Secured Lending - Brazil

Antonio Giglio Neto

1. Are lenders required to register or be licensed by any government entity to
lend to local borrowers?
Yes. A lender must enroll in the Central Bank of Brazils CADEMP (Cadastro de
Empresa) and Brazils Federal Taxpayer Identification System CNPJ (Cadastro
Nacional de Pessoa Jurdica) to lend to local borrowers.
2. Must lenders register or be licensed by a government entity to take a security
interest or mortgage on collateral?
No, lenders are not required to register or be licensed by a government entity to
take security interests or mortgages on collateral.
3. Are lenders required to register loans made to local borrowers? Are the
borrowers required to register the loan?
The loan must be registered with the ROF (Registro de Operao Financeira),
which is the registration obtained from the Central Bank of Brazil through its
electronic system SISBACEN. Brazilian borrowers are the parties responsible for
registering the loan with the ROF.
4. Are there any exchange controls in effect?
Currently there are no exchange controls in effect, meaning that exchange
transactions are permitted inbound and outbound through financial institutions
duly licensed to operate in the exchange markets, provided that the transaction is
legal; the transaction has economic substance; the parties comply with the
provisions in relevant documentation; and all applicable taxes are duly paid.
All foreign exchange transactions are performed via foreign exchange
agreements. Through these agreements, individuals and companies that incur
foreign-currency obligations exchange Brazilian reais for foreign currency from
local financial institutions authorised to deal in foreign-exchange markets.
Conversely, individuals and entities that earn income in a foreign currency
exchange it for Brazilian reais.
As a general rule (with exceptions made for insurance companies when
operating internationally, and diplomatic representations), individuals and
companies domiciled in Brazil are not allowed to have bank accounts in a foreign
currency in Brazil.
Foreign loan transactions are subject to electronic registration at the Central
Bank of Brazil and at this time are not required to have any prior approval or
authorization by the authorities. Registration implies assumption of liability by the
involved parties for the legitimacy of the relevant documentation submitted to the
financial institution licensed to operate in the exchange markets.
As for exchange rates, Brazil adopts the so-called managed or dirty float
system, with the Central Bank occasionally intervening to change the direction of
the value of the Brazilian real in order to pursue monetary policy.

It is important to note that exchange-control policy is conducted by the National

Monetary Council (Conselho Monetrio Nacional), empowered by law to regulate
exchange transactions at its convenience in light of international and domestic
macroeconomic circumstances. As such, the National Monetary Council may
impose temporary restrictions on imports and remittances of yields on foreign
capital whenever there is a serious imbalance in the balance of payments. In
these circumstances, according to applicable law, the National Monetary Council
may also grant the Central Bank of Brazil a full or partial monopoly over
exchange transactions. However, these restrictions have not been applied for
over 20 years.
5. What taxes apply to foreign lenders or loans (ie withholding, stamp, etc)?
Interest and any other financial charges paid, credited, employed, delivered or
remitted by a local borrower to a foreign lender under the loan are subject to
withholding of Brazilian income tax at a rate of 15 per cent (or 25 per cent if the
lender is domiciled in a country that does not impose income tax or imposes
income tax at a rate lower than 20 per cent), which may be reduced, depending
on the foreign lenders location, pursuant to bilateral treaties on double taxation.
siderations regarding the provision of guarantees by a local subsidiary of a
borrower?
There are no restrictions or special considerations regarding the provision of
guarantees by a local subsidiary of a borrower.
As for financial-assistance restrictions applicable to domestic loan transactions,
however, Brazilian financial institutions may not lend to, or guarantee the
transactions of, their affiliates, except in limited circumstances subject to prior
approval by the Central Bank. For this purpose, the law defines an affiliate
primarily as any company or individual that holds more than 10 per cent of capital
stock in a financial institution or in which a financial institution holds more than
this stake. Moreover, financial institutions may not lend to their executive officers,
members of the management or advisory boards, statutory audit committees or
other bodies similar thereto, or to their respective spouses or relatives to the
second degree. Lending to controlling/controlled entities, members of
management or their respective spouses, relatives, and entities controlled by
such individuals, is also considered to be a crime against the national financial
system.
There are also certain restrictions currently imposed on financial institutions for
loans extended to public-sector entities, such as government-controlled
companies and governmental agencies, which are in addition to certain limits on
indebtedness to which these public sector entities are already subject under the
applicable legal provisions on public finance issues. Lending to these publicsector entities by foreign lenders is subject to prior approval by the Senate.
7. What are the principal types of security interests available to lenders in your
jurisdiction for security interests over stock, real property, personal property,
receivables or bank accounts? Are certain structures preferable?

The principal types of security interests available to lenders in Brazil are

mortgages (hipoteca), pledges (penhor), and fiduciary transfers/assignments
(alienao/cesso fiduciria).
It is important to note that, in theory, any contractual provision that authorizes a
lender to keep assets offered as security if a loan is not repaid will be null and
void. Only if the borrower and the lender so agree upon default may the borrower
transfer said assets to the lender as payment in kind of the outstanding debt.
Also, upon judicial and (in certain cases) extra-judicial enforcement of security,
the lender is allowed to become the definitive owner of the asset given as
security (adjudicao).
Mortgage
Mortgage is the appropriate type of security for real properties, their accessories,
railways, natural resources, ships and airplanes. Mortgages can only be created
by a public deed (escritura pblica) prepared by a notary public (Tabelio de
Notas), except in certain cases where the law expressly authorises a lien to be
created within a private credit instrument or certificate (hipoteca cedular). The
maximum term for a mortgage according to the Brazilian Civil Code is 30 years,
although it may be renewed through a new public deed.
Whenever a mortgage is created over a real property (the type of asset most
commonly subject to mortgages), both legal title to and possession of the
property remain with the mortgagor (borrower). If the mortgaged property
deteriorates or depreciates, and the borrower does not offer additional collateral,
the loan accelerates. If repayment is properly made by the borrower upon
maturity of the loan, then the loan is terminated and the mortgage, which is
accessory to the loan, is also considered automatically terminated. A release
document is signed and registered at the appropriate Real Estate Registry Office
for effectiveness with third parties.
In a bankruptcy scenario (similar to US chapter 7), a loan secured by a mortgage
is only subordinated to labour credits (up to a limit of 150 times the minimum
monthly wage per employee - currently about 76,500 reais or US$41,700). That
does not mean, however, that the lender is entitled to the full amount of the
mortgaged property. The property is sold to benefit the bankrupt estate, and the
lender is granted priority (with other creditors secured by mortgages and
pledges) in sharing the proceeds thereof, as well as the proceeds from the sale
of the bankrupt estates other assets.
Pledge
A pledge is a form of security granted over movable assets. Stocks, personal
movable assets, receivables and bank accounts can all be subject to a pledge.
Conventional subsets of pledge, set out by law, include rural pledges (penhor
rural), where pledged assets are agricultural machinery and equipment, crops,
inventories or animals; industrial and mercantile pledges (penhor industrial e
mercantil), for industrial machinery, materials, instruments, raw materials and
manufactured products; pledged rights and credit instruments (penhor de direitos

e ttulos de crdito), for receivables, rents, credits or credit instruments; and

pledged vehicles (penhor de veculos).
Whenever a pledge is created, title to the pledged asset remains with the pledgor
(borrower), but possession may or may not be temporarily transferred to the
lenders domain. If the pledged asset is sold, deteriorated or modified, the loan
accelerates. If repayment is properly made by the borrower upon maturity of the
loan, then the loan is terminated and the pledge, which is accessory to the loan,
is also considered automatically terminated. A release document is then signed
and registered at the appropriate Registry of Deeds and Documents, Real Estate
Registry Office, or traffic/transport/licensing department(s), as the case may be,
for effectiveness with third parties.
A pledge is ranked the same as a mortgage for bankruptcy purposes. In a
bankruptcy (similar to the United States chapter 7 - liquidation) scenario, a loan
secured by a pledge over the borrowers assets is only subordinated to labour
credits (up to a limit of 150 times the monthly minimum wage per employee
currently about 76,500 reais or US$41,700). That does not mean, however, that
the lender is entitled to the full amount of the pledged assets. These are sold to
benefit the bankrupt estate, and the lender is granted priority (with other creditors
secured by mortgages and pledges) in sharing the proceeds thereof, as well as
the proceeds from the sale of the bankrupt estates other assets.
Fiduciary Lien
Fiduciary types of liens - generally also applicable to stocks, real properties,
personal assets, receivables and bank accounts - give a lender fiduciary
ownership of an asset or right. Either a pledge or a fiduciary lien can be created
over stocks, personal assets, receivables and bank accounts. Mortgages or
fiduciary liens are alternatives for real properties.
If payment is properly made by a borrower upon maturity of the loan, title
automatically reverts to the original owner (borrower).
When a fiduciary lien is created, possession of the asset is deemed to be split
into direct possession, held by the borrower, and indirect possession, held by the
lender.
Under Brazilian law, the following types of fiduciary lien are possible: fiduciary
transfer of non-fungible movable assets; fiduciary transfer of fungible assets - to
domestic financial institutions only; fiduciary transfer of bank accounts; fiduciary
transfer of real properties; and fiduciary assignment of receivables.
In general terms, the advantage of fiduciary forms of security compared to
pledges and mortgages is that the lender typically enjoys greater protection in the
event of a borrowers bankruptcy (similar to United States chapter 7
liquidation). A lender may take possession of an asset de pleno jure, while the
borrowers other creditors have to abide by the terms and other conditions of a
bankruptcy proceeding. That is, since ownership is deemed to be transferred to
the lender, the asset is not in theory considered part of the bankrupt estate for
the purposes of apportioning among creditors in a bankruptcy proceeding.

In addition, in the event of judicial recovery (in Portuguese, recuperao judicial)

(similar to United States chapter 11), a lender secured by a fiduciary lien is not
subject to the recovery plan.
A lender secured by a mortgage or a pledge is subject to the recovery plan
approved by the creditors, but cannot be forced to release or to sell the
mortgaged or pledged property.
8. Is title insurance available?
We know that certain insurance companies are interested in providing title
insurance in Brazil. However, in practice, this product has not yet been widely
sold in the country.
9. How are security interests created, perfected and terminated?
Mortgage
As per question 7 above, mortgages are generally created by a public deed
prepared by a notary public. In addition to execution of a public deed, perfection
of a mortgage involves recording this public deed at the Real Estate Registry
Office in the jurisdiction where the mortgaged property is located. Once recorded,
the mortgage is in force for third parties, although until that time, it is deemed to
be legally binding between the contracting parties as of execution of the public
deed. A properly recorded mortgage gives the mortgagee preference over any
prior-but-unregistered mortgage created on that same property.
Pledge
A pledge agreement may be entered into through a private instrument (in
Portuguese, instrumento particular), and is registered either at a Registry of
Deeds and Documents in the debtors domicile in Brazil or at the Real Estate
Registry Office where the pledged assets are located, depending on the subset
of pledge adopted. A pledge is also annotated in the ownership certificate issued
by the appropriate traffic/transport/licensing department(s) in the case of pledged
vehicles.
As a general rule, legal possession of a pledged asset is transferred to the
lender, but physical possession may remain with the borrower.
In the case of receivables, except for formal credit instruments such as
promissory notes or trade bills (in Portuguese, duplicatas), the payer of the
receivables must be notified and instructed to pay in accordance with the pledge
agreement.
Fiduciary Lien
Fiduciary transfer or assignment may be entered into through a private
instrument registered at the Registry of Deeds and Documents in the borrowers
domicile. In the case of real properties, it is registered at the appropriate Real
Estate Registry Office. Finally, in the case of vehicles, fiduciary transfer is also
annotated on the ownership certificate issued by the traffic/transport/licensing
department(s).
Termination of a mortgage, a pledge or a fiduciary lien occurs upon full
repayment of the outstanding obligations under the loan. However, execution and

registration of a release document at the proper Registry Office, signed by the

lender, is required for termination to take effect with third parties.
10. What are the formalities of execution for local security documents? Are
proceedings before a notary required, or may pledges be executed
extraterritorially?
As previously explained, as a general rule, mortgages must necessarily be
created locally by a public deed prepared by a notary public.
As for pledges and fiduciary liens, a private instrument may be executed
extraterritorially, provided that, in that case, all signatures are notarised by a
notary public and legalised at the nearest Brazilian consulate, translated into
Portuguese by a sworn translator and filed (along with a sworn translation into
Portuguese) at a Registry of Deeds and Documents in Brazil.
Signatures on local security documents are also usually subject to local
notarization (reconhecimento de firmas), as a requirement for filing at the
appropriate registries.
11. How are security interests recorded? Are lien searches available to determine
the existence of other liens?
Mortgages are recorded on the certificate (matrcula) of the mortgaged property
by submitting the mortgage deed to the Real Estate Registry Office in the
jurisdiction where the mortgaged property is located and registered.
As for pledges, in addition to the registration requirements referred to in question
9 above: in the case of vehicles, the pledge is annotated on the ownership
certificate issued by the traffic/transport/licensing department(s); for shares,
pledges are created by annotating the pledge in the Nominative Shares Registry
book - if the shares are nominative - or in the financial institutions books, and
thereafter on the relevant deposit account statements - for book-entry shares.
Likewise, fiduciary types of lien are recorded with the mortgaged propertys
certificate, on the ownership certificate issued by the traffic/transport/licensing
department(s) (in the case of vehicles) and, in the case of shares, in the
Nominative Shares Registry book - if nominative - or on the financial institutions
books that is the custodian, and thereafter on the relevant deposit account
statements - for book-entry shares.
The existence of prior liens can be verified by researching at the appropriate
Real Estate Registry Office (for mortgages of real properties, crops or equipment
fixed to the real property); having access to the Nominative Shares Registry book
- if nominative shares - or to the financial institutions books that is the custodian
and the relevant deposit account statements - for book-entry shares (for pledges
or fiduciary transfer of shares); having access to the ownership certificate issued
by the competent traffic/transport/licensing department(s) (for pledges or fiduciary
transfer of vehicles); and researching at the Registries of Deeds and Documents
of the borrowers domicile (for other types of assets).
12. What are the registration or recordation fees and taxes applicable to taking a
security interest over assets?

Notary and registration fees vary from state to state. They are usually a
percentage of the debt and should be verified on a case-by-case basis at the
appropriate notary public or registry office. In the state of So Paulo, the current
ceilings are 26,893.40 reais (about US$15,000) for notary publics, 95,963.39
reais (about US$50,000) for Real Estate Registry Offices, and 10,613.03 reais
(about US$6,000) for Registries of Deeds and Documents.
There is no specific tax levied on registering or recording the security.
13. How is a security interest enforced?
Mortgage
In the event of default on a loan, once a favourable court decision has been
issued in a summary collection claim, the mortgage is enforced at the competent
court through: adjudication of the mortgaged property by the creditor; private sale
of the mortgaged property by the creditor; or a public auction to sell the
mortgaged property.
Actual transfer of ownership to the mortgaged property after any of the above is
ordered by the judge at the appropriate Real Estate Registry Office.
Pledge
In the event of default on a loan, as in most cases, the pledged assets remain in
the borrowers possession, and the lender files a lawsuit requesting possession
of the assets.
The lender is allowed to sell the pledged asset. This sale may take place in an
out-of-court proceeding, provided that the borrower has contractually granted the
creditor this right. If no such authorisation exists, then the sale must necessarily
be sought judicially through the same mechanism described above for the
mortgage. As explained above, it is also possible for the lender to adjudicate the
pledged assets, if duly approved by the court.
Fiduciary security
With fiduciary types of security, given that the assets are deemed to have been
transferred to the lender on a fiduciary basis, the lender may file suit seeking
seizure of the assets, which will be preliminarily granted if the borrower is proven
to have defaulted, thus restoring possession to them.
Once the lender has possession of the assets, it shall have the right to sell the
assets in an out-of-court private sale.
14. How are foreign judgments enforced?
A foreign judgment is recognised and enforceable in the Federative Republic of
Brazil if and when ratified by the countrys Superior Court of Appeals (Superior
Tribunal de Justia) as a valid judgment. Upon submission of a foreign judgment
to the Superior Court, the final decision must: comply with all formalities
necessary for its enforcement under the laws governing the legal documentation
in dispute; have been handed down by a competent court after proper service of
process; not be subject to any appeal and fulfill all requirements for foreclosure
pursuant to the laws in force in the place where such judgment was granted; not
violate Brazilian national sovereignty, public policy or good morals; be duly

translated into Portuguese by a sworn public translator; and be registered at the

appropriate Registry of Deeds and Documents in Brazil (with the translation
thereof).
15. Is the access of foreigners to local courts restricted in any way? Is a New
York loan agreement, or other agreement governed by foreign laws, enforceable
in local courts? What steps (other than translation) must be taken prior to seeking
enforcement locally of such an agreement?
In certain cases, according to Brazilian procedural law, a foreign creditor that has
no properties in Brazil must post bond for court costs and fees, in an amount
equal to 10 per cent to 20 per cent of the total amount in dispute. If the creditor
meets the requirements for a summary collection claim (processo de execuo),
no bond is required.
Generally speaking, standard international loan agreements are enforceable in
Brazilian courts. We have no reason to believe that the laws of the state of New
York would violate Brazilian sovereignty, public policy and good morals. This
opinion assumes that all other points referred to in question 14 are also present.
The steps to be taken prior to seeking enforcement locally are set out in question
14 above. In addition, as a precaution, to meet the requirement of the Brazilian
Civil Procedure Code (for a party to be entitled to commence a summary
collection claim, if enforcement is to be sought in Brazil), we usually recommend
that foreign documents be signed by two witnesses and that each disbursement
be represented by a promissory note in the amount of principal and estimated
interest.
In cases where the debtors assets and revenues are located in Brazil and
enforcement would therefore be sought in Brazil, it is worth mentioning that the
ubiquitous Bank Credit Certificate (Cdula de Crdito Bancrio (CCB)), created
in 2004, is a safe alternative for international loans. The CCB, by definition of law,
would ensure a right enforced through summary proceedings, as it is legally
accepted as a clear, defined, and enforceable credit in the amount indicated
thereon and/or in the account statements presented by the lender.
A CCB may be denominated in foreign currency and issued for foreign financial
institutions, provided that it is subject to Brazilian law and jurisdiction.