An Overview Of CBN Guidelines For Mortgage Refinance Companies In Nigeria

To combat the longstanding problem of homelessness in Nigeria¹, the Central Bank of Nigeria (CBN), on the 5^th of August 2013, issued the Regulatory and Supervisory Guidelines for the Operations of Mortgage Refinance companies in Nigeria.

Drawn from the provisions of the Central Bank of Nigeria Act 2007, the Bank and Other

Financial Institutions Act (BOFIA) CAP B3. LFN 2004, extant CBN guidelines and circulars,

and other relevant laws, this guideline is aimed at regulating and supervising the operation

of Mortgage Refinance Companies (MRC) in Nigeria, and ensuring that these facilities

operate based on globally recognized guidelines, standards, and best practices, in a secure

and reliable manner.

Notably, on the 20^th of February, 2024, the Central Bank of Nigeria (CBN) shared the Revised Regulatory and Supervisory Guidelines for The Operations of Mortgage Refinance Companies in Nigeria Exposure Draft which revised and reviewed several essential conditions of the 2013 Regulatory and Supervisory Guidelines for The Operation of Mortgage Refinance Companies in Nigeria.

To keep up with the current changes in law, we will be reviewing the Regulatory and Supervisory Guidelines for the Operations of MRC in Nigeria in the light of the 2024 draft.

What is A Mortgage Refinance Company (MRC)

The revised draft defines an MRC as a financial institution established to provide liquidity refinancing and guarantee to mortgage loan originators.²

These facilities have the primary objective of providing support to mortgage originators such as Primary Mortgage Banks (PMBs) and banks to increase mortgage lending by refinancing their mortgage loan portfolios.³

Permissible and Non-permissible Activities of MRCs⁴

In Paragraphs 2.3 and 2.4, the 2024 CBN draft provides for the list of activities in which MRCs are to engage in and activities which MRCs are not to engage in.

The following are activities which MRCs are to engage in:

• 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 percent of the MRC's total investments.
• Repurchase agreements on securities, solely for the purpose of raising intermediate funding for refinancing operations prior to issuing bonds in the capital market.
• Issuing guarantee for mortgage loans as part of its off-balance sheet engagements
• Issuing bonds and notes to fund the purchase of eligible mortgages
• Other activities may be prescribed by the CBN from time to time.

The following are activities which MRCs are not to engage in:

• 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
• All other businesses are NOT expressly permitted by the CBN.

Licensing Requirements⁵

Before a proposed MRC can be allowed to operate as an MRC, it must apply for and be granted the MRC license. The application for this license is in 2 stages:

• Approval-in-principle
• Final license.

Approval-in-Principle License Grant (AIP)⁶

To be granted the Approval – in – Principle license, a proposed MRC must:

1. Submit a letter of intent to apply for an MRC license addressed to the Governor.

Upon doing this, the promoters and investors shall be invited to make a pre-licensing presentation to CBN's Director of Financial Policy and Regulation Department covering the following under-listed areas:

• The business case or model for the MRC;
• Profile of the promoters;
• The proposed shareholding structure;
• Profile of the proposed Directors;
• Sources of funds for the minimum capital;
• Proposed organizational structure; and
• AML/CFT/CPF compliance program.

1. Upon satisfying the CBN with its presentation, a letter of No-Objection will be issued to the promoters to submit a formal application for the grant of Approval-in-Principle (AIP) addressed to the Governor of the CBN and accompanied by the list of documents in Appendix 1.

1. MRCs are required to deposit the required Minimum Regulatory Capital of N5,000,000,000 to a designated account in the CBN and provide evidence of the deposit.

1. Where CBN is satisfied with the application and has verified the capital contributions of the prospective shareholders of the proposed MRC, it may issue an AIP to the promoters.
   
   It is noteworthy that till the AIP is granted by the Bank in writing, a proposed MRC CANNOT apply to the CAC for registration or incorporation.

• Upon grant of the AIP, the proposed MRC shall be unable to make any form of amendment to the approved ownership structure and board composition as captured in the AIP without the prior written approval of the Bank.

Upon incorporation and opening of a corporate account, the proposed MRC may apply for and be paid 20% of its capital deposit to enable it to meet its pre-operational expenses.

Final License⁷

Not later than six (6) months after obtaining the AIP, the promoters of a proposed MRC shall submit an application to the Governor of the CBN for the grant of a final license.

This application is to be accompanied by the supporting documents listed in Appendix 2 of the Guidelines.

Upon a satisfactory review of the submitted documents, CBN shall conduct a pre-licensing inspection to assess the readiness of the proposed MRC to commence operations.

Where the pre-licensing inspection is satisfactory, the MRC may be granted a final license upon payment of a non-refundable licensing fee of N5 million through RTGS to the designated CBN account.

Refund of Capital Deposit⁸

The minimum capital deposited with the CBN shall be refunded whether or not the license is granted.

Where an MRC license is granted, then a refund of the balance of its capital deposit (where the proposed MRC had received a percentage of the capital deposit post AIP) or the full sum shall be made to the MRC together with any investment income, which shall be treated as an income of the MRC.

Where the MRC license is not granted then a refund of the capital deposit with any accrued interest (less any administrative charge) shall be made to the applicants using the account from which the deposit originated.

Caveat⁹

• At any time before the grant of a final license, the CBN may vary or review any condition of a license or impose additional conditions.
• Where a license is granted subject to certain conditions, the MRC shall comply with those conditions to the satisfaction of the CBN within such period as may be deemed appropriate in the circumstances as failure to comply renders the MRC guilty of an offense under BOFIA 2020.

Financial Requirements of MRCs¹⁰

The financial requirements of MRCs which may be varied as the CBN considers

necessary are as follows:

• Minimum capital – N5,000,000,000.00
• Non-refundable application fee – N1,000,000.00
• Non-refundable licensing fee – N5,000,000.00
• Change of Name fee – N500,000.00

Corporate Governance Requirements Of MRC¹¹

The ultimate responsibility for the operations of an MRC shall be vested in its Board of Directors who amongst others, have the duty to act in good faith in the best interest of the MRC, Direct operations in conformity with the requirements set forth in these regulations and other such requirements and directives as the CBN may issue from time to time.

The number of directors on the board of an MRC shall be a minimum of seven (7) and a maximum of eleven (11).

At all points in time, the non-executive members shall be more than the number of the executive directors.

The approval of the appointment of each director who meets the requirements as specified by the CBN from time to time shall be by the CBN.

The Executive directors of an MRC shall hold office for a maximum period of twelve (12) years in the one MRC or within a group structure, subject to other applicable tenure limits.

Non-Executive directors shall serve for a term of not more than 4 years and such term may be renewed only twice.

An Independent Non-Executive director shall serve for a term of four years renewable only once.

This means that a Non-Executive Director shall not be allowed to serve for a period exceeding 12 years in total, and an Independent Non-Executive Director shall serve for a period not exceeding 8 years in total.

The tenure of an Executive Director (ED) who becomes the MD/CEO of the same MRC before the end of his/her maximum tenure as ED (12 years), is subject to a maximum period of twelve (12) years as MD/CEO.

Minimum Qualification of Board Members¹²

The minimum qualifications and experience for persons who may occupy Board positions are as follows:

1. Positions of Managing Director/Chief Executive or executive members of the Board:
2. A recognized university degree or its equivalent in any discipline
3. A professional qualification in banking, finance, or other related fields may be an added advantage
4. At least 20 years post qualification experience in banking or related industry for the Managing Director and 15 years for the position of Executive Director.

• The positions of Non-Executive members of the Board:
• A recognized university degree or its equivalent in any discipline
• A professional qualification in banking, finance, or other related fields may be an added advantage
• At least 5 years of post-qualification experience

Sources of Funds of MRCs¹³

An MRC fund source shall consist of the following:

• Paid-up share capital and reserves
• Long term loans
• Debentures and bonds
• Loans from national and supra-national governments and other bodies
• Funds from development partners
• Gifts and donations

Rendition Of Statutory Returns¹⁴

MRCs have the duty to render the following returns to the CBN:

• Monthly Returns not later than five (5) days after the end of each month

• Anti-Money Laundering, Combating the Financing of Terrorism and Countering Proliferation Financing of Weapons of Mass Destruction in Financial Institutions Return

• Quarterly Returns not later than five (5) days after the end of each quarter

• Annual audited financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) not later than three (3) months after the end of a financial year.

These returns are to be submitted to the Director, Other Financial Institutions

Department, CBN, or any other department as may be prescribed by the CBN

from time to time.

Mortgage Refinancing Rules¹⁵

An MRC is to only refinance mortgages of borrowers in good standing and the refinancing shall be made with clearly disclosed, non-preferential terms and conditions.

A borrower is deemed not to be in good standing if the borrower fails to satisfy any of the following conditions:

• Receives a qualified opinion on the borrower's most recent AFS
• Is unprofitable for four consecutive quarters
• Fails to meet its capital adequacy or liquidity ratio requirements as prescribed by the CBN
• Is delinquent on its payment obligations at any time (for existing obligors)

In refinancing mortgages of borrowers, an MRC's credit to a borrower shall be fully secured by pledged qualified collateral at all times, with each borrower providing a specific listing of otherwise unencumbered collateral that secures each advance.

A pledged qualified collateral shall be deemed to fully secure an MRC's credit when it exceeds at least 125 percent of the refinanced amount.

A MRC shall not extend credit exceeding 50 percent of its shareholders fund unimpaired by losses to a single customer, without prior approval of the CBN.

MRCs are expected to assess the value of the collateral that is to secure the advances before refinancing, and at least within every twenty-four months thereafter for all outstanding advances.

Management of Interest Rate Risk¹⁶

Every MRC shall be required to match-fund long-term advances to borrowers with obligations of similar characteristics and duration so as to maintain minimal risk exposure.

In other words, the funding sources used by mortgage refinance companies for their long-term advances should have similar attributes and durations as the borrower's mortgages being refinanced.

Branch Expansion, Relocation, and Closure of MRCs¹⁷

No branch of an MRC shall be opened, relocated, or closed without the prior approval of the CBN.

Application for the opening of a new branch shall be accompanied by the following documents:

1. A copy of the Board resolution approving the proposed branch
2. A detailed feasibility report on the branch shows:
3. Rationale for the branch.
4. Initial capital outlay for the branch.
5. Projected income and expenditures for a 3-year period.
6. The proposed organizational structure of the branch.
7. Staffing requirements.
8. The assumption for the financial projection in the Report.

Every MRC seeking approval for the opening of a new branch must have record of good financial performance, regularity in the rendition of all returns and compliance with laws and extant regulations.

Application for the closure of an MRC branch shall be accompanied with:

• A copy of the Board Resolution authorizing the closure.
• Reasons for the closure with relevant evidence.

Changes in Ownership Structure of MRCs¹⁸

Except with the Bank's prior written authorization, an MRC may not engage in an arrangement or agreement which:

• Produces a change in the ownership or control of the MRC. In furtherance of this, shareholders are prohibited from selling or transferring their shares without the Bank's prior written approval.
• Allows the sale, disposal or transfer of the whole or any part of the business of the MRC
• Allows the reconstruction of the MRC,
• Allows the amalgamation or merging of the MRC with any other corporation
• Allows the hiring of a management agent, or the transfer of the MRC's operations to any such agent.

Examinations of MRC¹⁹

MRCs are subject to examinations following the same guidelines and processes that apply to banks and other financial organizations.
Upon request by the Bank, an MRC will provide its books and records for inspection and other supervisory purposes in a timely manner.

An MRC will be subject to off-site monitoring by the CBN and will submit reports on a regular basis in compliance with Section 7 of the guidelines.

Sanctions²⁰

Where an MRC contravenes a provision in the guideline, the CBN may impose one or more of the following sanction:

1. Monetary penalties in such amounts as may be determined by the Bank.
2. Prohibition from declaring or paying dividends.
3. Suspension of access to the credit facilities of the CBN.
4. Suspension of lending and investment operations, capital expenditure, and/or debt issuance.
5. Suspension or removal from office of the offending director, officer or employee.
6. Disqualification from holding any position or office in any licensed bank, MRC or other financial institution in Nigeria.
7. Revocation of licence.

Where an MRC, a director, or an employee is engaging in, has engaged in, or the CBN has reason to believe is about to engage in an unsafe and unsound practice in conducting the MRC business, or engages in any other conduct that contravenes any of the guidelines or other applicable laws and directives, the CBN may also issue cease and desist orders.

CONCLUSION

The release of the Regulatory and Supervisory Guidelines for the Operations of Mortgage Refinance companies in Nigeria by the CBN is an important development in the regulation of MRCs in Nigeria. It is believed that with proper implementation and enforcement, this guidelines will develop and strengthen the growth of mortgage refinance companies, which are vital in providing liquidity to mortgage lenders thus expanding the access of Nigerians to affordable housing finance options and ultimately developing and strengthening the Nigerian mortgage market.

Footnotes

1. World Population Review (https://worldpopulationreview.com/country-rankings/homelessness-by-country)

2. Section 2.1 of the Revised Regulatory and Supervisory Guidelines for The Operation of Mortgage Refinance Companies in Nigeria Exposure Draft (The 2024 Guidelines)

3. Section 2.2 of The 2024 Guidelines

4. Section 2.3 and 2.4 of The 2024 Guidelines

5. Section 3.0 of The 2024 Guidelines

6. Section 3.1 of The 2024 Guidelines

7. Section 3.2 of The 2024 Guidelines

8. Section 3.4 of The 2024 Guidelines

9.Section 3.5 of The 2024 Guidelines

10. Section 4.0 of The 2024 Guidelines

11. Section 5.0 of The 2024 Guidelines

12. Section 5.2 of The 2024 Guidelines

13. Section 6.0 of The 2024 Guidelines

14. Section 7.0 of The 2024 Guidelines

15. Section 8.3 of The 2024 Guidelines

16. Section 8.5 of The 2024 Guidelines

17. Section 9.2 of The 2024 Guidelines

18. Section 9.3 of The 2024 Guidelines

19. Section 10.0 of The 2024 Guidelines

20. Section 11.0 of The 2024 Guidelines

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.