On February 18, 2021, the Mexican Senate passed a bill (the “Bill”) to amend and supplement several provisions of the General Law of Negotiable Instruments and Credit Transactions (“LGTOC”), the General Law on Credit Organizations and Related Activities (“LGOAC”) and the Law for the Protection and Defense of Financial Services Users (“LPDUSF”) to regulate payroll deduction loans. The Bill will now be discussed and potentially approved by the Chamber of Deputies.
The Bill (i) expressly recognizes payroll deduction loans as a specific type of loan under the LGTOC that can only be granted by financial institutions (which are comprised by banks, regulated and non-regulated multiple purpose financial entities, popular financial entities, community financial entities, savings and loan cooperative entities, financial institutions that act as trustees in trusts that provide financings to the public, credit unions and financial technology institutions), (ii) limits the kind of income that can be subject to deduction, (iii) requires lenders to check the credit history of the borrowers, (iv) establishes the irrevocability of the payment mandate and the obligation of the employer to remit to the lender all deductions within four days of having paid the payroll, (v) obliges employers to notify the lender and the borrower on the day the deduction is carried out and payment is made, (vi) provides for a maximum repayment capacity formula, (vii) obliges the employer to implement an online information system to administer the payroll deductions that can be accessed and audited by regulators, borrowers, employers, and lenders, and (viii) regulates cooperation agreements between lenders and employers, including by requiring that the forms of cooperation agreements be publicly registered before CONDUSEF, the entity in charge of protecting users of financial services.
The Bill defines a payroll deduction loan as a term or revolving loan in which the parties agree that payments will be made by the borrower through a third party pursuant to written and irrevocable instructions (or payment mandate) from (i) salaries, (ii) labor related extraordinary payments (such as severance payments), (iii) pensions or annuities, and (iv) fees accrued similar to salaries or any other consideration in favor of the borrower of similar nature (the “Sources of Payment”).
The Bill requires that prior to entering into a payroll deduction loan, the lender shall enter into a cooperation agreement with the employer or the social security institution to which the borrower is affiliated (such as a labor union, chamber of commerce or similar entity that consents to the terms and conditions of the relevant cooperation agreement). Payroll deduction loans shall (i) make reference to the Sources of Payment, (ii) consider the total repayment capacity of the borrower pursuant to an maximum repayment capacity formula provided in the Bill, (iii) establish conditions that ensure repayment of principal in all scheduled payments, (iv) unless otherwise agreed, accrue interest from the moment of execution, (v) expressly set forth the corresponding interest and fees, and (vi) require lenders to check the credit history of the borrowers.
The Bill sets forth that payroll deduction loans shall have a preferential collection right over common creditors in respect of the Sources of Payment and does not limit the lender’s collection rights in an event of default.
The borrower shall provide an irrevocable instruction (which will become void in the event the borrower is deceased, the Source of Payment is extinguished or the borrower fulfills the obligations arising from the payroll deduction loan) to its employer or relevant social security institution, who will deduct and deliver the payable amount on its behalf to the lender within four days of having paid the payroll. The employer is required to notify the lender and the borrower on the day the deduction is carried out and payment is made. The employer will be considered a legal depository of any deducted amounts that are not paid to the lender, and will be liable for principal, interests and fees, in addition to any applicable civil, administrative and penal liabilities.
Cooperation Agreements cannot establish a consideration in favor of the employer (the employer is only entitled to be reimbursed for the incurred expenses) and must establish conditions that ensure that the repayment of the principal amount will be made in an uninterrupted manner in each of the partial payments agreed upon.
Payroll deduction loans entered into prior to the Bill becoming effective (but not refinancings executed after the Bill becomes effective) will be governed by the terms and conditions agreed in accordance with legislation in effect at the time they were executed.
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