Articles

MORTGAGE LOAN COMPANIES

29 October 2003 (Invest Romania)

In anticipation of the substantial effects which might be seen over the domestic economy by a sustainable development of the mortgage market, and also, in consideration of the attempt to alleviate contemporary severe social needs (that, actually, do not allow the freedom of plurality of options in this respect), Romania has been working steadily in the past years to set up and implement an operative market for the mortgage loans.

In the background of the efforts to induce macro-economic stability, to slow-down the depreciation of the national currency and to reduce the interest-rates for the bank loans (as minimal requirements for a healthy and effective market in the matter concerned), noticeable improvements have been also recorded in the past period as regards the implementation of the applicable legal framework.

In this regard, the foundations of the legal regime applicable to the mortgage loans have been laid by the enactment of the Law no. 190/1999 concerning the mortgage loan for real estate investments (as subsequently modified by the Government Emergency Ordinance no. 201/2002). Thereafter, the said law has been followed by the approval of subsequent legislation and also by the enactment of the Government Emergency Ordinance no. 200/2002 concerning the mortgage loans companies (recently approved by the Parliament by the Law no. 330 as of July 8th, 2003 - the "Law no. 330/2003"). The main objectives of the Law no. 330/2003 are to help the development of the mortgage loans market by diversifying the range of the financial institutions entitled to act on the market and also to stimulate the specific competition in this sector by multiplying the sources of financing, types and quality of the loans offered.

The Law no. 330/2003 regulate the special legal regime applicable to the incorporation and organization of the mortgage loan company (the "MLC"), of which inception has been inspired by existing financial institutions from EU countries. In accordance with the Law no. 330/2003, the MLC is defined as a financial company, organized as joint stock company, and its business scope includes primarily the mortgage lending activities, along with the various related transactions specified by the law (ranging from management of mortgage-loans portfolios to the diverse foreclosure operations, etc).

Besides the Law no. 330/2003, the MLCs are also governed by the regulations applicable generally to the commercial companies (i.e., mainly, the Law no. 31/1990 concerning the commercial companies, as subsequently amended and republished), as regards all basic aspects which are not specifically dealt with in the Law no. 330/2003. Therefore, based on the general provisions applicable to the joint stock companies, the shareholders' structure of the MLC will consist of minimum 5 shareholders, and, due to the absence of express derogative provisions, the MLCs' management will be organized in accordance with the general rules applicable to the commercial companies.

However, special requirements are set by the Law no. 330/2003 as regards the share capital and the auditors of the MLCs. Thus, the minimum value of the share capital should be the ROL equivalent of EUR 3,000,000, which exceeds by far the minimum threshold applicable in case of the ordinary joint stock companies (currently, the minimum registered capital requirement is nearly EUR 650). Moreover, the shareholders contributions should be made exclusively in-cash, and be fully paid-in upon the date of the subscription.

As regards the MLCs' auditors, pursuant to the provisions of the Law no. 330/2003 the MLCs shall not have internal auditors, but this authority must be exercised by a financial auditing company, as external independent auditor. Among the auditors' specific legal duties, there can mentioned the analysis of the internal controlling procedures and the auditing of the internal lending regulations of the MLCs, which, in accordance with the law, need to be adopted and observed by the companies concerned.

Considering that the opportunity of the MLCs' inception has been well regarded by the National Bank of Romania ("NBR") well before its launching, no special conditions regarding the prior authorization of this financial company nor its subsequent verification and registration have been set in this respect. The only formalities to be accomplished are rather uncomplicated, consisting of the duty to notify the NBR with respect to the MLC's incorporation (for statistical purpose only), within 30 days as of its registration with the Trade Registry, and also to the subsequent amendments of the corporate documents (however, special reporting duties should be observed in strict compliance with the NBR regulations during the running of the specific commercial activity of the company).

Although the legislation applicable to mortgage loans has undergone important improvements so far, the positive aspects of the legislation in force need to be confirmed in practice, by the every day application of the newly adopted regulations. Conversely, beyond this, substantial reforms are still awaited to cover important topics such as the organization of the credit bureau, refined legislation applicable to mortgage bonds, harmonization with the EU recommendations, etc.