New Dominican Law Facilitates Development Of Country’s Mortgage Market

Wednesday, August 15, 2012 - 11:06

The Dominican Republic recently enacted a law that is helping the country’s mortgage market develop while providing significant opportunities for investors – and a boost to the country’s efforts to expand its housing stock.

The new law contains a number of key definitions, including trust, settlor, trustee and beneficiary. As explained in the new law, a settlor is a person who transfers property to a trust, which is under the care of a legal entity (such as an investment fund manager; a securities intermediary; multiple-service banks; savings and loans; and other financial institutions) authorized to act as a trustee, for the benefit of a beneficiary.

Under the law, a trust may be established for any legal purpose or objective, including for the purpose of promoting the development of the country’s housing market. The law presumes that a trust is irrevocable and provides that it may not be amended unless otherwise expressly stated in the document that has created the trust. The trust document has to be registered with the Mercantile Registry of the Chamber of Commerce and Production that has jurisdiction over the trustee; the transfer of rights subject to registration is perfected after the change of ownership of the property in the trust actually is registered.

Significantly, under the new Dominican law, all property and rights that are part of a trust constitute a separate and independent estate, separate from the settlor’s property – and separate from any other trust property that the trustee of the trust also is managing. Also, as might be expected, creditors of a beneficiary of a trust may not seek to enforce their claims against trust property, except that they can pursue revenues and profits generated by the trust that the trustee is required to deliver to the beneficiary. By the same token, creditors of a settlor may not seek to enforce their claims against property transferred by the settlor to a trust unless their claims relate to the transfer of the property to the trust. A trust’s creditors are permitted to enforce their claims against trust property, and trust property can be pursued where the trust has been fraudulently created.

Kinds Of Trusts

Among the kinds of trusts that the new Dominican law permits to be created are trusts known as “real estate investment” or “real estate development” trusts. These trusts have the primary objective of investing in real estate projects in various stages of design and construction.

The law also recognizes a trust for the public offering of securities, which has the primary goal of backing up public offerings of securities made by the trustee, with the trust property as security for the debt.

Another important kind of trust is a collateral trust, which is designed to secure compliance with certain obligations by the settlor for the benefit of a third party or third parties.

Securities Offerings

As the new Dominican law recognizes, a trust may issue securities. Moreover, the law specifically authorizes a trust to issue securities to raise funds for mortgage financing for Dominican housing and the Dominican construction industry. The kinds of securities that a trust may issue includes

  • mortgage notes;
  • mortgage bonds;
  • mortgage certificates;
  • mortgage participation agreements;
  • endorsable or non-endorsable mortgage loans;
  • participations in closed investment funds and mutual or open funds;
  • trust securities; and
  • mortgage-backed securities.
Insurance For Mortgage Securities

The new Dominican law authorizes mortgage insurance to provide coverage for mortgage loan losses as a result of default by a debtor. Financial institutions, in their discretion, may insure all or part of their mortgage loans with this type of insurance. Similarly, financial institutions may obtain private insurance to cover financial losses generated as a result of a default by a debtor or debtors. These policies may be bought from insurance companies that are authorized to operate in the Dominican Republic.

Additionally, the new law provides that financial institutions may enter into hedging arrangements designed to secure the payment and the performance of loans; financial instruments; or securities issued by a portfolio of loans, securities certificates that evidence ownership over the collateral and those aimed to ensure the risk of inflation and exchange rate fluctuations.


The process of securitization of a mortgage loan portfolio is subject to the provisions of the Dominican Republic’s Securities Exchange Law and, where applicable, the provisions of the country’s Monetary and Financial Law. There are minimum capital requirements for securitization companies. Financial institutions may participate in securitization transactions and may purchase these kinds of securities without the need to obtain regulatory approval where a transaction meets certain conditions.

In other cases, prior regulatory approval is required – but the Banking Department has only 30 calendar days from receipt of an application and the completion of all required documentation to decide whether to reject the applicant’s request. The law contains an abbreviated approval process for specialized issuers under which the regulators only have 15 days to hear and issue a decision on an application; if they do not do so within that period, the application is deemed to be approved.

Similarly, the issuance of publicly offered mortgage-backed securities, issued as a result of a process of securitization of mortgage loans, is subject to prior authorization and registration with the country’s Securities Department, which has 30 days, beginning with its receipt of the request, to make a decision. For specialized issuers, Dominican law provides an abbreviated process of 15 days for the regulators to issue a decision. If the decision is not issued within that time, and if any other required approvals have been obtained, the Securities Department is deemed to have approved the issuance.

If a securitization entity enters bankruptcy, compulsory liquidation or any equivalent process, it only affects its own assets and does not require the liquidation of the trust property. When a securitization entity is declared bankrupt or undergoes a forced liquidation or any equivalent process, the representative of the investors or whomever is appointed by the investors shall temporarily manage the separate funds, subject to the procedure defined in the corresponding indentures, until they are finally transferred to another trustee.

Low-Cost Housing Provisions

The new Dominican law also contains special provisions relating to the development of low-cost housing through public-private partnerships, which the Dominican government believes can help solve the country’s housing problems. To benefit from the incentives created by the new law, the low-cost housing projects must be duly authorized by the National Housing Institute.

The new law provides that trusts for construction of this kind of housing are completely exempt from the payment of the following taxes:

  • income taxes and capital gains taxes;
  • any tax, duty, fee, charge or contribution that may be applicable to bank transfers and the issue, exchange or deposit of checks;
  • taxes on assets or estate taxes, including but not limited to real estate property taxes;
  • taxes, fees and charges on construction provided for in specified Dominican law; and
  • taxes on real estate property transfers and registration of real estate transactions in general.

In addition to the above, trusts created for construction of low-cost housing projects are entitled to seek compensation for the Tax on the Transfer of Industrialized Goods and Services, or “ITBIS,” paid during the process of construction of the housing.

The new law also provides that low-cost housing projects may be developed with investments from both the Dominican government and the private sector through the creation of a trust for purposes of its construction. The law provides that the real estate property contributed to a trust for that construction may be subject to a conventional mortgage in favor of the entities financing the project.

The Dominican law also provides that the document incorporating the trust for the construction must indicate the instructions regarding the duties of the appointed trustee; the scope of the trustee’s administration; and the sale and the disposition of trust property. There is a mandatory bidding process to recruit the firms or persons to design and construct these projects. The trustee also must publicly announce the conditions that purchasers have to meet to be able to purchase units from the projects and the process of requests and approval of these buyers. These homes may be assigned only to purchasers for whom these units shall constitute a first home destined as their primary residence, and under no circumstance may they be a purchaser’s second home. The law provides that the failure to observe this condition shall be punished with the annulment of the allocation of the residence, and the house will be transferred to a third-party buyer.

Finally, the law creates a special foreclosure procedure available to creditors, such as local or foreign financial institutions, securitization companies and trustees, as long as the mortgage has been granted by a contract and regardless of the kind or nature of the debt that is secured. The foreclosure process is commenced with a formal request for payment, which is carried out pursuant to the terms and conditions specified in the law.


The new Dominican law creates a market for securitized mortgages that will significantly enhance the country’s housing and construction industries while offering institutional investors an important investment opportunity. This would appear to be a win-win for all involved and interested parties.

Luis R. Pellerano, a Partner in the Dominican Republic law firm of Pellerano & Herrera (, leads the firm’s foreign investment and international practice group and is resident in the firm’s office in Santo Domingo, Dominican Republic.

Please email the author at with questions about this article.