Vietnam central bank circular does not prohibit loans to buy future-formed houses

Circular No. 22/2023 of the State Bank of Vietnam (SBV) basically does not affect access to loans to buy future-formed houses mortgaged by those houses as some people fear, writes Nguyen Van Dinh, a real estate legal expert.

Purpose of Circular No. 22, rules on procedural law and substantive law

It is necessary to clearly understand the nature, scope of coverage and purpose of the State Bank of Vietnam (SBV) governor’s issuance of Circular No. 41/2016 and Circular No. 22/2023.

Circular No. 41, dated December 9, 2015, stipulates the capital adequacy ratios of banks and foreign bank branches (generally called "banks"). Circular No. 22 was issued in 2023 to amend some articles of Circular No. 41.

Thus, Circular No. 41 itself as well as the amended contents of Circular No. 22 only aim to stipulate the capital adequacy ratios of banks.

What was the legal basis for the SBV governor to issue these circulars?

The two circulars clearly state that the promulgation is based on the Law on the State Bank of Vietnam 2010 and the Law on Credit Institutions 2010 (amended and supplemented in 2017).

Accordingly, Article 4 of the Law on the State Bank of Vietnam stipulates that the tasks and power of the SBV are "to stabilize the value of currency; ensure the safety of operations of banks and the system of credit institutions; and ensure the safety and efficiency of the national payment system".

At the same time, Article 93 of the Law on Credit Institutions stipulates that credit institutions must issue internal regulations, including "regulations on assessment of asset quality and compliance with the minimum capital adequacy ratio". These internal regulations must be immediately sent to the SBV for management.

Article 130 of the Law on Credit Institutions states that credit institutions must maintain safety ratios including "the minimum capital aquadecy ratio of 8% or higher as prescribed by the SBV in each period; the maximum ratio of short-term capital used for medium- and long-term loans". Article 130 also assigns the SBV to "specify aquadecy ratios for each type of credit institution".

The above regulations were the basis for the SBV governor to issue Circulars No. 41 and No. 22 stipulating capital adequacy ratios of banks. It should be noted that meeting or failing to meet the capital adequacy ratio criteria is the basis for the central bank to consider applying measures to credit institutions to ensure the safety of banking operations, including "early intervention" and "special control" (stipulated in Articles 130a and 145 of the Law on Credit Institutions).

The law does not include single regulations but is an overall system of legal norms - general rules of conduct promulgated in many documents, consistent with their functions, tasks and scope of state management of the promulgating agency. The development and promulgation of legal documents (laws, decrees and circulars) must comply with principles, authority, form, order and procedures of the Law on Promulgation of Legal Documents.

Article 8 of the Law on Promulgation of Legal Documents clearly stipulates: "Legal documents do not re-stipulate contents that have been mentioned in other legal documents."

Following the principles and requirements for promulgating legal documents, the implementation of housing transactions, including transaction forms and conditions of housing for transactions, must be stipulated in the Housing Law, which is a specialized law and "substantive law" regulating residential property.

In fact, regulations related to housing transactions have been clearly and fully stated in Chapter 8 of the 2014 Housing Law (from Article 117 to Article 158). The Housing Law allows the mortgage of houses, including existing and future-formed houses, to borrow capital.

Specifically, Article 147 of the Housing Law stipulates that organizations and individuals purchasing future-formed houses in a developer’s housing construction investment project may mortgage these houses at a credit institution operating in Vietnam to borrow capital to buy them. Articles 148 and 149 of the Housing Law specify conditions for mortgage of future-formed houses and handling of mortgaged assets.

In addition, Article 295 of the 2015 Civil Code, as a general law featuring property relationships of individuals and legal entities, also stipulates that assets to be formed in the future can be used as collateral to perform obligations, including mortgages.

Article 8 of the government’s Decree No. 21/2021/ND-CP on ensuring the performance of obligations also clearly states: "Assets used to ensure the performance of obligations include existing assets or assets to be formed during the future, unless the Civil Code or other relevant laws prohibit the trading or transfer of ownership rights..."

Thus, the prohibition of using assets to be formed in the future (including future-formed houses) as collateral must be stipulated in the law, while both the Civil Code and the Housing Law do not have any provisions prohibiting it.

Therefore, in terms of authority and legal effect, the circulars of the SBV governor, and even the decrees of the government, cannot feature regulations prohibiting the use of houses to be formed in the future as collateral. This is also completely consistent with the provisions of Article 14 of the Constitution (human rights and civil rights can only be limited according to the provisions of law, and cannot be limited by sub-law documents).

Circulars No. 41 and No. 22 are only documents to detail the contents assigned to the SBV by the Law on Credit Institutions and the Law on State Bank of Vietnam to ensure the safety of operations of banks and the system of credit institutions, as well as the safety of the national payment system.

The Law on Credit Institutions is only a "procedural law", stipulating the establishment, organization and operation of credit institutions, meaning the professional activities of banks, including granting credit and accepting mortgage of assets to secure loans.

The legal regulations on the type of property used for mortgage must be specified in the "substantive law" that governs that type of property. For example, the mortgage of land use rights must comply with the Land Law while the mortgage of housing must abide by the Housing Law.

This principle was also discussed in the process of drafting the amended Law on Credit Institutions (approved by the National Assembly on January 18, 2024), during which the drafting and verifying agencies agreed that when handling collaterals that are real estate projects to settle debt, the Law on Real Estate Business (substantive law) must be applied without following order and procedures mentioned in the Law on Credit Institutions (procedural law).

No prohibition on loans to buy future-formed houses

Circular No. 22 amends Clause 11, Article 2 of Circular No. 41, stipulating that real estate as collateral for loans must be completed for handover under the purchase and sales contract, except for social housing and housing under the government’s support programs and projects.

This regulation stirs concerns among developers and people, but in reality, Clauses 10 and 11, Article 2 of Circular No. 41 are only intended to distinguish "home mortgage loans" (from existing housing) and loans secured by other real estate (for example, future-formed houses). It aims to determine the credit risk coefficient for each type of asset, including loans secured by real estate and house mortgage loans (specified in Article 9 of Circular No. 41).

Circular No. 41 and Circular No. 22 do not include any regulations restricting loans to buy houses to be formed in the future. Lending to buy future-formed houses remains stable under Circular No. 26/2015 dated December 9, 2015 of the SBV governor.

Specifically, Circular No. 26 clearly stipulates the order and procedures for mortgage and mortgage lien release at credit institutions for assets including housing projects; housing to be formed in the future by developers and investors. Now this circular is still in effect.

On the other hand, Circular No. 22 amends Clause 11, Article 2 of Circular No. 41 on home mortgage loans, but does not amend Clause 10, Article 2 on loans secured by real estate. Thus, Clause 10, Article 2 is a framework regulation, stipulating that the collateral can be a real estate project or property that is a product of the project, including existing houses and construction works or future-formed ones.

Clause 11, Article 2 of Circular No. 41 stipulates that a "home mortgage loan" is a separate case of "loans secured by real estate" according to Clause 10, Article 2. For example, the regulation at Point a, Clause 11, Article 2 of Circular No. 41 (amended by Circular No. 22) is for cases where the loan is secured by the "house completed for handover according to the purchase and sale contract". It is not valid for loans secured by real estate formed in the future. The mortgage of a future-formed house for home loans will comply with the regulations on "loans secured by real estate" (Clause 10).

Thus, the provisions of Circular No. 22 basically do not affect the obtaining of loans to buy future-formed houses as some people fear. On the other hand, the provisions of Point a, Clause 11, Article 2 of Circular No. 41 are an explanation of terms, do not contain mandatory rules of conduct and do not exclude "loans secured by real estate", including houses to be formed in the future.

Furthermore, when Circular No. 22 had not yet become effective, Clause 11, Article 2 of Circular No. 41 already stipulated a condition that "the house has been completed according to the purchase and sale contract". Meanwhile, Circular No. 22 only adds a condition that the house has been handed over.

According to recent concerns, it was not possible to get loans using future-formed houses as collateral under Circular No. 41. However, over the past eight years, customers have still been able to mortgage their future homes to borrow capital according to Circular 26/2015, proving that such concerns are unfounded.