MB okays market guidelines for CTS financing

The Monetary Board (MB) has approved the prudential reference standards for contract-to-sell (CTS) financing, which allows real estate developers to sell property to buyers on an installment basis, with developers liquidating their holding of CTS receivables by selling the receivables to banks. The sale of CTS receivables is called CTS financing since it effectively gives developers a way to get immediate funding out of their receivables, the Bangko Sentral ng Pilipinas (BSP) explained Thursday. The system was jointly developed by the Bankers Association of the Philippines, the Chamber of Thrift Banks, and the Rural Bankers Association of the Philippines in coordination with the BSP. The MB hopes this approach on managing the risks in CTS financing will be immediately adopted by market players. The BSP considers it a step forward as it provides for a formal and uniform recognition of the various risks that arise from CTS financing. “This market guidelines approach may be considered a milestone,” the BSP said. “These guidelines specifically streamline market practice since no common standards had been recognized to-date.” The BSP did not move to formal prescriptive regulations at this stage since market players have defined the guidelines themselves to achieve balance between development and stability objectives. Among the key elements of the new market guidelines are the accreditation of both real estate developers and their specific projects, the eligibility of homebuyers who can avail of CTS financing, and the robustness of the participating banks’ risk management systems. The BSP said the guidelines should be considered as defining a minimum standard. “Banks should either comply or explain to the BSP any deviation of actual market practices from such standard,” it said. “Moreover, banks are expected to adopt stronger practices than the standard depending on their customer risk profile.” The market’s move was in line with the prudential thrust of the BSP to strengthen credit underwriting practices for real estate activities. The BSP had earlier approved a policy move that would eventually broaden its monitoring of real-estate financing transactions. The same policy initiative is expected to more closely link real-estate exposures to banks’ capital levels. Existing prudential limits may be re-visited as circumstances warrant. Also, the BSP previously revised the operation of the Truth in Lending Act to further assist borrowers and promote consumer protection and self-restraint. Creditors are now mandated to inform potential debtors of the true cost of borrowing using a standardized pricing model. The BSP has been stepping up on its oversight of real estate finance. The actions it has taken are designed to prevent excesses that may lead to financial crisis. They are likewise pro-active steps meant to mitigate any potential easing of banks’ credit standards under a global regime of low interest rates.— KBK, GMA News