Venezuela: Indexed Loan Agreements

On Wednesday, January 23, 2002, the Constitutional Chamber of the Supreme Justice Tribunal (TSJ) ruled on the claim filed for diffuse or collective rights by Asociación Civil de Deudores Hiopotecarios de Vivienda Principal et al against the Superintendency of Banks and Other Financial Institutions, and against the Directive Counsel of the Institute for the Defense and Education of Consumers and Users (INDECU).

The decision which is to be published unabridged in upcoming days, orders the partial disapplication of the legal and regulatory norms contained in the Housing Policy Law of 1993 and in the Decree with the Status and Force of Law Governing the Home and Housing Policy Subsystem, published in Office Gazette of November 5, 1998, referring to the establishment of the interest rates applicable to indexed loan agreements.

The decision orders the Venezuelan Central Bank (BCV) to regulate and establish the cap interest rates applicable to the mortgage market, and to regulate, modify and recalculate currently effective interest rates for indexed credits, to be done with retroactive application as of 1996, in accordance with the rate to be set by the Venezuelan Central Bank, as of that date.

The TSJ further declared that the Housing Policy Law allows the capitalization or refinancing of interest, which constitutes compound interest and not a new loan, which means that such interest would not be due, and any interest already charged must be allocated to principal.

Additionally, until the BCV has determined the interest rate, payments made in this regard (refinanced interest) are suspended, at least during the two (2) months following the issuance of the financing. The TSJ annulled the collection of an additional interest surcharge in the event of delinquency, considering it to be a behaviour that constitutes usury and that is contrary to good practise.

In terms of the financing of vehicles, the TSJ first declared all covenants violating Article 13 of the Conditional Sales Law to be NULL AND VOID, which means that under agreements executed in such modality, failure to make payment of one or more installments which collectively do not exceed one-eighth of the aggregate price of the item at market shall not be grounds for the termination of the agreement, but for the collection of the unpaid installments, reserving the benefit of the terms in respect of any successive installments.

In that same connection, the BCV was ordered to set the cap interest rate for vehicle financing according to Article 108 of the Consumer and User Protection Law which, as of 1996, corresponds to the conditional sales market.

Additionally, financial entities and anyone that has made conditional sales were ordered to restructure the corresponding agreements, eliminating collection expenses and charging to the payment any expenses unduly covered by the borrower since 1998. Any excess in payments made determined above the new cap rate set by the BCV for the vehicle conditional sales market, shall be charged to the principal owed when restructuring the agreements.