Ministry of Finance of Republic of Latvia : LAW ON MORTGAGE BONDS

Chapter I

General conditions

Article 1

The following terms are used in this Law:

1) mortgage bond(s) – (hereinafter referred to as mortgage bond or bonds) – a security of

public circulation, issued by a bank and secured by mortgages and other collateral,

stipulated by this Law;

2) mortgage loan(s) (loan(s)) – is a loan, secured by pledged real estate (mortgage),

registered with the Land Book in accordance with the regulations of the Civil Law;

3) market value of the real estate to be mortgaged – the calculated value – the money

amount, determined as of the day of valuation, for which the property may be sold

(purchased), in a transaction between a willing seller and willing buyer.

Article 2

The terms "mortgage" and "mortgage bonds" and their derivatives together or separately may

be used only when referring to securities, which are issued and are in circulation in

accordance with this Law.

Article 3

The provisions of this Law shall be applied only to such mortgage loans which can serve as

security for the mortgage bonds in circulation as set forth in this Law.

Chapter II

Issue and Circulation of Mortgage Bonds

Article 4

The mortgage bonds are issued and circulated under the Law "On Securities", this Law and in

cases determined by the Law " On Securities Market Commission", under the regulations of

the Securities Market Commission.

Article 5

(1) Banks meeting the following criteria are entitled to issue mortgage bonds:

1) which have own capital not less than five million Lats; and

2) which are permitted to conduct all the banking operations (transactions), specified by

Paragraph 4 of Article 1 of the Law "On Credit Institutions" without any restrictions

imposed by the Bank of Latvia; and

3) which have submitted to the Securities Market Commission rules of the banks' board

of directors on mortgage transactions and internal bank procedures, which must

provide for the establishment of a Mortgage Bond Collateral Register and

management of data therein including mortgage claims and substitute collateral. The

mortgage claims and substitute collateral must be kept separately from all other assets

of the bank.

(2) Subsequent to the request of the Securities Market Commission, the Bank of Latvia will

issue an opinion on the procedures, specified in sub-paragraph 3 of Paragraph (1) of this.04-08-99 2

Article, as well as with the criteria, determined by sub-paragraphs 1 -2 of Paragraph (1)

of this Article.

Article 6

The following basic provisions shall be followed in respect of mortgage bonds:

1) the issue prospectus shall determine whether the mortgage bonds have a call option; if

there is a call option, it should set forth the procedures;

2) if the issue prospectus defines a term during which the mortgage bonds call option shall

not be exercised, the provisions of Article 1767 of the Civil Law are not applicable;

3) should a call option be exercised while the bonds are still in circulation, the accrued

interest payments should only be terminated on the interest payment date subsequent to

the mortgage bond retirement date;

4) if any part of mortgage bonds series is prepaid, then all the mortgage bonds of that

respective series shall be subject to a similar right of prepayment;

5) the interest coupon payment on mortgage bonds shall take place not less than once per


Article 7

If the mortgage bond prospectus provides for recalculation of the nominal value and interest

on mortgage bonds in accordance with changes in macroeconomic indicators, foreign

exchange rates or refinancing interest rate of the Bank of Latvia, or other changes, then the

basis for recalculation may be only the official data published by the State Statistics

Committee of Latvia or the Bank of Latvia.

Article 8

If a mortgage loan is included in a mortgage bond issued then the bank shall not refuse to

accept the repayment of such loan by delivery of a mortgage bond of the same series for the

nominal value of the loan outstanding.

Chapter III

Mortgage Bond Collateral

Article 9

(1) The mortgage bonds in circulation shall be backed in the full amount of their nominal

value at least by the same volume of mortgages. Guarantees of the government of Latvia

may fully or partially replace the mortgage bond security.

(2) The total interest expenditure on mortgage securities shall always be covered by at least

the same amount of total interest revenues from mortgage loans.

(3) The collateral of mortgages, government guarantees and interest income from mortgage

loans may be replaced by the substitute collateral (see below), not exceeding 20% of the

total amount of nominal value and accrued interest on mortgage bonds in circulation.

(4) The issuer may include as substitute collateral:

1) liquid T-bills of the Government of Latvia or securities, guaranteed by the

Government of Latvia, in the amount of 95 % of their market value, but not

exceeding nominal value of these securities;

2) a cash deposit with the bank and correspondent account with the Bank of Latvia.

(5) Redemption of the mortgage bonds in circulation and their interest payments (in

compliance with the issue rules) shall always be secured by principal and interest

repayments of mortgage loans of at least the same value (in accordance with the loan

agreement) and substitute collateral.

Article 10

(1) If as a result of the collection of a mortgage loan serving as collateral for the mortgage

bonds the bank takes onto its balance sheet the real estate, then such real estate may be

utilised as mortgage bond collateral. In this circumstance the real estate may be valued at

no more than 50% of the original mortgage loan collateral value, and the real estate may

be held as collateral at the reduced value for a maximum period of two years.

(2) A mortgage loan, obtained by the issuer from another bank pursuant to a contract, may

be utilised as a collateral for the mortgage bonds, only if either the issuer assumes

responsibility for valuation of the real estate, or the contract stipulates which bank is

responsible for the valuation.

(3) A mortgage may not serve as the collateral for bonds, if the bank, when granting the

mortgage loan, has not complied with the provisions of Article 52 of the Law on Credit


Article 11

(1) The bank shall keep a Mortgage Bond Collateral Register, to provide evidence of the

mortgage bonds collateral at any moment of their life.

(2) The form and content for the entries in the Mortgage Bond Collateral Register are to be

determined by the Securities Market Commission from time to time.

Article 12

(1) A mortgage shall be deemed incapable of providing acceptable collateral, if within three

months of a default the bank has not taken any steps to exercise the rights of mortgage as

defined in Paragraph (4) Article 17 or if the borrower has been declared insolvent by the


(2) A mortgage, incapable of providing the collateral in accordance with the provisions of

the Paragraph (1) of this Article, must be removed from the Mortgage Bond Collateral

Register only subsequent to execution of the bank's claim.

Article 13

(1) It is only permitted to utilise the mortgages included in the Mortgage Bond Collateral

Register, and substitute collateral to secure execution of the liabilities, arising on

mortgage bonds issued.

(2) The mortgages and substitute collateral, included in the Mortgage Bond Collateral

Register, shall be managed by the bank separately from its other assets.

(3) In case of bankruptcy of the bank, mortgages and substitute collateral, recorded in the

Mortgage Bond Collateral Register, shall not be included in the bankrupt's estate

(financial means), from which expenses of the insolvency and liquidation procedures are

covered and creditors' claims addressed.

Chapter IV

A Mortgage Loan

Article 14

A mortgage loan shall not exceed 60% of the market value of the real estate pledged as a

collateral for this loan.

Article 15

The market value of the real estate to be pledged is determined by persons, who have received

real estate valuation license (a professional qualifications certificate) in accordance with rules

set forth by the Cabinet of Ministers.

Article 16

The collateral of a mortgage loan shall only be such a real estate, which is not encumbered by

any prior debts registered with the Land Book, or if the creditor of any prior claim has

assigned the priority rights to the bank..04-08-99 4

Article 17

(1) The mortgage loan agreement must include at least the following obligations of the

borrower (mortgagor):

1) within the course of validity of the contract to make regular repayments of the loan,

repaying principal together with the interest in equal amounts (except during first 12

months and the last payment, if stipulated by the contract conditions);

2) to provide continuous and sufficient insurance of the mortgaged property during the

whole period of mortgage agreement validity or reimburse the bank for the costs of

insuring the property;

3) not to cash in lease or rent payments from the tenants (lessees) of the pledged asset

for more than one year in advance.

(2) Loans in the amount of up to 20 % of the total amount of loans included in the Mortgage

Bond Collateral Register may not comply with the sub-paragraph 1) of Paragraph (1) of

this Article.

(3) The contract shall stipulate such activities of the borrower (mortgagor), which reduce or

may reduce the value of the mortgaged property, and therefore require a prior written

consent of the bank.

(4) The bank is entitled to withdraw unilaterally from the mortgage agreement before expiry

of the contract and apply to the court with a claim to sell the mortgaged real estate in the

following cases:

1) the mortgagor has fallen into arrears with the payment or violated other

obligations stipulated in Paragraph (1), Article 17;

2) the market value of the mortgaged real estate has been essentially reduced and the

amount of the claim exceeds 60% of the value of the property as a result of

activities or inactivity of the borrower (mortgagor).

Article 18

The loan may be renewed not more than twice and only, if complying with the provisions of

sub-paragraph 1) of Paragraph (1) of Article 17 of this Law, at least 33 % of the loan amount

have been repaid during the initial term, and each term of renewal.

Article 19

The insurance contract or policy with assignment of the insurance payment to the bank must

be held with the bank during the whole period of the mortgage agreement validity.

Article 20

Should the market value of the real estate decrease due to reasons outside the borrower's

control, the bank is entitled to request repayment of the part of loan not secured as specified

in Article 14 of this Law.

Chapter V


Article 21

(1) The bank, issuing mortgage bonds, shall monthly submit to the Securities Market

Commission, in term and form established by it, the information, describing the

underlying mortgage bond security.

(2) The Securities Market Commission is entitled to require additional information and

receive documents, containing such information, as well as, carrying out an examination

of the valuation of the mortgaged property, to insure the safety of the mortgages, recorded

in the Mortgage Bond Collateral Register..04-08-99 5

Article 22

Should a bank not comply with the requirements under sub- paragraphs 1 – 2 of Paragraph (1)

of Article 5 of this Law or not follow in its operations the internal procedures, specified in

sub-paragraph 3 of Paragraph (1) of Article 5, it is the duty of the Bank of Latvia to notify the

Securities Market Commission, indicating the concrete violations.

Article 23

(1) The Securities Market Commission is entitled to suspend the issue of mortgage bonds should any of the following arise:

1) in case it has received information from the Bank of Latvia, specified in Article 22 of this Law; or

2) if according to the evaluation of the Commission, the security registered in the Mortgage Bond Collateral Register does not comply with requirements of this Law; or

3) if the terms and conditions of mortgage transactions are not followed.

(2) If the Securities Market Commission decides to suspend the issue of mortgage bonds, it shall specify the reasons for such a decision and set a deadline for correction of the stated


(3) Suspension of the mortgage bond issue shall not affect the liabilities of the issuing bank, as established in the mortgage bond issue prospectus, and shall not create rights to

demand pre-mature redemption of the bonds.

Transitional Provisions

With this Law taking effect, Regulations No. 127 "Decree on Mortgage Bonds" (Latvijas Republikas Saeimas un Ministru Kabineta Zi n ot a js, 1998, No. 10) issued by the Cabinet of Ministers according to provisions of Article 81 of the Satversme (Constitution) become ineffective.

The Law passed by the Saeima (Parliament) on September 10, 1998.

President of the State G. Ulmanis

Riga, September 29, 1998