Nigeria Central Bank releases framework for Mortgage Refinance Companies

The guidelines stipulate what is required to operate a MRC

The Central Bank of Nigeria has released a regulatory and supervisory framework for the operations of a Mortgage Refinance Company (MRC).

A Mortgage Refinance Company, according to the regulatory body, is a financial institution established to provide short-term liquidity and/or medium- to long-term funding or guarantees to mortgage loan originators.

The establishment of such company is primarily aimed at increasing the liquidity within the mortgage sub-sector and availability of mortgage credit in Nigeria, reduce mortgage and related costs, and make residential housing more affordable, the regulatory agency said.

The benefits of such mortgage liquidity facilities are well documented and globally acknowledged. As a financial institution, the MRC would be under the regulatory and supervisory purview of the Central Bank of Nigeria (CBN).

“The objectives of the MRC shall be to support mortgage originators such as Primary Mortgage Banks (PMBs) and commercial banks to increase mortgage lending by refinancing their mortgage loan portfolios. It shall act as an intermediary between originators of mortgage loans and capital market investors who typically are looking for long-dated high quality securities” the framework highlighted.

This regulatory framework, according to the Central Bank, is designed to ensure that the MRC operates in a safe and sound manner, on internationally accepted principles, standards and best practice in mortgage liquidity facilities.

The regulatory framework is drawn pursuant to the provisions of the Central Bank of Nigeria (CBN) Act 2007, Banks and Other Financial Institutions Act (BOFIA) CAP B3, Laws of the Federation of Nigeria (LFN) 2004, other relevant Laws, and extant CBN Guidelines and Circulars.

The framework prescribes the basic regulatory requirements for the MRC’s principal line of business of re-financing credits to borrowers on the security of residential mortgage asset and other qualified collaterals.

It also sets the capital adequacy requirements for the MRC, including its minimum paid-up capital, maximum leverage limit, and the minimum risk-weighted capital requirement.

Furthermore, the framework specifies the types of collateral that a borrower can pledge for the MRC’s advances, and the discount that the MRC shall apply in determining how much it can lend against any qualified collateral. It also prescribes procedures for the management of the MRC’s interest rate risk, its permissible investments and liquidity requirements.

It is divided into ten parts, beginning with a preamble, which includes a statement on the major regulatory powers and duties of the CBN with respect to the MRC’s operations. The second part discusses mortgage liquidity operations, followed by the licensing requirements for the approval-in-principle and the grant of final licence in the third part.

The fourth part highlights the MRC’s corporate governance requirements, including the specific duties and responsibilities of its Board of Directors and senior management. The remaining six parts of the framework discuss sources of funds, rendition of returns, prudential requirements, on-site examination, reporting, and off-site monitoring of the MRC and the administrative sanctions that the CBN may impose for violations of any of the specified regulatory requirements.

According to the framework, the Central Bank of shall have the powers and duties with respect to the operations of the Mortgage Refinance Company: to license it, to determine its capital adequacy standards and requirements and to supervise its business operations.

The supervision includes prescribing rules and conditions upon which the MRC may extend credits (“loans or advances”) to borrowers, prescribing minimum liquidity requirements and permissible investments, conducting both on-site and off-site supervision of the MRC operations and approving the Board and Management team of the MRC in accordance with the provisions of BOFIA and the Approved Persons Regime, and the appointment of the external auditors, among others responsibilities.

Activities

According to the Central Bank, the MRC shall engage in the following activities: Refinancing of fully secured mortgage loans; Investment in debt obligations issued or guaranteed by the Federal Government of Nigeria or any of its agencies, which shall not be less than 50 per cent of the MRC’s total investments; Issuing guarantee for mortgage loans as part of its off-balance sheet engagements; Issuing bonds and notes to fund its purchase of eligible mortgages; and other activities as may be prescribed by the Central Bank from time to time.

“The MRC shall NOT engage in the following activities: Granting consumer or commercial loans, Origination of primary mortgage loans, Acceptance of demand, savings and time deposits, or any type of deposits, Financing real estate construction, Undertaking of estate agency or facilities management, Provision of project management services for real estate development, Management of pension funds/schemes and All other businesses NOT expressly permitted by the CBN” the framework highlighted.

Requirement for licensing

The procedures and criteria to be used in granting a licence to the MRC will be the same as specified for banks under the Banks and Other Financial Institutions Act, CAP B3, Laws of the Federation of Nigeria, 2004 (herein after referred to as “BOFIA) and any other regulations issued by the Bank, the regulatory body said.

Any promoter(s) seeking a licence for the operation of the MRC in Nigeria will apply in writing to the Governor of the Central Bank of Nigeria. The application shall be accompanied with some documents which include a non-refundable application fee of N100,000 [one hundred thousand Naira only] or any other amount that may be determined by the Bank from time to time payable to the Central Bank of Nigeria and a detailed feasibility report.

This feasibility report will contain the objectives and aims of the proposed MRC (including a vision & mission statement); the need for the services of the MRC; the branch expansion program [if any] within the first 5 years; the proposed training programs for staff and management, as well as succession plan; and a five year financial projections for the operation of the MRC, indicating expected growth and profitability among others.

The financial requirements which may be varied as the regulatory body considers necessary include a minimum capital of – N5 billion, non-refundable application fee of N100,000, non-refundable licensing fee of N200,000 and change of name fee  of N50,000.

The MRCs are expected to sources for their funds via equity, paid-up share capital and reserves, long term loans from sponsors, debentures/bonds, loans from national and supra-national governments and other bodies, funds from developmental partners, gifts and donations from charitable institutions.


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