Circular 15/2007 issued by the Bank of Mexico (“Circular”) became effective December 2007. It is primarily directed to banks, sofoles (limited-purpose financial institutions), sofomes (multiple-purpose financial entities), trustees granting credit to the public and other type of entities habitually granting credit (“Entities”) in Mexico.
This Circular sets forth new general rules to calculate the total annual cost (“CAT” or “APR”) that the Entities must now include in contracts of adherence and advertisement pursuant to the new Mexican Law for Transparency and Order of Financial Services enacted in June 2007 (“Transparency Law”). This requirement to calculate the CAT will be applicable in the event that it is required in the different general rules issued pursuant to the Transparency Law. In order to meet the requirements set forth by the Transparency Law, certain governing bodies have been assigned regulation powers over the various financial entities. The National Banking and Securities Commission controls banks, sofoles and regulated sofomes; the National Commission for the Protection of Users of Financial Services governs non-regulated sofomes; and the Federal Agency for Protection of Consumers oversees other type of entities habitually granting credit.
Subject to the above rules, the CAT shall be calculated and included in contracts of adherence and advertisement of the Entities granting credit, loans or financing below the equivalent of 900,000 Units of investment (indexed pursuant to inflation and referred to as UDIS), which is approximately $3,500,000 Mexican Pesos.
The Circular contains certain exemptions to this obligation, including certain housing secured loans granted to developers, commercial loans for any amount granted to clients that have previously received other loans from the same Entity for an amount exceeding 900,000 UDIS, financial leasing, factoring, commercial discount and letters of credit on demand.
Due to the complexity of the formula used to calculate the CAT, it should be reviewed on a case-by-case basis, according to the credit products offered by each Entity. In very general terms, the CAT must include, in annual percentage terms, the total amount payable for a loan, including principal, interest, commissions, VAT (if applicable), insurance and any other charge directly or indirectly made to client. No charge deductions or reductions for the loan shall be included in the calculation of the CAT. It also does not include charges for anticipated, late or default payments.
Before this Circular was enacted, only banks were obliged to calculate the CAT in Mexico. This Circular replaces the previous rules issued by the Bank of Mexico for calculation of the CAT as applicable to banks. Although the new methodology to calculate the CAT is still very similar to the previous rules applicable to banks, there are certain assumptions for the calculation that changed. This issue should be carefully reviewed by the banks.
For other types of entities, including sofoles (the Bank of Mexico had issued CAT calculation rules for sofoles in the past but they never became effective), sofomes, and other companies habitually granting loans, the calculation of the CAT is now mandatory (if so provided for by the rules issued by the National Banking and Securities Commission, the National Commission for the Protection of Users of Financial Services and the Federal Agency for Protection of Consumers, respectively, for each type of Entity).