Circular 15/2007 — Total Annual Cost (CAT)

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

CIRCULAR 15/2007 regarding the general provisions referred to in Article 8 of the Law for Transparency and Ordering of Financial Services, regarding the Total Annual Cost (CAT).

A logo appears at the margin, stating: Bank of Mexico.

CIRCULAR 15/2007

TO CREDIT INSTITUTIONS; LIMITED OBJECT FINANCIAL SOCIETIES; MULTIPLE OBJECT FINANCIAL SOCIETIES; POPULAR SAVINGS AND CREDIT ENTITIES; FINANCIAL ENTITIES ACTING AS TRUSTEES IN TRUSTS THAT EXTEND CREDIT TO THE PUBLIC, AS WELL AS TO SOCIETIES THAT USUALLY EXTEND CREDITS:

The Bank of Mexico, based on Articles 28 of the Political Constitution of the United Mexican States, sixth and seventh paragraphs; 24, 26 and 36 of the Bank of Mexico Law; 8, 21 and 22 of the Law for Transparency and Ordering of Financial Services; 6 of the Law for Transparency and Promotion of Competition in Secured Credit; as well as paragraphs 3 and 4 of Article 8, 10, 14 in relation to fraction II of Article 25 which provides for the attribution of the General Directorate of Analysis of the Financial System to participate in the issuance of provisions, and fraction I of Article 17, which establishes the attribution of the Directorate of Central Banking Provisions 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 object of promoting the sound development of the financial system, fostering transparency and protecting the interests of the public, considering that:

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and Ordering of Financial Services published in the Official Gazette of the Federation on January 26, 2004 is repealed, the Law for Transparency and Ordering of Financial Services is issued, and various provisions of the Credit Institutions Law and the Law for Protection and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of the User of Financial Services and the Law of the National Banking and Securities Commission are reformed, added and repealed” (Decree) was published in the Official Gazette of the Federation;

b) These reforms provide for the authority of the Bank of Mexico to establish, through general provisions, the formula, components and calculation methodology of the Total Annual Cost (CAT), as well as to establish in said provisions the types and amounts of credits, loans or financings to which it will be applicable;

c) The eighth transitory article of the Decree establishes that the general provisions that the Bank of Mexico has issued regarding advertising, account statements or adhesive contracts, directed at credit institutions or limited object financial societies, will remain in force until such time as the general provisions issued by the National Banking and Securities Commission enter into force for such effect;

d) Article 15 of the Law for Transparency and Ordering of Financial Services provides that credit institutions; limited object financial societies; multiple object financial societies; popular savings and credit entities; financial entities that act as trustees in trusts that extend credits, and societies that habitually grant credits, must incorporate the aforementioned CAT in the advertising they generate and in adhesive contracts, regarding the credits, loans or financings they offer, under the terms established by the general provisions issued by the National Banking and Securities Commission, the Federal Consumer Protection Agency, as well as the National Commission for the Protection and Defense of Users of Financial Services for such effect, within the scope of their respective competencies;

e) Article 6 of the Regulations of the Federal Consumer Protection Law establishes that in the celebration of credit operations, including installment sales operations, deferred payments and periodic exhibitions, before the corresponding contracting, the provider must inform the consumer of the CAT applicable to the operation, expressed in annual percentage terms, which will be calculated using the methodology established by the Bank of Mexico;

f) The Law for Transparency and Promotion of Competition in Secured Credit and the general rules emanating from the Ministry of Finance and Public Credit indicate that the CAT must be calculated in accordance with the methodology issued by the Bank of Mexico;

g) With a uniform methodology to calculate the CAT, those interested in obtaining any credit, loan or financing are able to compare the respective financial costs with ease, which allows them to have greater elements to make the choice that best suits their interests, and

h) To the extent that credit users have adequate comparison elements, competition among entities is promoted, which can translate into a reduction in financial costs.

It has resolved to issue the following:

GENERAL PROVISIONS REFERRED TO IN ARTICLE 8 OF THE LAW FOR TRANSPARENCY AND ORDERING OF FINANCIAL SERVICES, REGARDING THE TOTAL ANNUAL COST (CAT).

1. Definitions
   For brevity, in singular or plural, the following shall be understood:

CAT: the total annual cost of financing expressed in annual percentage terms, which for informational and comparison purposes incorporates the totality of the costs and expenses inherent to Credits;

Client: the person who intends to contract or contracts a Credit;

Commission: any charge, other than interest, regardless of its denomination or modality, that an Entity charges directly or indirectly to a Client;

Contract: the document by which a Credit is instrumented;

Credit: the credits, loans or financings that Entities offer;

Guaranteed Housing Credit: the credit related to housing, referred to in the Law for Transparency and Promotion of Competition in Secured Credit;

Entities: the: (i) credit institutions; (ii) limited object financial societies; (iii) multiple object financial societies; (iv) popular savings and credit entities; (v) financial entities that act as trustees in trusts that extend Credit to the public, and (vi) societies that habitually extend Credits, 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 Tax Code of the Federation and the Income Tax Law are reformed and added”, published in the Official Gazette of the Federation on April 1, 1995.

2. Calculation and use of the CAT

Entities must calculate the CAT of Credits that meet the conditions referred to in the following section, using the formula, components and methodology described in these Provisions.

3. Types and amounts of Credits

These Provisions shall be applicable to Credits that Entities extend, whether they offer them directly or through a third party, for amounts less than the equivalent to 900,000 UDIS, as well as to Guaranteed Housing Credits for any amount.

Entities shall not be obligated to calculate the CAT of the Credits listed below:

a) Guaranteed Housing Credits that Entities extend to promoters, urbanizers, builders and real estate developers, in order for them to construct real estate for subsequent commercialization. The foregoing shall also be applicable to Credits that Entities grant to third parties or trusts, so that they in turn grant Credits to said persons for the purposes indicated;

b) Corporate or business credits, for any amount, that Entities enter into with Clients to whom they have previously granted a Credit or credit line for an amount greater than the equivalent to 900,000 UDIS;

c) Financial leasing;

d) Financial factoring;

e) Commercial discount, and

f) Demand letters of credit.

4. Formula, components and methodology for the calculation of the CAT

4.1 The CAT is the numerical value of the variable i, expressed in percentage terms, that satisfies the following equation:

∑ ∑ = = +
= +
N k s k
M j t j j k i
B i
A
1( ) 1( )

Where:

M = Total number of disbursements of the Credit. j = Consecutive number that identifies each disbursement of the Credit.
Aj = Amount of the j-th disbursement of the Credit.
N = Total number of payments. k = Consecutive number that identifies each payment.
Bk = Amount of the k-th payment. tj = Time interval, expressed in years and fractions of a year, that elapses between the date the Contract takes effect and the date of the j-th disbursement of the Credit. sk = Time interval, expressed in years and fractions of a year that elapses between the date the Contract takes effect and the date of the k-th payment.

The mathematical equation for the calculation of i may, on some occasions, have more than one solution. In these cases, the CAT will be the positive value closest to zero.

4.2 Aspects to consider to determine the values of Aj and Bk

To determine the amount of each of the disbursements of the Credit (Aj), the corresponding amounts must be considered without including accessories or any deduction.

To determine the amount of each of the payments (Bk), the following concepts must be considered, if applicable:

a) The payment of the principal;

b) Ordinary interest;

c) Commissions for investigation, analysis, granting, opening, administration and risk coverage (different from the insurance premiums mentioned in the following letter d)), that the Client is obliged to pay as a condition to contract the Credit or during its validity;

d) The premiums of life, disability, unemployment, damage and theft insurance operations: (i) that Entities require from Clients as a requirement to contract the Credit or during its validity, and (ii) whose purpose is to guarantee the partial or total payment of the Credit. The premiums of damage insurance operations in the automobile branch that the Client may contract with the insurer of their choice and documented separately are excepted;

e) Any Commission or expense other than the above that the Client is obliged to cover directly or indirectly as a condition for the granting or administration of the Credit;

f) The difference between the price of the good if acquired through a Credit and its cash price. For these purposes, cash price shall be understood as that which considers all discounts, bonuses or offers for operations that are settled through a single payment on the date the good or service is acquired. This difference shall only be included if the Client must cover it;

g) The value added tax corresponding to the Commissions and premiums mentioned in letters c) and d)), as well as, if applicable, the corresponding to ordinary interest, and

h) Discounts, bonuses or any other amount that the Client has the right to receive in case of complying with the conditions established in the Contract.

To determine the amount of Bk, the following shall not be included:

i) Charges that must be paid by both the person who buys for cash and the one who buys on credit, such as notary expenses, registration and transfer of ownership expenses, and

j) Tax deductions to which the Client may be entitled, if applicable; nor the decreases in interest rates and Commissions due to events outside the Client's control.

The disbursements (Aj) and payments (Bk) must be in the same currency or unit of account.

4.3 Assumptions for the calculation of the CAT

To perform the calculation of the CAT, the following assumptions must be considered:

a) The Client fulfills its obligations in a timely manner. For this reason, any charge for early payment, late payment or default shall not be considered;

b) For the elements used to determine the values of Aj and Bk that are referred to variable interest rates, units of account or variable indices, the value of the reference variable in effect on the day the calculation is made shall be taken and it shall be considered that said value does not change during the validity of the Credit;

c) When maximum and minimum values are established for interest rates, indices, charges or Commissions, the maximum values shall be used;

d) Entities must estimate, at the time of calculating the CAT, the values that are not known of those concepts used to determine the amounts of Aj and Bk;

e) Charges, Commissions and disbursements whose payment dates are not established in the Contract or are made before its signing, shall be considered made at the time of its signing;

f) When Contracts stipulate that the elements used to determine Aj and Bk vary during the validity of the Credit, it shall be considered that the modifications will occur on the agreed date;

g) In credit card contracts or revolving credit lines, it shall be assumed that the Client disposes of the total amount of the line at the beginning of the validity of the Credit. It shall also be assumed that the amount to be paid, in each of the periods, is the minimum required by the Entity and that the amount available in the Credit line is used again. Furthermore, regarding the CAT used for advertising, it shall be considered that the credit line of classic type cards or equivalent is $10,000.00; of gold type cards or similar is $25,000.00, and of platinum type cards or equivalent is $50,000.00;

h) For credit card contracts or revolving credit lines or other Credits where the maturity date is not specified, it shall be that corresponding to the amortization date of such Credits. If the maturity date exceeds 3 years, it shall be assumed that the outstanding balance is amortized at the end of the last period of the third year;

i) Regarding Guaranteed Housing Credits, employer contributions to INFONAVIT used to settle mortgage credits shall not be considered, and

j) Regarding the CAT used for the advertising of Guaranteed Housing Credits, the average value corresponding to each classification range of the type of housing made known by the Federal Mortgage Society, S.N.C., and the conditions that Entities establish for credits with a term and capacity closest to 15 years and 80%, respectively, shall be considered.

5. Total Amount to be Paid

Entities must estimate the Total Amount to be Paid of the Credit, understood as the sum of all and each of the payments that must be made for the concept of principal, interest, Commissions, insurance and any other expense at their charge, considering for such effect each of the payments Bk established in section 4.2 of these Provisions.

The foregoing, in order for the aforementioned Total Amount to be Paid to be included in the covers of the adhesive contracts provided to their Clients, in accordance with the general provisions that the National Banking and Securities Commission; the Federal Consumer Protection Agency, as well as the National Commission for the Protection and Defense of Users of Financial Services, issue on the matter under the Law for Transparency and Ordering of Financial Services.

6. Remaining CAT

When, after the granting of a Credit, Entities must disclose the CAT applicable to the remainder of the validity of said Credit, they must calculate it using the formula, components and methodology provided for in section 4 of these Provisions, taking into consideration the information in effect at the time of the calculation, as well as the outstanding balance and not considering the costs and Commissions already paid.

7. CAT Information

Offers of pre-approved or pre-qualified Credits that Entities make to specific persons must include the CAT.

Without prejudice to the foregoing, the CAT must be disclosed in the form and terms established by the competent authorities in the applicable provisions.

The Bank of Mexico may require Entities the date of calculation of the CAT contained in the advertising, as well as the information used to perform said calculation, within twelve months following the date it is made known to the public.

TRANSITORY PROVISIONS

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

SECOND.- On the date of entry into force of these Provisions, sections M.26.1, M.26.11., M.26.12., M.26.53., and Annex 21, of Circular 2019/95 applicable to multiple banking institutions, incorporated and modified by Circulars-Telefax 8/2006 and 11/2006 issued by the Bank of Mexico, are repealed. Likewise, on said date, the “Resolution that establishes the Components, Calculation Methodology and Periodicity of the Total Annual Cost” of the Bank of Mexico published in the Official Gazette of the Federation on July 1, 2003 is repealed.

THIRD.- The regulation on the CAT issued by the Bank of Mexico applicable to multiple banking institutions regarding advertising, account statements and adhesive contracts, provided for in sections M.26.13., M.26.2, M.26.21., M.26.22., M.26.23., M.26.3, M.26.51. and M.26.52. of Circular 2019/95, incorporated and modified by Circulars-Telefax 8/2006 and 11/2006 issued by the Central Institute itself, shall remain in force until such time as the general provisions issued by the National Banking and Securities Commission regarding the aforementioned topics, which were published in the Official Gazette of the Federation on November 22 last, enter into force.

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

For any inquiries regarding the content of this Circular, please go to the General Manager 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 to the phones 5237.2308, 5237.3200 or 5237.2317.