Legal Framework of Guarantees

With the aim of improving the rules related to the main guarantees used by the banking sector, in 2021, the Government presented to the National Congress the bill that is currently known as the Legal Framework of Guarantees. The bill proceeded with considerable speed, compared to other bills, and was promulgated on October 30, 2023, coming into effect immediately.

The Legal Framework improved the guarantee rules, allowed for extrajudicial foreclosure of mortgages, the competition of real estate creditors, and extrajudicial execution in such situations, among other provisions, and directly amended nine other laws dealing with guarantees.

It is expected that the legal framework of guarantees will help reduce the Brazilian interest rate, which is known to be one of the highest in the world. Our country occupied the first position in the ranking until the beginning of the reduction of the basic interest rate by the Central Bank in March 2024.

Regarding the changes brought by the legal framework, we highlight the creation (or legal formalization) of the security agent, a figure quite common abroad, and the changes in the rules related to mortgage and fiduciary assignment.

As for the security agent, this figure has been incorporated into the rules of the Brazilian Civil Code. As provided by law, any guarantee may be constituted, registered, managed, and executed by a security agent, who is a person (natural or legal entity) designated by the creditors to act on their own behalf for the benefit of the creditors.

The security agent has a fiduciary duty towards the creditors and may be replaced at any time, provided that the same formalities necessary for the publicity of the original guarantee are respected.

Before the effectiveness of this norm, there was a lot of discussion about the possibility of appointing a security agent, which is common in operations involving multiple creditors and sometimes faced difficulties in being used in Brazil. The centralization of procedures related to the guarantee in a single person is interesting, especially when there are multiple creditors, as it would be difficult to gather them all to act together in the satisfaction of their credits, especially when multiple jurisdictions are involved.

The mortgage, which is a guarantee on real property, in which ownership of the property remains with the debtor, unlike in fiduciary assignment, where resoluble ownership is transferred to the creditor, with the debtor only retaining possession of the property, was a less commonly used institution due to the bureaucracy for debt execution, which could only be carried out through a judicial lawsuit.

Now, the mortgage, just like fiduciary assignment, can be executed extrajudicially, through the real estate registry office. If the debtor, notified by the registry office, does not pay the debt in default within the legal deadline, the auction of the property will proceed, and it may be sold, in the first auction, for a value higher than the property’s appraisal, and in the second auction, the sale can be made for at least 50% of the property’s value.

However, although the institutions of mortgage and fiduciary assignment have become closer and now share certain rules and procedures, the mortgage continues to be a real guarantee subject to the effects of judicial recovery. In other words, if a debtor who has a debt secured by a mortgage requests judicial recovery, the mortgage creditor will be subject to the effects of this recovery and restructuring and will have its credit settled according to the terms established in the recovery plan approved by the creditors.

In turn, with regard to fiduciary assignment, which continues to be a modality in which the guarantee is linked to the transfer of ownership to the creditor until complete payment of the debt, and the changes brought by the legal framework of guarantees, one of the main changes made by the new legal framework is the possibility of carrying out more than one fiduciary assignment of the same asset, similar to what was already possible in the case of a mortgage.

This change is significant and brings even more advantages to the institute, allowing for contracting a new debt, including with a different creditor, using the same asset as collateral. In this situation, the first creditor will have preference over the others, and so on subsequently. In case of default, the first obligation will be satisfied first, so that the remaining balance can be used to pay off the other debts. In addition, the early maturity of subsequent debts is allowed due to non-compliance with the original debt.

Furthermore, it has become possible to contract new debts or extend an existing financing with the same creditor, as long as it is within the guaranteed value of the asset. The extension of the fiduciary assignment cannot exceed the final payment deadline or the original guaranteed value. In addition, there is no need for notarization in the instrument, which can be public or private, reducing considerably the necessary bureaucratic procedures and, as a consequence, the costs.

As we have tried to demonstrate in this brief text, the legal framework of guarantees has brought substantial and positive changes regarding relevant issues, which we hope will be reflected in greater legal certainty for the parties involved and also in the reduction of interest rates in Brazil.