Circular 14/2007 — Interest Rates

Friday, November 30, 2007 OFFICIAL GAZETTE (Third Section) 1

THIRD SECTION
BANCO DE MEXICO

CIRCULAR 14/2007 regarding the general provisions referred to in Article 4 of the Law for Transparency and Regulation of Financial Services regarding interest rates.

A logo appears at the margin, stating: Banco de México.

CIRCULAR 14/2007

TO CREDIT INSTITUTIONS; LIMITED-OBJECT FINANCIAL SOCIETIES, AND REGULATED MULTIPLE-OBJECT FINANCIAL SOCIETIES:

The Bank of Mexico, based on what is provided in Articles 28 of the Political Constitution of the United Mexican States, sixth and seventh paragraphs; 24 and 26 of the Bank of Mexico Law; 4 and 22 of the Law for Transparency and Regulation of Financial Services; as well as, in Articles 8, third and fourth paragraphs, 10 first paragraph, 14 first paragraph, in relation to Article 25 fraction II which grants the General Directorate of Financial System Analysis the authority to participate in the issuance of provisions, and 17 fraction I, which establishes the attribution of the Central Banking Provisions Directorate to issue provisions, all of the Internal Regulations of the Bank of Mexico published in the Official Gazette of the Federation on September 30, 1994, whose last modification was published in the aforementioned Official Gazette on April 26, 2007;

With the objective of promoting the healthy development of the financial system and transparency, as well as protecting the interests of the public, considering that:

a) On June 15, 2007, the "Decree by which the Law for Transparency and Regulation of Financial Services published in the Official Gazette of the Federation on January 26, 2004 is repealed, the Law for Transparency and Regulation of Financial Services is issued, and various provisions of the Credit Institutions Law and the Law for Protection and Defense of Users of Financial Services and the Law of the National Banking and Securities Commission are reformed, added, and repealed" was published in the Official Gazette of the Federation;

b) In accordance with said reforms, the Bank of Mexico is authorized to issue general provisions to regulate the interest rates of credit institutions, limited-object financial societies, and regulated multiple-object financial societies, and

c) When clients have sufficient information, they are able to demand the exercise of their rights.

It has resolved to issue the following:

GENERAL PROVISIONS REFERRED TO IN ARTICLE 4 OF THE LAW FOR TRANSPARENCY AND REGULATION OF FINANCIAL SERVICES REGARDING INTEREST RATES.

1. Definitions

For brevity, in singular or plural, the following shall be understood as:

Client: the person who receives a Credit;

Credits: the credits, loans, or financings that Financial Institutions grant;

Financial Institutions: the: (i) credit institutions; (ii) limited-object financial societies and (iii) regulated multiple-object financial societies, and

UDIS: the investment units referred to in the "Decree by which the obligations that may be denominated in Investment Units are established and various provisions of the Federal Tax Code and the Income Tax Law are reformed and added", published in the Official Gazette of the Federation on April 1, 1995.

2. Interest Rates

2.1 General Provisions

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Financial Institutions may agree with their Clients on the interest rate they intend to charge for Credits, agreeing to a single ordinary interest rate and, if applicable, a single default interest rate.

Without prejudice to the foregoing, they may divide the term of validity of the Credits into two or more periods and establish from the moment of the start of the validity of the respective Credit the interest rate applicable to each of the aforementioned periods. Each period shall not be less than three years.

The interest rate shall be determined in accordance with one of the following three options:

a) A fixed rate;

b) A variable rate, which may be determined under any formula agreed upon with the Client, provided that it uses as reference a single rate chosen from among those indicated in sections 2.5, 2.6, and 2.7 of these Provisions, depending on whether the Credits are denominated in national currency, in UDIS, or in foreign currency, or

c) A variable rate with a fixed maximum limit.

Regarding the opening of credit lines in which Financial Institutions have not waived the right to denounce them at any time, the parties may agree that the applicable interest rate will be fixed at the moment each respective disbursement is made. The foregoing must be agreed upon by the parties in the documents that instrument the Credits.

2.2 Modification of the Interest Rate

It is prohibited for Financial Institutions to unilaterally modify the interest rate upwards or the mechanisms for determining it, during the validity of the Credit in question.

The foregoing shall not apply to programs that Financial Institutions enter into with companies whereby they grant Credits to their employees, nor to Credits that Financial Institutions grant to their own employees; in which it is agreed that the interest rate will increase in the event that the employment relationship ceases to exist. To this effect, the applicable increase to the interest rate must be expressly agreed upon from the moment the Credit is contracted.

The provisions in the preceding paragraphs are without prejudice to the authority that the parties have to modify through agreement the clauses of the instruments in which the Credits are documented, including those related to the interest rate. In such case, the Client, at the time of agreeing on the modification, must provide their written consent or by any other means that leaves a record thereof.

Regarding current account credit opening contracts in national currency, Financial Institutions, through the means they agree upon with their Clients, must inform them of modifications to interest rates, at least thirty natural days in advance of the date scheduled for such modifications to take effect. As a result of the foregoing, Clients, under the terms established in the contracts and within the sixty natural days following the effective date of the modifications, will have the right to terminate the respective contract if they do not agree with them, without the Financial Institution being able to charge them any additional amount for this fact, except for debts that had already been generated by the date the contract is terminated.

2.3 Applicable Rate and Period for Interest Calculation

Ordinary and default interest rates must be expressed exclusively in terms of annual simple interest, considering years of 360 days.

In the event that Financial Institutions agree on the interest rate based on a reference rate, they must also agree that such reference rate shall be the last published during the period agreed upon for the determination of said interest rate, or the one resulting from the arithmetic average of said rates, published during the aforementioned period. This is understood to mean that the period for determining the interest rate does not necessarily have to coincide with the period in which interest accrues.

2.4 Substitute Reference Rates

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When a reference rate is agreed upon, one or more substitute reference rates must be agreed upon in the event that the originally agreed reference rate ceases to exist, agreeing on the order in which, if necessary, said substitute reference rates would replace the originally agreed one.

The aforementioned agreements must be clearly established from the moment the corresponding Credit is granted and may only be modified in accordance with what is provided in sections 2.1 and 2.2.

2.5 Reference Rates in National Currency

In Credits denominated in national currency, only the following may be used as a reference rate: a) the interbank equilibrium interest rate (TIIE) provided for in Annex 1 of Circular 2019/95 of the Bank of Mexico; b) the yield rate in primary placement of Certificates of the Treasury of the Federation (CETES); c) the term deposit cost of liabilities denominated in national currency that the Bank of Mexico deems representative of the set of multiple banking institutions and that it publishes in the Official Gazette of the Federation (CCP); d) the Nafin Rate (TNF) which is published in the Official Gazette of the Federation; e) the rate that had been agreed upon in the instruments that document Credits of development banking or public economic promotion trusts, only in Credits that are subject to discount with such development banking institutions or those trusts, or that are granted with resources from said institutions or trusts; f) the weighted banking funding rate, or g) the weighted government funding rate. These last two rates shall be those that the Bank of Mexico makes known on its electronic page on the worldwide Internet network with the domain name www.banxico.org.mx.

Regarding the reference rates provided for in items a) and b), the term of the TIIE or CETES to which the Credit rate is referred must be indicated.

2.6 Reference Rates in UDIS

In Credits denominated in UDIS, only the yield rate in primary placement of Development Bonds of the Federal Government denominated in UDIS (UDIBONOS) may be used as a reference.

2.7 Reference Rates in Foreign Currency

In Credits denominated in foreign currency, only the following may be used as a reference: a) interest rates that have a market reference, that are not unilaterally determined by a financial entity, which may be determined by a financial authority of the country in question or by a group of financial entities, among which is the LIBOR (London Interbank Offered Rate) rate, of which their term and the publication where they will be obtained must be clearly indicated, such publication being of public knowledge; b) the rate that had been agreed upon in the instruments that document credits received from foreign or international financial organizations, development banking institutions, or public economic promotion trusts, only in Credits that are subject to discount with such development banking institutions or trusts, or that are granted with resources from said organizations, institutions, or trusts, or c) regarding Credits in U.S. dollars, the term deposit cost of liabilities denominated in U.S. dollars (CCP-Dollars), which the Bank of Mexico calculates and publishes in the Official Gazette of the Federation.

3. Exceptions

Financial Institutions will not be obligated to comply with what is provided in section 2 regarding Credits that fall under any of the following circumstances:

a) To financial intermediaries, and

b) To any other Client, provided that the minimum amount of the Credit or the irrevocable credit line granted, individually or syndicated, is greater than the equivalent of 5 million UDIS.

TRANSITIONAL PROVISIONS

FIRST.- These Provisions shall enter into force on December 13, 2007.

SECOND.- Upon the entry into force of these Provisions, sections M.21., M.21.1, M.21.2, M.21.3, M.21.4, M.21.5, M.21.6, M.21.7, M.21.8, M.22. and M.23., of Circular 2019/95 applicable to multiple banking institutions, modified or incorporated by Circulars-Telefax 15/2000, 52/2001, 56/2001, 21/2002, 23/2002, 16/2005 and 20/2005, are repealed.

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Respectfully,
Mexico, D.F., November 29, 2007.- BANCO DE MEXICO: The General Director of Financial System Analysis, José Gerardo Quijano León.- Signature.- The Director of Central Banking Provisions, Fernando Luis Corvera Caraza.- Signature.

For any inquiries regarding the content of this Circular, please contact the General Directorate of Authorizations, Consultations and Legal Control, located at Avenida 5 de Mayo, number 2, sixth floor, Centro Neighborhood, Mexico City, D.F., C.P. 06059, or at the phones 5237.2308, 5237.3200 or 5237.2317.