Circular 9/2015 — Modifications to Circular 21/2009 (Annual Total Cost)

(Second Section) OFFICIAL GAZETTE Monday, April 27, 2015

CIRCULAR 9/2015, addressed to credit institutions, regulated and unregulated multiple-object financial societies, popular financial societies, community financial societies, savings and loan cooperative societies, credit unions, financial entities acting as trustees in trusts that grant credit to the public, as well as societies that habitually grant credits, regarding the Modifications to Circular 21/2009 (Annual Total Cost (CAT)).

At the margin, a logo stating: Bank of Mexico.

CIRCULAR 9/2015

TO CREDIT INSTITUTIONS, REGULATED AND UNREGULATED MULTIPLE-OBJECT FINANCIAL SOCIETIES, POPULAR FINANCIAL SOCIETIES, COMMUNITY FINANCIAL SOCIETIES, SAVINGS AND LOAN COOPERATIVE SOCIETIES, CREDIT UNIONS, FINANCIAL ENTITIES ACTING AS TRUSTEES IN TRUSTS THAT GRANT CREDIT TO THE PUBLIC, AS WELL AS SOCIETIES THAT HABITUALLY GRANT CREDITS:

SUBJECT: MODIFICATIONS TO CIRCULAR 21/2009 (ANNUAL TOTAL COST (CAT))

The Bank of Mexico, with the purpose of continuing to promote the sound development of the financial system and the protection of the public's interests, as well as to foster transparency and competition, considers it convenient to make clarifications, among other aspects, to the calculation methodology and assumptions for the advertising and promotion of the Annual Total Cost.

For the above, based on articles 28, paragraphs sixth and seventh, of the Political Constitution of the United Mexican States, 24, 26 and 36, first paragraph, of the Bank of Mexico Law, 8, 21 and 22, of the Law for Transparency and Ordering of Financial Services, 4, first paragraph, 8, fourth and seventh paragraphs, 10, first paragraph, 14 Bis, first paragraph, in relation to 17, fraction I, and 14 Bis 1, first paragraph, in relation to 25 Bis 1, fraction IV, and 25 Bis 2, fraction II, of the Internal Regulations of the Bank of Mexico, which grant it the authority to issue provisions through the General Legal Directorate and the General Directorate of Financial System Affairs, respectively, as well as Second, fractions I and X, of the Agreement on the Assignment of Administrative Units of the Bank of Mexico, taking into account what is established in articles 5 and 6, of the Law on Transparency and Promotion of Competition in Guaranteed Credit, as well as 6 of the Regulations of the Federal Law for Consumer Protection, which refers to the Annual Total Cost (CAT), has resolved to modify numerals 1, in the definitions of “Entities” and “UDIS”, 4.2, first paragraph, as well as second paragraph in items a), c), d), e) and g), 5.1, first paragraph, and items a), c) and f), 5.2, 5.4, 5.4.1, 5.4.2, 5.4.3, 5.4.3.1, and item i), 5.4.3.2, 5.4.3.3, and items ii) and iv), 5.5, first paragraph, 7, first paragraph, and items ii) and iv) and 8, add the definitions of “Revolving Credit” and “Minimum Payment” to numeral 1, a second paragraph to numeral 2, items (a) and (b) to the last paragraph of numeral 4.1, items d Bis) and d Ter) to numeral 4.2, items i) to iv) and a second paragraph to numeral 5.4.1, and fractions a) to c) and a last paragraph to item i) of numeral 5.4.3.1, a second paragraph to numeral 7, and numeral 9, as well as repeal items ii) and iii) of numeral 5.4.3.1, the sole paragraph of item iii) of numeral 5.4.3.2, and the sole paragraph of item iii) of numeral 5.4.3.3 of the “General Provisions Establishing the Calculation Methodology, Formula, Components and Assumptions of the Annual Total Cost (CAT)”, contained in Circular 21/2009, to remain in the following terms:

GENERAL PROVISIONS ESTABLISHING THE CALCULATION METHODOLOGY, FORMULA, COMPONENTS AND ASSUMPTIONS OF THE ANNUAL TOTAL COST (CAT)

1. Definitions

“...

Revolving Credit: the Credit that gives the Client, in their capacity as the borrower, the right to avail themselves of amounts corresponding to an agreed credit line, as well as to make partial or total payments of the availments previously made, remaining authorized, while the Contract does not conclude, to avail themselves in the agreed manner of the resulting balance to their

Monday, April 27, 2015 OFFICIAL GAZETTE (Second Section)

favor;

Entities: to: (i) credit institutions; (ii) regulated and unregulated multiple-object financial societies; (iii) popular financial societies; (iv) community financial societies; (v) savings and loan cooperative societies; (vi) credit unions; (vii) financial entities that act as trustees in trusts that grant Credit to the public, and (viii) societies that habitually grant Credits to the public;

Minimum Payment: the amount that the Entity requires from the borrower of a Revolving Credit in each payment period, according to the respective Contract, so that, once covered, said Revolving Credit is considered current and that, in its case, it is determined in accordance with what is provided in numeral 4.1 of Circular 34/2010, or in numeral 2 of Circular 13/2011, both issued by the Bank of Mexico, and

UDIS: the accounting units, whose value in national currency is published by the Bank of Mexico in the Official Gazette of the Federation, in accordance with articles Third of the “Decree by which obligations that may be denominated in investment units are established and reforms and adds various provisions of the Federal Tax Code and the Income Tax Law” and 20 Ter of the Federal Tax Code.”

2. Calculation and use of the CAT

“...

Without prejudice to the foregoing, in the event that, by virtue of applicable regulations, any other person distinct from the Entities must calculate, in accordance with the provisions issued by the Bank of Mexico, the CAT of the Credits granted by said person, they must use the methodology, formula, components and assumptions referred to in these Provisions.”

4.1 …

“In those cases where the mathematical equation for the calculation of the variable i results in the indicated in any of the following items a) or b), the CAT will be the positive value closest to zero:
a) More than one solution, or b) A negative or indeterminate value, depending on the value of the guarantee indicated in item d Bis) of numeral 4.2 of these Provisions. In this case, the value of the guarantee must be reduced in the proportion necessary to obtain the first positive value of the variable i.”

4.2 …

“To determine the amount of each of the availments of the Credit (Aj), that amount of financing that, in its case, the Entity in question adds to cover Commissions, costs or expenses other than the aforementioned, related to the Credit, shall be considered as one of said availments.
… a) The payment of the principal, which shall include, in its case, the amount of financing granted to cover insurance premiums and other payments required for the contracting and maintenance of these, as well as commissions, rights or services, associated with the Credit; … c) Commissions for investigation, analysis, granting, opening, administration and coverage of financial risks (different from the insurance premiums mentioned in item d) below), that the Client is obliged to pay as a condition for contracting the Credit or during its validity;

(Second Section) OFFICIAL GAZETTE Monday, April 27, 2015 d) The premiums of life, disability, unemployment, damage, theft and other insurance operations that the Entities require from Clients as a requirement for contracting the Credit or during its validity; d Bis) Cash guarantees that the Client is obliged to constitute or maintain, directly or indirectly, as a condition for the granting or administration of the Credit, considering the cash flows on the date the guarantee is constituted and on the date it is released, including, in its case, the interest generated in that period. For these purposes, on the one hand, the total amount of the guarantee indicated shall be included in the variable (Bk) in the order corresponding to the moment of its constitution and, on the other hand, upon releasing said guarantee, it shall be included, with a negative sign, the amount of the guarantee in said variable (Bk); d Ter) In its case, Commissions whose payments are optional for Clients but that the Entities require from them as a condition to access preferential interest rates in the Credits granted to them; e) Any Commission, expense or cost other than the aforementioned that the Client is obliged to cover, directly or indirectly, as a condition for the granting or administration of the Credit; … g) Discounts, bonuses or any amount of money, that the Entities will apply to the Credit in the event that Clients comply with the payment conditions established in the Contract, except in Revolving Credits, in which case what is provided in numeral 5.4.1 shall be observed. …”

5. …

5.1 …

“To perform the calculation of the CAT, the Entities must apply, in all cases, the following general assumptions:
a) The Client fulfills their obligations timely. For this reason, any charges for early payment, late payment or Client default shall not be considered, except in the case indicated in item iv) of numeral 5.4.3.3 of these Provisions; … c) The Entities, at the time of calculating the CAT, must estimate the values that are not known of those concepts they use to determine the amounts of Aj and Bk and keep evidence of the market elements used to perform said estimation; … f) With respect to the exponents tj and sk of the calculation formula, it shall be considered that all payments or availments are made in uniform periods. For this purpose, it shall be considered that a year consists of: 2 semesters, 4 quarters, 12 months, 24 fortnights, 26 two-week periods, 36 ten-day periods or 52 weeks. For Credits with a single payment at maturity, it shall be considered that the exponent sk will be the time interval expressed in days divided by 360. …”

5.2 …

“For Credit products that are offered in the first year of commercialization, the Entity must make known the CAT resulting from the computation of the estimation of the characteristics of the Credit product that said Entity intends to establish for each product.
When it comes to products that have been commercialized for more than one year, the Entity must use the weighted average of the CATs corresponding to the Credits granted for the specific product, identified under the same commercial brand, from Clients who are not in arrears in their payments and whose Credits have not been restructured. Neither shall Credits that the Entities grant to their employees, nor those that credit institutions grant to the persons referred to in article 73 of the Law of Credit Institutions, be considered. For these purposes, the Entity will consider the portfolio of Credits generated in the twelve months prior to the one in which the calculation of the corresponding CAT is performed.”

“5.4 Additional Specific Assumptions for Revolving Credits”

“5.4.1 Methodology

In the case of Revolving Credits, the Entities must apply, in all cases, the following assumptions for the calculation of the corresponding CAT:
i) The Client: a) avails themselves of the total amount of the credit line at the beginning of the Credit's validity; b) covers in each period only the Minimum Payment, and c) avails themselves of the part of the credit line amount that results immediately after each payment of the period in question; ii) The interest, the Minimum Payment and the new availments of the credit line are generated or made, as the case may be, at the end of the period to which they correspond; iii) The Minimum Payment and the interest are constant for all periods, and iv) The amount of the annual Commission charged at the end of the first period of each year remains constant for a term of 3 years and must correspond to the specific product according to the Commission register kept by the Bank of Mexico. For the calculation of the CAT applicable to the Revolving Credits referred to in this numeral 5.4, the Entities must exclude discounts, bonuses or any other amount that the Client has the right to receive in case of complying with the payment conditions established in the Contract.”

5.4.2 …

“Regardless of the maturity term of the Revolving Credit or, in its case, its automatic renewal, the Entities must apply to the CAT calculation a term of 36 months of 30 days each and assume that the outstanding balance of the Credit is amortized at the end of the last period of the third year.”

“5.4.3 Parameters for Revolving Credits

The CAT must be calculated for the uses indicated in the following numerals 5.4.3.1, 5.4.3.2 and 5.4.3.3 and, for this effect, the Entities must consider, in addition to the mentioned assumptions, the amount of the credit line, the interest rate, the Commissions and the Minimum Payment, as follows:”

“5.4.3.1 Additional CAT Assumption to be used in advertising and promotion i) … The Entities must classify Revolving Credits within one of the following categories, according to their characteristics, as well as apply to the CAT calculation the amount in national currency equivalent to the respective quantity of UDIS as indicated below:
a) Classic type credit card or equivalent Revolving Credit: 3,000 UDIS; b) Gold type credit card or equivalent Revolving Credit: 7,000 UDIS, and c) Platinum type credit card or equivalent Revolving Credit: 13,000 UDIS.
The amounts indicated in this item i) must be updated from the first banking business day of January of each year and, for this purpose, the respective calculation will be made based on the value of the UDI corresponding to December 31 of the previous year. ii) Repealed iii) Repealed”

“5.4.3.2 Additional CAT Assumptions to be used in the Contract … iii) Minimum Payment:
Repealed”

“5.4.3.3 Additional CAT Assumptions to be used in the statement of account … ii) Interest rate:
The interest rate resulting from dividing the amount of interest effectively generated in the period covered by the statement of account, by the sum of the following balances: i) the daily average balance of the revolving part of the credit line; ii) the daily average balance of promotions with interest, and iii) the daily average balance of promotions without interest. The resulting weighted average interest rate will be divided by the days of the period covered by the statement of account and multiplied by 360, in order to be expressed in annual terms. iii) Minimum Payment:
Repealed iv) Commissions:
In addition to the amount of the Annual Commission described in numeral 5.4.1 of these Provisions, the Commissions effectively charged in the period that have been generated due to late payment or as a consequence of the Client's payment default must be included.”

5.5 …

“In the case of Guaranteed Housing Credits or Credits associated with housing that have government or development entity supports or subsidies used to amortize the Credit, the Entities must consider the amounts corresponding to said supports and subsidies as payments made by the Clients. In this case, the Entities must include, among others, the payments with employer contributions to the National Institute for Workers' Housing Funds (INFONAVIT), and with subsidies from the National Housing Commission (CONAVI). …”

7. …

“In the information in which, in accordance with applicable provisions, the CAT must be included, it must:
… ii) Be expressed prominently in percentage terms, rounded to one decimal place; … iv) In advertising and promotion, immediately after the word “CAT” incorporate the word “AVERAGE” and the validity period of the applicable offer.
In the event that the Credit is denominated in UDIS, minimum wages or foreign currency, the denomination or abbreviation of the accounting unit in question must be added to the CAT.
…”

8. …

“The Bank of Mexico may require credit institutions; limited-object financial societies; multiple-object financial societies; popular savings and credit entities, and financial entities that act as trustees in trusts that grant Credit to the public, within twelve months following the date on which the CAT is made public, the date of its calculation, as well as the information used to perform it, including a copy of the respective Contract and the cover sheet corresponding to this, as well as the Credit amortization table or required payments.”

“9. Publication of criteria

The Bank of Mexico may publish, on its Internet page, criteria, guidelines or best practices for the calculation of CAT.”

TRANSITORY

SINGLE.- This Circular will enter into force on October 26, 2015.

The CAT values that the Entities have calculated in accordance with the provisions in force prior to the date indicated in the previous paragraph, which in turn have been indicated in the Contracts and the printed advertising and promotion of Credits that they have granted and offered, as the case may be, may remain in those terms until the conclusion of the Contract or respective advertising and promotion. In the case of Credits that, on the date of entry into force of this Circular, are subject to advertising and promotion by electronic and telecommunications means, the corresponding CAT must be calculated in accordance with what is established by this Circular and other provisions in force on that date.

Monday, April 27, 2015 OFFICIAL GAZETTE (Second Section)

Mexico, D.F., April 23, 2015.- The General Legal Director, Luis Urrutia Corral.- Signature.- The General Director of Financial System Affairs, Jesús Alan Elizondo Flores.- Signature.

For any consultation regarding the content of this Circular, please contact the Authorization, Consultations and Legal Control Management, at phones (55) 5237-2308, (55) 5237-2317 or (55) 5237-2000, extension 3200