In our Winter 2005 edition, we discussed the issues to be addressed for the mortgage banking system to develop into a fully-fledged market comparable to European standards. During the past few months, the Capital Markets Board (“CMB”) revised the draft law, proposing amendments to various pieces of legislation including the Execution and Bankruptcy Law, Capital Markets Law, Consumer Protection Law, Corporate Tax Law, Income Tax Law, Expenditure Taxes Law, Fees Law, Stamp Tax Law, Banks Act, Financial Leasing Law and the Law on Regulation of Public Financing and Debt Management to address concerns raised by the relevant authorities, including the Prime Ministry and the Ministry of Industry and Commerce (“Revised Draft Law”).
In an effort not only to improve the legal issues hindering the growth of the mortgage market but also to address the authorities’ concerns, the Revised Draft Law includes the following proposals, among others:
- Scope of Financing
By amending the definitions “mortgage financing” and “mortgage financing institutions”, the CMB has limited the scope of financing only to buildings with construction utilization licenses (yapı kullanma izni), which may prove to be a very crucial step to fight illicit settlements.
- Mortgage Backed Securities
The Revised Draft Law includes changes to provisions related to “mortgage backed securities” (ipotek teminatlı menkul kıymetler), and further details the management principles of mortgage backed securities. Highlights of the management principles include appointment of a separate supervisor (“cover monitor”), who will be responsible for supervision of the management of mortgaged backed securities, creation of mortgage financing funds (konut finansman fonu) which will be able to directly issue mortgage backed securities (rather than fund units) that could be traded, and will not be subject to any third party claims (i.e., being subject to a pledge, an attachment, even in the case of public debts, a preliminary injunction or the bankruptcy estate.
- Valuation of Real Estate
Valuation of real estate is of prime importance, particularly with regard to financing institutions since not only the initial value assessment of the real estate in question plays an important part in extension of the credit itself but it also plays a crucial role during the foreclosure process and the validity of public auctions (i.e., the minimum amount the real estate should be sold for) which will be based on this valuation. Under the Revised Draft Law, valuation of real estate must be conducted by the members of the Turkish Real Estate Valuation Experts Association (Türkiye Gayrimenkul Değerleme Uzmanları Meslek Birliği) in order to facilitate the lengthy and sometimes cumbersome mortgage foreclosure procedures and to pave the way for a healthy value assessment of real estate. This Association will also be responsible for collection of relevant data, preparations of statistics, and the announcement thereof both locally and nationwide.
- Tax Benefits
Tax benefits that were more generously provided to individuals as well as to the mortgage banking institutions in the previous Draft Law have been restricted, although major tax benefits such as exemption from corporate tax and stamp tax were kept.
- Treasury Guarantee
The payback guarantee obligation of the Undersecreteriat of Treasury (in the maximum amount of 400 million YTL) has been further detailed under the Revised Draft Law. The prerequisites to obtaining the Treasury guarantee (e.g., requirements to be satisfied by the mortgage banking institutions, qualities that the assets backing the securities must have, type of securities, amount and term of the guarantee) is proposed to be regulated separately.1 The CMB aims to increase the transparency in obtaining the Treasury Guarantee in order to make mortgage banking more attractive for financing institutions.
- Consumer Protection
One of the major amendments of the Revised Draft Law relates to the information to be provided to consumers by mortgage banking institutions prior to execution of any agreements. Accordingly, “Information Notice Prior to Sale” leaflets are to be distributed to consumers, the content and format of which is to be determined by the Ministry of Industry and Commerce.
Consumers will not be allowed to execute any agreements with mortgage banking institutions prior to the lapse of one whole day following the distribution of these leaflets. Furthermore, the provisions of the agreement executed with consumers may not be amended within the term of the agreement in a manner that would create disadvantages to consumers.
Nevertheless, this is not to say that there are no revisions in favor of the mortgage banking institutions. As a striking example, the conditions precedent to application of any “acceleration clause” has been eased and the condition that the mortgage banking institution should have performed all of its duties and obligations under the agreement in full prior to requesting the remaining payments from the consumers has been abolished. In this respect, upon default of the consumer, the acceleration clause in the agreement, if any, may only be applied (i) upon a five-day event of default notification to be sent to the consumer by registered mail; (ii) only if the consumer defaults twice consecutively; and (iii) after a one-month period to be granted by the mortgage banking institution to the consumer.
In financial leasing transactions, upon expiration of the one-month period, if the mortgage banking institution terminates the financial lease agreement, the immovable that forms the subject matter of the agreement has to be put to sale immediately and a valuation of the property has to be conducted. The Revised Draft Law requires the valuation to be notified to the consumers and the sale to be realized by the mortgage banking institution, which is obliged to act as a prudent merchant. As an important note, consumers are not included in the valuation process and there are no obligations brought upon the mortgage banking institutions with respect to the sale of the real estate.
One of the most discussed innovative approaches under the Revised Draft Law is related to the “types of interests” that may be applied in a financing transaction by the mortgage banking institution. The revisions allow a fixed interest and a floating interest to be applied as well as the application of both types of interest in a transaction (which has not been further detailed under the Revised Draft Law). Further protection is envisaged on behalf of the consumers, particularly for cases where they contract for floating interests, i.e., mandatory discussions of floating interest and any consequences attached to that prior to the execution of the contracts or regulating the interest ceiling to be applied in cases as such.
“Pre-payment” with a “pre-payment fee” not exceeding 2% of the pre-paid portion of the loan, and a discount in the interest of the loan, the terms of which will be regulated by the Council of Ministers, are still allowed under the Revised Draft Law.
The liability of credit institutions has also been regulated in more detail in the Revised Draft Law. With regard to defective goods (i.e., real estate), the lenders (i.e., the mortgage banking institutions) will be liable for the defects jointly with the manufacturer/producer, seller, distributor, agency and the importer whereby their liability amount will be limited to the credit they had extended.
The Ministry of Industry and Commerce, in particular the General Directorate for Protection of Consumers and Competition, remains unsatisfied with the Revised Draft Law, arguing that the protection provided for consumers is limited. The Ministry opposes the floating interest option in the agreements, since it could prove to be disadvantageous for the consumer.
Whilst the Ministry and other relevant authorities intend to further revise and work on the Draft Law, financial impediments for the development of the system in an emerging market like Turkey has considerably improved, the interest rates for real estate financing have dropped to 1.30-1.20% per month with maximum 20-year terms, real estate prices have skyrocketed, foreign investors are anxious to incorporate mortgage financing institutions, and it is high time to let the players into the game.
1 It was initially proposed that the Council of Ministers be authorized to determine where and when to grant such guarantee.
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