Can foreign banks participate in the foreclosure of real estate?

On July 21, 2014, President Benigno Simeon Aquino III signed into law Republic Act No. 10641,  which amended Republic Act No. 7721, to further liberalize the entry of foreign banks in the Philippines.

The law became effective on July 31, 2014 following its publication in the Official Gazette on July 15, 2014.

The new law, in its Section 6, now allows foreign banks to bid and take part in the foreclosure of real estate that were mortgaged to them.  It provides that “foreign banks which are authorized to do banking business in the Philippines through any of the modes of entry under Section 2 hereof shall be allowed to bid and take part in foreclosure sales of real property mortgaged to them, as well as to avail of enforcement and other proceedings, and accordingly take possession of the mortgaged property, for a period not exceeding five (5) years from actual possession.” The law further provides that in no event “shall title to the property be transferred to such foreign bank.  In case said bank is the winning bidder, it shall, during the said five (5)-year period, transfer its rights to a qualified Philippine national, without prejudice to a borrower’s rights under applicable laws. Should the bank fail to transfer such property within the five (5)-year period, it shall be penalized one half (1/2) of one (1) percent per annum of the price at which the property was foreclosed until it is able to transfer the property to a qualified Philippine national.”

Thus, the  provision removes the prohibition against foreign banks  bidding or taking part in any sale of such real property in case of foreclosure.  To this extent, the new law amends  Section 1 of Republic Act No. 133, as amended by R.A. 4882 in 1967, which provides as follows:

“Section 1.    Any provision of law to the contrary notwithstanding, private real property may be mortgaged in favor of any individual, corporation or association, but the mortgage or his successor in interest, if disqualified to acquire or hold lands of the public domain in the Philippines, shall not take possession of the mortgaged property during the existence of the mortgage and shall not take possession of mortgaged property except after default and for the sole purpose of foreclosure, receivership, enforcement or other proceedings and in no case for a period of more than five years from actual possession and shall not bid or take part in any sale of such real property in case of foreclosure: provided, that said mortgagee or successor in interest may take possession of said property after default in accordance with the prescribed judicial procedures for foreclosure and receivership and in no case exceeding five years from actual possession.”

Observations

The lifting of the prohibition applies only to foreign banks allowed to operate in the Philippines under R.A. 7721, as amended. It does not affect non-bank creditors taking mortgages of real estate.  Other foreign creditors may not still bid or participate in the foreclosure of real estate. The prohibition contained in section 1 of R.A.  133, as amended, stays with respect to them.

Secondly, foreign banks can only bid and take part in the foreclosure of real estate mortgaged to them.  It does not authorize them to participate in the foreclosure of assets mortgaged to other banks.

Indeed,  R.A. 10641 does not expressly repeal Section 1 of R.A. 133, as amended.

Most importantly, note the phrase “foreign banks which are authorized to do banking business in the Philippines through any of the modes of entry under Section 2 hereof” in the new law.  Take particular note of the sub-phrase: “through any of the modes of entry under Section 2”.

Section 2 of R.A. 7721, as amended by R.A. 10641,  in turn, provides:

SEC. 2. Modes of Entry. – The Monetary Board may authorize foreign banks to operate in the Philippine banking system through any one of the following modes of entry: (i) by acquiring, purchasing or owning up to one hundred (100) percent of the voting stock of an existing bank; (ii) by investing in up to one hundred (100) percent of the voting stock of a new banking subsidiary incorporated under the laws of the Philippines; or (iii) by establishing branches with full banking.

The question then is asked: Is the prohibition under Section 1 of R.A. 133, as amended, still applicable to foreign banks that have already gained entry in the Philippine banking system prior to R.A. 7221?

Well, the question may be more academic than real, but it may be worth clarifying the issue soonest to prevent legal complications in the future. After all, there are strong legal arguments supporting the view that these foreign banks should be allowed to bid and participate in the foreclosure of real estate.

The author is a senior partner of the Angara Abello Concepcion Regala & Cruz Law Offices (Accralaw) and is a law professor in the Ateneo Law School.  The views in this column are exclusively his, and should not be attributed in any way to the institutions with which he is currently affiliated.