PHILIP

The Act on Mortgage Deed Companies which became effective on 1 July 2010 and the objective of which is to stop the so-called mortgage deed roundabouts intensifies the demands on the businesses, Henning Hansen, Partner of Philip Law Firm, explains.

”It is important for the businesses dealing commercially in mortgage deeds to apply for permission with the Danish Financial Supervisory Authority and to ensure that the new legal requirements for inter alia information and the aptitude of the management and the board of directors are met. A breach of the provisions of the act can in fact entail revocation of the permission, order or monetary penalty” Henning Hansen states. 

Philip is ready to advise your business on this issue.

Lack of regulation

Trade in mortgage deeds has not previously been regulated by law. Concurrently there have not been any special legal requirements for the businesses dealing in mortgage deeds. This has contributed to creating a quick and flexible market which among other things has functioned as an alternative financing facility when buying real property.

The lack of regulation by law, including the requirement for credit rating combined with a real property market in rapid growth made it possible to start mortgage deed roundabouts which especially took place in 2006-2007.

Already in 2007-2008 the mortgage deed roundabouts began to collapse as a result of the decreasing prices in the real property market and the consequently lacking possibility for borrowing. The collapse led to mortgage delinquency and as the properties which were provided as security had been bought at an artificially high price, the security of the mortgage deeds did not really exist. This implied great losses for several banks which have been a contributory cause of their financial difficulties. The collapse of the mortgage deed roundabouts has also played a not inconsiderable role in the financial crisis.

Important to obtain permission

In future it is a statutory requirement for trade with mortgage deeds to obtain a permission from the Danish Financial Supervisory Authority. The permission is given to public limited companies and private limited companies which meet the statutory requirements. The company shall e.g. have a management board and a board of directors with adequate experience in the field. Furthermore, the company must appoint a person who is responsible for the mortgage deed trade and who has at least 3 years working experience in this field. Both the person responsible for the trade, the management board and the board of directors must furthermore meet the requirements for aptitude and integrity as it is known from the financial legislation.

If a company obtains permission from the Danish Financial Supervisory Authority this will be entered in a register which is accessible to the public.

The government desires with the adoption of the act to create a well organized market with among other things the license system by means of which the mortgage deed roundabouts will be stopped. At the same time the act will by means of the requirements for information make the trade with mortgage deeds more transparent. About 40-50 companies are expected to be subject to the new act.

Current mortgage deed dealers

The act contains a transitional provision pursuant to which persons who carried on trade with mortgage deeds before 1 July 2010 can continue with this for another 5 years without having to meet the requirement that it has to take place in the company structure of either a public limited company or a private limited company.

Persons and companies which have carried on trade with mortgage deeds before 1 July 2010 and have filed an application with the Danish Financial Supervisory Authority before 1 January 2011 can continue their business until the Danish Financial Supervisory Authority has made a decision as to grant of permission.

The act’s requirements for permission does not extend to financial undertakings carrying on trade with mortgage deeds as these undertakings already have a permission pursuant to another financial legislation.

Purchasers are entitled to more information

The financial crisis has made it clear how important it is to make a thorough valuation of the underlying security for the mortgage deeds as the mortgage deeds most often are issued for the extreme and thereby most unsecure value of the building.

In order to meet this demand the government has introduced a legal requirement for the information which seller has to give to purchaser when dealing in mortgage deeds. This new requirement for information will make it possible for purchaser, in an easy and clear way, to be able to assess and to take note of a number of conditions of the mortgage deed, including valuation of the real value of the mortgage.

Purchaser is entitled to information about inter alia the mortgage deed, including the type of real property in which it provides security and under which circumstances it has been created. Seller must furthermore provide information about the position of priority of the mortgage deed in the property.

New supervisory agreement

In order to ensure that only companies with a permission are carrying on business as mortgage deed companies, this field of business is supervised by the Danish Financial Supervisory Authority. Companies having a permission as a financial undertaking are not subject to supervision pursuant to the act apart from supervision regarding compliance with the act’s requirements for information. This is due to the fact that they already are subject to supervision in accordance with their permission.

The supervision is carried out successively by inspections. The expenses in this connection are covered by the annual duties which the mortgage deed companies pay to the Danish Financial Supervisory Authority.

Possible sanctions

If a company does not observe the requirements of the act for information and permission, the Danish Financial Supervisory Authority can make use of different sanctions.

Thus, the Danish Financial Supervisory Authority can revoke a company’s permission if the company repeatedly or in a serious case infringes the act, does not carry on business comprised by the act for a 12 month period or no longer employs a person responsible for the mortgage deed trade who complies with the requirements of the act.

If a director or a member of the board does not meet the requirements of the act, the Danish Financial Authority can furthermore order the company to remove the director or order a board member to retire. In the event of non-compliance with the order the Danish Financial Supervisory Authority can revoke the permission of the company.

Finally, the Danish Financial Supervisory Authority is in a position to fine a company which is dealing commercially in mortgage deeds without a permission.