The FIMA changes everything – direct housing loans

 

From a legal interpretation perspective, section 282(2) is the enabling statutory provision enacted by Parliament, whereas the regulations are subordinate legislation made under the Act.

The wording of section 282(2) is mandatory:
"...grant loans secured by first mortgages of immovable property..."

The use of the words "secured by first mortgages of immovable property" is a substantive statutory requirement. It is not merely permissive or illustrative.

The established principles of statutory interpretation are that:
  1. Regulations cannot override, amend or dilute an Act of Parliament.
  2. Regulations must be read consistently with the Act.
  3. If a regulation is inconsistent with the Act, the Act prevails, and the inconsistent part of the regulation is invalid to the extent of the inconsistency.
Accordingly:
  • If Regulation 35 also requires a first mortgage and imposes additional security (such as a pledge of the member's benefit), there is no inconsistency. The regulation supplements the statutory minimum.
  • However, if Regulation 35 were interpreted as permitting a loan without a first mortgage, or as replacing the first mortgage with another form of security, that interpretation would be inconsistent with section 282(2) and could not stand.
I also think there is a further point worth considering.

Section 282(2) prescribes that a first mortgage must secure the loan. That appears to leave no discretion to the board to accept a second mortgage or another form of real security. Unless another provision of the Act creates an exception, every direct housing loan made by a retirement fund should therefore be backed by a registered first mortgage bond over the qualifying immovable property. Any fund rule, policy or loan agreement that purported to accept lesser security would be vulnerable to challenge as being contrary to the Act.

I suggest we next examine Regulation 35 line by line. If it is drafted differently from section 282(2), we should determine whether it can be reconciled with the Act or whether there is a genuine inconsistency.

Having reviewed Regulation 35 against section 282(2), I do not see an inconsistency. In fact, they can be read harmoniously.

1. The Act
Section 282(2) requires that a direct housing loan by a fund must be:
"...secured by first mortgages of immovable property..."
That is a mandatory statutory requirement.

2. Regulation 35
Regulation 35(1) provides that a fund may not grant a loan or guarantee unless it is secured in full by:
  • (a) a first mortgage;
  • (b) a pledge of the member's fund benefit; or
  • (c) both the mortgage and the pledge.
At first glance, paragraph (b) appears to permit a loan secured only by a pledge of the retirement benefit, which would conflict with section 282(2).
However, the answer lies in reading Regulations 34 and 35 together.

3. Regulation 34 expressly refers to section 282(2)
Regulation 34 opens with:
"A fund, as contemplated in section 282(2) of the Act ... may grant a loan..."

That introductory wording imports the statutory requirements of section 282(2), including the requirement for a first mortgage.

4. The key distinction
  • Regulation 34 governs both: direct loans by the fund; and
  • guarantees furnished by the fund in favour of another lender.
Section 282(2), by contrast, deals only with direct loans.

Accordingly:
  • Direct loan by the fund: section 282(2) requires a first mortgage. Regulation 35 cannot dispense with that statutory requirement.
  • Guarantee in favour of a bank or other lender: the regulation allows greater flexibility because the bank itself will usually hold the mortgage while the fund may rely on a pledge of the member's retirement benefit.
5. The drafting problem
I do, however, think Regulation 35 is poorly drafted.
The words:
"...secured in full by—
  • a) a first mortgage;
  • (b) a pledge; or 
  • (c) both..."
are capable of being read as allowing a direct loan secured only by a pledge, which would be inconsistent with section 282(2).

To avoid ambiguity, Regulation 35(1) should distinguish between:
  • direct loans, where a first mortgage is mandatory under the Act; and
  • guarantees, where a pledge of the retirement benefit may constitute the fund's security while the lender holds the mortgage.
Conclusion
I therefore conclude that:
  • Section 282(2) prevails. A first mortgage over the immovable property must secure every direct housing loan granted by a fund.
  • Regulation 35 should be interpreted consistently with the Act and cannot lawfully permit a direct loan secured only by a pledge of the retirement benefit.
  • The wording of Regulation 35(1) is ambiguous and would benefit from amendment to make that distinction explicit.
A simple amendment to Regulation 35(1) could eliminate the ambiguity and ensure that the regulations clearly reflect Parliament's intention in section 282(2). Fund members will undoubtedly expect NAMFISA to initiate the requirement amendment without delay – and many more will have to follow