Salient Points of The Financial Institutions Strategic Transfer (FIST) Act

On February 17, 2021, President Rodrigo Duterte signed the Financial Institutions Strategic Transfer (FIST) Act (Republic Act No. 11523).

The Financial Institutions (FI) referred to in the FIST law are the credit-granting institutions such as the Bangko Sentral ng Pilipinas (BSP), banks, financing companies, investment houses, lending companies, accredited microfinance nongovernment organizations (NGOs), and insurance companies.

FI’s shall also include Government Financial Institutions (GFI) including Philippine Deposit Insurance Corporation (PDIC), Landbank of the Philippines (LBP), and Development Bank of the Philippines (DBP); Government-owned-or-controlled corporations (GOCC) including National Home Mortgage Finance Corporation (NHMFC), Philippine Guarantee Corporation (PGC), Home Development Mutual Fund (HDMF), Social Security System (SSS), Government Service Insurance System (GSIS), Small Business Corporation (SBC), and National Housing Authority (NHA); and other institutions licensed by the BSP to perform (i) quasi-banking functions and (ii) credit-granting activities including non-stock savings and loan associations, and nonbank credit card issuers.

FIST aims to strengthen FIs that are vital in providing much needed liquidity into the financial system amidst the pandemic and to revitalize the economy at a faster pace and with more lasting positive effects.

Establishing a Financial Institutions Strategic Transfer Corporation (FISTC)

FIST allows the creation of a Financial Institutions Strategic Transfer Corporation (FISTC) which shall have a minimum authorized capital stock of Five Hundred Million Pesos (Php500,000,000.00), a minimum subscribed capital stock of One Hundred Twenty-Five Million Pesos (Php125,000,000.00), and a minimum of paid-up capital of Thirty-One Million Two Hundred Fifty Thousand Pesos (Php31,250,000.00). It cannot be organized as a one person corporation (OPC) and if the FITSC will acquire land, at least sixty percent (60%) of its outstanding capital stock shall be owned by Filipinos.

The application for the establishment and organization of a FISTC must be filed with the Securities and Exchange Commission (SEC) within thirty-six (36) months from the effectivity of FIST.

Within the period prescribed by the SEC reckoned from the incorporation of the FISTC, the FISTC must submit the FISTC Plan including among others its investment policies, contribution plan including the amounts and draft of subscription documents, features of the Investment Unit Instruments (IUI) including specific amounts issued and to be issued, rights of holders of the IUIs, draft agreements for the appointment of trustees and agents with respect to the IUIs and the Non-Performing Loans (NPL) acquired from an FI; name of the external auditor of the FISTC; roles and responsibilities of the trustees, advisors, loan servicers and property managers; draft form of financial reports of the FISTC; details of distribution policies; methods for the increase and decrease of future fund contribution, methods for the alteration or modification of the approved FISTC Plan, methods for the liquidation and distribution of assets to the holders of IUIs, details of credit enhancements like guarantee or standby letters of credit or advances that may be extended to the FISTC by an entity which shall not be the selling FI, its parent, subsidiaries or affiliates; and other documents required by the SEC.

The FISTC is allowed to issue IUIs pursuant to its plan after it secures from the SEC an Approval Certificate. The IUIs may only be sold to qualified buyers such as banks, registered investment houses, insurance companies, pension funds or retirement plans maintained by the government or managed by a bank or other persons authorized by the Bangko Sentral to engage in trust functions, investment companies, or such other person as the SEC may by rule determine as qualified buyers, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial and business matters, or amount of assets under management.

Powers of FISTCs

Once established, FISTCs shall have the power to invest in, or acquire from FI’s non-performing assets (NPA) that the FISTC can lease, mortgage, sell, exchange, usufruct, or securitize, to generate profits. It can engage third parties to manage, operate, collect and dispose said NPAs. FISTCs can also rent, lease, hire, subject to security interest, mortgage, transfer, sell, exchange, usufruct, secure, securitize, collect rents and profits and other similar acts concerning said NPAs. FISTCs can spend funds to renovate, improve, complete or alter its NPAs acquired from an FI. FISTCs can issue equity or participation certificates or other forms of IUIs for the purpose of acquiring, managing, improving and disposing of its NPAs acquired from an FI.

It must be emphasized that the FIST law shall be applicable to assets that have become non-performing as of December 31, 2022.

In case of non-performing loans (NPL), FISTCs are authorized to restructure debt, condone debt and undertake other restructuring related activities. FISTCs have the power to enter into dation in payment arrangements, foreclose judicially or extrajudicially, and utilize other forms of debt settlements involving NPL’s.

With regard to business reorganization or rehabilitation of a borrower, the FISTC can buy or transfer shares issued by the borrower subject to the provisions of the Revised Corporation Code with respect to the rights of the shareholders of the borrower company, and apply other measures or restructuring techniques with the approval of the SEC.

FISTCs are also allowed to guarantee credit, and accept, intervene or honor the bills of borrowers, advance funds to borrowers as may be required for an acquired asset or any debt restructuring agreement pursuant thereto, or under any court order or rehabilitation plan, engage the services of third-party asset servicing company for the collection and receipt of the debt payments for debts under restructuring or business reorganization, management and disposition of assets of the FISTC in accordance with the rules, procedures and conditions prescribed by the Securities and Exchange Commission, or by the courts.

Finally, FISTCs can require from selling FIs a data package which should contain, among others, scans of all pertinent documents and particulars of each property or loan account being sold.

It must be noted that the transfer of NPAs from an FI to a FISTC shall be subject to prior Certification of Eligibility as NPA by the appropriate regulatory authority having jurisdiction over its operations. The Certification shall be issued within twenty (20) working days from the submission of application by the FI for eligibility and it is required to avail incentives and exemption privileges under FIST.

No transfer of NPLs to the FISTC shall take effect unless the FI concerned shall give prior notice to the borrowers of the NPLs and all persons holding prior encumbrances upon the assets mortgaged or subject to security interests. The borrower has thirty (30) days from receipt of notice from the FI to restructure or renegotiate the loan.

Incentives and exemption privileges

The transfer of NPAs from the FI to the FISTC, and from the FISTC to a third party or dation in payment by the borrower or by a third party in favor of an FI or in favor of the FISTC shall be exempt from Documentary Stamp Tax (DST), Capital Gains Tax (CGT) imposed on the transfer of lands and/or capital assets, Creditable Withholding Income taxes imposed on transfer of land and/or buildings treated as ordinary assets, and Value Added Tax (VAT) on the transfer of NPAs.

The abovementioned transfers shall also enjoy fifty percent (50%) discount on registration and transfer fees on the transfer of real estate mortgage and security interest to and from FISTC; fifty percent (50%) discount on filing fees for foreclosure initiated by the FISTC in relation to any NPA acquired from and FI; and fifty percent (50%) discount on the land registration fees.

All sales or transfers of NPAs from the FIs to the FISTC or transfers by way of dation in payment by the borrower or by a third party to the FI shall be entitled to the privileges enumerated herein for a period of not more than two (2) years from the date of effectivity of FIST. Transfers from the FISTC to a third party of NPAs acquired by the FISTC within such two (2)-year period or within such extended period, or transfers by way of dation in payment by a borrower or by a third party to the FISTC shall enjoy the above privileges for a period of not more than five (5) years from the date of acquisition by the FISTC; provided that the properties acquired by the FISTC from GFIs or GOCCs that are devoted to socialized or low-cost housing shall not be converted to other uses.

With regard to FISTCs that will infuse capital to the borrower with NPL, the capital infusion shall be exempt from DST. With regard to FISTCs that will lend financial assistance for the purpose of rehabilitating a borrower’s business, the FISTC will also enjoy exemption from income tax on net interest income, DST, and mortgage registration fees on new loans in excess of existing loans extended to borrowers with NPL’s which have been acquired by the FISTC. In both circumstances, the tax exemptions and fee privileges shall apply for a period of not more than five (5) years from the date of acquisition by NPLs by the FISTC.

Net Operation Loss Carry-Over (NOLCO) of Participating FIs

Any loss that is incurred by an FI as a result of the transfer of an NPA within the two (2)-year period from the effectivity of the FIST act shall be treated as ordinary loss which can be carried over for a period of five (5) consecutive taxable years immediately following the year of such loss. Nevertheless, any tax savings derived by the FI from the NOLCO shall not be made available for dividend declarations but shall be retained for capital build-up.

Click here to read the entire text of FIST or Republic Act No. 11523.