multiple service banks with a real estate lending portfolio (bancos múltiplos com carteira de crédito imobiliário), savings banks (caixas econômicas), saving and loans associations (associações de poupança e empréstimo – APE), mortgage companies (companhias hipotecárias), and from now on by investment banks as well.

The minimum term of maturity of the LCI shall be: (i) 36 months when updated monthly by price index; (ii) 12 months, when updated annually by price index; and (iii) 60 days, where updated by other parameters (fixed or floating rate) and not by price index. These periods shall be counted from the date on which a third party acquires the LCI of the issuing institution.

The issuing institution is prohibited to effect the following transactions: (i) to repurchase or redeem all or part of the LCI before the minimum term of maturity set forth herein. This prohibition also applies to repurchases made by institutions linked to the issuer of the LCIs, except for transactions made with the aim of intermediation, which are expressly permitted; (ii) to make the payment of the updated monetary value since the date of issuance of the LCI, when there is the repurchase by the issuer or the total or partial redemption before the agreed term of maturity; and (iii) to issue LCI under the following conditions: (a) while the credit balance of the LCIs previously issued is greater than the amount of the total debit balance of the credit(s) funding the LCIs; (b) whose value plus the amount of the credit balance of the LCIs previously issued exceeds the amount of the outstanding balance of the credit(s) funding the LCIs; and (c) with ballast in credit operations launched against losses.

With the change instituted by Bacen Circular 3614/2012, the record of the registry and financial settlement systems of the LCIs will identify in more detail the conditions for the issuance of these assets and credits used as ballast of such securities.

In addition the assets used as ballast of LCIs are classified as: (a) housing loans contracted under the Housing Financial System (Sistema Financeiro da Habitação) secured by mortgage or fiduciary alienation of immovable property; (b) other real estate financing secured by mortgage or fiduciary alienation of immovable property; (c) loans to individuals secured by mortgage or fiduciary alienation of immovable property; and (d) other mortgage-backed loans and financing.

The change in the form of record of the LCIs shall be valid as of January 1st, 2013. In the case of securities issued before that date, financial institutions will have until June 28, 2013 to fit the form of record to the parameters of Bacen Circular 3614/2012, provided however that there is a waiver to the ballast classification requirement during such period.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.