Digital lending Fintech companies in Colombia: rules related to interest and fee rates

Carlos Fradique-Méndez
Brigard & Urrutia, Bogotá
cfradique@bu.com.co

Nicolás Alonso
Brigard & Urrutia, Bogotá
nalonso@bu.com.co

For the past four years, Colombia’s lending market has been experiencing a revolution. According to the Colombian Fintech Association (the Asociación Colombiana de Empresas de Tecnología e Innovación Financiera or Colombia FinTech), more than 30 digital lending Fintech companies have been established in the country during this period to compete with traditional Colombian banking institutions. The entry into the loan market of these new players has led to a Colombian individual or company now having more than 50 options to choose from when requesting a consumer loan online, and the ability to receive approval and disbursement in less than three hours. This was unimaginable in Colombia even six years ago.

The lending market revolution in Colombia has created a competitive environment between traditional banks and digital lending Fintech companies. In a nutshell, each of the players is currently trying to gain a bigger portion of the market by implementing two simple strategies:

• offering lower interest and fees (ie, final price of the loan); and
• offering a better and simpler consumer experience.

This article summarises the main limits imposed by Colombian laws applicable to interest and fee rates in loan transactions.

The activity of offering and granting certain types of loans on a regular basis in Colombia is not exclusive to Colombian financial institutions. A non-regulated entity may offer and grant loans to the Colombian public, provided that the non-regulated entity uses its own funds to grant and disburse the loans. In other words, a digital lending Fintech company does not, for most lending transactions, require a financial licence to compete with a traditional banking institution in the Colombian lending market, provided it does not leverage its lending operation in any type of transaction that involves capturing money from the public. However, even though digital lending Fintech firms are not regulated entities, they should comply with virtually the same regulations and restrictions regarding interest rates and fee limits as other Colombian traditional banking institutions.

First, Colombian law provides for a maximum interest rate that a lender may charge on debt, which is known as the usury limit (tasa de usura). No one may charge an interest rate exceeding 1.5 times the current bank interest (interés bancario corriente) certified by the Superintendence of Finance of Colombia (Superintendencia Financiera de Colombia or SFC) from time to time.^[1] In the event that an individual or entity charges interest that exceeds the legal limit, such action will be deemed usury under Colombian commercial, financial and penal regulation. Usury is prohibited by commercial law and the Consumer Protection Statute; it is also considered a felony under the Colombian Criminal Code (Código Penal). Furthermore, the SFC has established in multiple memoranda that charging interest in excess of the usury limit will be considered usury despite the fact that it has been paid or applied to future payments.

Moreover, charging interest above the usury limit may entail for the creditor:

• the loss of all interest charged in excess of such usury limit, increased by an equal amount;
• administrative and monetary fines; and/or
• criminal proceedings that may result in prison.

Second, Colombian law provides that, in addition to interest, any other fees and charges charged in connection with a loan may be deemed as interest and, therefore, be calculated within the usury limit. Article 68 of Law 45 of 1990 provides that all amounts that a lender receives from a borrower in consideration for a loan must be computed as interest and computed towards any usury calculation. Such amounts include any type of fees or commissions charged in connection with a loan. Therefore, any amounts that a borrower pays for services directly linked to the granting of a loan are considered interest and should be counted for purposes of usury calculations.

In conclusion, any digital lending Fintech and any Colombian banking institution must be particularly careful when designing interest and fee structures for consumer loans to comply with these restrictions. Several recent discussions have been held with Colombian authorities regarding technology and other types of fees, to understand if such fees should be computed as interest and counted towards any usury calculation. There is no definite answer to this in Colombian regulation or interpretation by government authorities. Therefore, a case-by-case analysis should be made to determine the existence of any potential usury risk.