Mexico Will Regulate Employer-Deducted Payroll Loans
Mexico will regulate payroll loan agreements with automatic employer deduction. To this end, on Feb. 18, 2021, the Mexican Senate approved a bill in order to reform provisions under the General Law of Negotiable Instruments (Ley General de Títulos y Operaciones de Crédito or LGTC), the General Law of Organizations and Activities Ancillary to Credit (Ley General de Actividades Auxiliares del Crédito or LGAAC) and the Law for the Protection and Defense of Financial Services Users (Ley de Protección y Defensa al Usuario de Servicios Financieros). The Senate's bill was sent to the Chamber of Representatives (Cámara de Diputados) where its approval is expected during the current legislative term.
Payroll Loans and Sources of Payment
The bill adds a new Title III to Chapter IV of the LGTC, in order to regulate the so-called payroll credit agreements with automatic employer deduction (the Payroll Loans). Payroll Loans are defined as loan agreements, whether term or revolving facilities, whereby the parties thereto agree that "the borrower shall repay the loan by means the issuance of a payment order (libranza) (Payment Order) instructing a third party to make such repayments using one or more of the sources of payment" set forth in article 310 Bis of the LGTC.
These sources of payment are fundamentally cash or cash equivalents of a borrower originated under a labor or equivalent relationship, including the following Sources of Payment:
- payable salary
- extraordinary labor payments (bonuses), indemnities or equivalent fees
- pensions and life-long annuities (renta vitalicia)
- liquid funds on deposit in savings accounts, including voluntary pension accounts
- payable professional fees which are equivalent to salaries (asimilado a salarios) or any other compensation in favor of a borrower arising from a commercial relationship (with an employer)
Any loan agreement whose purpose is the payment of services and is repaid with funds from a Source of Payment shall be deemed a Payroll Loan. The reforms do not apply to social security loans such as Institute of the National Housing Fund for Workers (Instituto del Fondo Nacional de la Vivienda para los Trabajadores or INFONAVIT), Housing Fund of the Institute of Security and Social Services of State Workers (Fondo de la Vivienda del Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado or FOVISSTE) y National Fund for the Consumption of Workers (Fondo Nacional para el Consumo de los Trabajadores or FONACOT) credit facilities.
The highlights of the bill are the following:
- Only financial institutions under Mexican law may act as lenders under Payroll Loan agreements (mainly credit institutions and commercial banks) and multi-purpose financial entities (Sociedad Financiera de Objeto Múltiple or SOFOMs).
- Prior to the execution of a Payroll Agreement, employers of the borrowers thereunder or the social security institutions (SSI) to which such borrowers are affiliated must enter into a payment agreement (convenio de cumplimiento) (Payment Agreement) with the lender, in order to regulate that the employer or SSI shall be responsible of deducting amounts from the designated Source of Payment and making the transfers to repay the Payroll Loan to such lender.
- The Payment Agreement may not contemplate fees or other form of consideration in favor of employers or SSIs, except for reasonable and documented out-of-pocket expenses. Other parties such as labor unions, chambers of commerce and "good faith entities may execute Payment Agreements.
- The forms of Payment Agreement shall be registered with the Commission for the Protection and Defense of Financial Users (Comisión para la Protección y Defensa al Usuario de Servicios Financieros or CONDUSEF).
- Upon contracting a Payroll Loan, borrowers shall issue a Payment Order instructing an employer or SSI to make partial or total repayments of such Payroll Loan "on its behalf" in favor of the lender. The Payment Order shall be irrevocable as long as there are amounts outstanding and unpaid under the Payroll Loan. The Payment Order shall be valid to the extent the underlying labor, social security or commercial relationship with a borrower is valid and existent.
- If a borrower has contracted more than one Payroll Loan, the employer or the SSI shall honor its obligations under any Payment Order without benefitting any lender over another (pro rata treatment) and each lender shall the priority and general creditor rights under applicable law.
- Employers must discount and effect repayment of the Payroll Loan within four business days after the Source of Payment funds are made available to the borrower.
- Employers or the SSIs shall serve a notice to the borrower and the lender, "in an indubitable fashion" that the corresponding deductions and repayments have been made.
- Employers shall have a 24-month period to implement an "online, automated, auditable and specialized" system where borrowers may access and consult any information related to the Payroll Loans.
- Employers who fail to transfer a deducted amount and effect repayments of the Payroll Loan to a lender shall be deemed as legal depositaries of such amount and will be liable for any interest or commissions triggered as result of its failure to perform.
- If approved in the Senate, the bill will enter into effect six months after its publication in the Official Federal Gazette (Diario Oficial de la Federación).
- The new provisions would not apply to existing payroll loan agreements unless such agreements are refinanced after the reforms have entered into effect.
Statutory Requirements of Payroll Loans
All Payroll Loan agreements must comply with the following requirements:
- Expressly identify the Source of Payment applicable to the Payroll Loan.
- Partial repayments or amortizations may not exceed the borrowers' payment capacity (PC). The new provisions of the LGTC will include a formula in order to calculate the borrowers' borrowing base relative to their payment capacity.
The formula is as follows:
PC = FCE - C where the following apply:
a. Fixed Cash Equivalents (FCE) = the amount corresponding to the Source of Payment minus 1) legal deductions and 2) existing debt
b. Compensating Factor (C) = 1) with respect to borrowers earning an amount greater than the minimum wage in Mexico City multiplied by three (> 3*SMV), C shall be 560 investment units (unidades de inversión or UDIs); and 2) with respect to borrowers earning an amount inferior to the minimum wage in Mexico City multiplied by three (< 3*SMV), C shall be 100 UDIs
- Payroll Loans shall include provisions that ensure a "constant, uninterrupted" amortization of the loan on the applicable repayment dates.
- Unless otherwise expressly agreed, Payroll Loans shall accrue interest from the date of execution (fecha de contratación).
- Any and all interest rates and commissions shall be expressly in writing.
- The deduction limits and exception set forth in Articles 97 and 110 (alimonies, labor union fees, INFONAVIT loan payments, etc.) shall not be applicable to Payroll Loans.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.