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The new Real Estate Credit Act: lukewarm protection for borrowers and strong impact on lenders

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18 March 2019

On 21 February 2019, the Spanish Congress passed the Act 5/2019, regulating real estate credit (the Act), after a long and "tortuous" legislative process. The final text of the Act has been published in the Spanish Official Gazette (BOE) on 16 March 2019.

The ultimate purpose of the Act is to strengthen the guarantees for borrowers in the contracting process and ultimately avoid the judicial enforcement of such loans with the consequent loss of their homes. The Act not only finally incorporates Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property into our law, it actually goes beyond this. It extends the scope of application in respect of that provided for the Directive, so the Act will apply to any natural person acting as borrower, surety or guarantor, regardless of whether he or she is a consumer or not. The Act also regulates aspects of mortgage subscription not provided for in the Directive, such as the distribution of expenses associated with the contracting of loans or the regulation of lenders’ early termination rights.

The Act will enter into force three months after its publication in the Spanish Official Gazette (BOE), that is from 16 June 2019.
 
All the provisions of the Act and its developing regulations will be mandatory except for those cases where it is expressly provided otherwise. In addition, acts carried out in violation of the Act as well as the waiver of the rights granted in the Act shall be null and void.
 
In accordance with the First transitory provision of the Act, it will not apply to loan agreements entered into prior to its entry into force, unless those agreements are now amended or subject to subrogation, after the entry into force of the Act. Subrogation also comprises the subrogation of the debtor due to the transfer of the mortgaged property (sixth additional provision). The Act also foresees retroactive application of the new rules on early termination and the exercise of the debtor’s right to early repayment in certain cases.
 
The following is a summary of some of the developments that we consider most relevant to the Act. This law also includes other developments, such as the regulation of real estate loan intermediaries, real estate loan representatives and lenders or the applicable sanctioning rules, which are not the subject of this newsletter.

1. Early termination of mortgage loan agreements (Art. 24)

The lenders’ right to early termination will depend on the number of unpaid loan instalments already due and payable and on the moment throughout the life of the loan in which the payment default occurs:
a.     If the default occurs during the second half of the term of the loan, early termination is only allowed after a default equal to 7% of the total commitments undrawn under the loan agreement. This requirement shall be deemed met if there are 15 outstanding monthly instalments or of a number of instalments that mean that the debtor has failed to repay an amount at least equivalent to a 15 month period.
 
(a) If the default occurs during the first half of the term of the loan, early termination is only allowed after a default equivalent to 3% of the total commitments undrawn under the loan agreement. Such percentage shall be deemed unpaid if there are 12 outstanding monthly instalments or of a number of instalments that mean that the debtor has failed to repay an amount at least equivalent to a 12 month period;
 
In addition, for the Lenders to early terminate a loan, the Act requires that the lender, when demanding for payment, grants the borrower one month to fulfil his or her obligations and flags that the lack of payment in that timeframe will imply that full repayment of the loan shall be claimed.
 
These rules do not admit agreement to the contrary. This new regulation seeks to reduce litigiousness and also give greater legal certainty to creditors in enforcement scenarios, by limiting the possibilities that an early termination clause can be declared as unfair when it meets these new parameters. However, it represents a considerable lengthening with respect to the term of three monthly instalments or equivalent number of instalments currently foreseen in Act 1/2000 of 7 January on Civil Procedure (LEC) (with the interpretation criteria established by case law).
 
These new early termination terms also apply to agreements entered into before the entry into force of this Act unless the debtor claims that the provisions on early termination in said agreement are more favourable. However, these new early termination terms will not apply to agreements that were declared early terminated before the entry into force of the Act, regardless of whether or not foreclosure proceedings have been initiated and whether or not they have been stayed.
 
In relation to early termination, the Act also provides for the:
 
a.     Amendment of the Mortgage Act (Decree of 8 February 1946, approving the Mortgage Act) to include a new Art. 129 bis regulating in these terms the early termination of loans or credit facilities, concluded with a natural person and backed by a mortgage on real property for residential use or which purpose is to acquire/preserve land or real property built or to be built for residential use, to bring an enforcement action.
 
b.    Amendment of Art. 693(2) LEC in relation to the possibility of claiming all that is owed in cases of payment in instalments if a series of requirements are met. This amendment: (i) replaces the reference to the non-payment of three monthly instalments (or equivalent) with the new criteria for declaring the early termination regulated in the Act; and (ii) eliminates the current uncertainty regarding the application of these new early termination instalments to any type of mortgage-backed loans, since this new wording expressly provides that they will be applied to loans executed with a natural person and backed by a mortgage on housing, referring in the rest of cases to what was agreed in the deed and recorded in the land registry record.
 
Art. 693(2) will thus be worded as follows: "The entire amount owed in terms of principal and interest may be claimed under the terms agreed in the mortgage loan deed and recorded in the respective entry. Provided that it is a loan or credit facility concluded by a natural person and which is backed by a mortgage on a dwelling or whose purpose is the acquisition of real estate for residential use, the provisions of Article 24 of Act 5/2019, regulating real estate loan agreements and, where appropriate, Article 129 bis of the Mortage Act, shall apply".

2. Early repayment (Art. 23)

As a general rule, the lender must not charge any (full or partial) early repayment fee on loans, with the following exceptions:
 
a.     For floating interest rate loans, a fee may be contractually agreed for some of the following cases (mutually exclusive):
  • During the first five years of the loan term, with a limit of 0.15% of the early repaid amount;
  • During the first three years of the loan term, with the limit of 0.25% of the early repaid amount.
b.    For fixed interest rate loans, a fee may be contractually agreed for some of the following cases:
  • During the first ten years of the loan term, with the limit of 2% of the early repaid amount;
  • Subsequently, up to a limit of 1.5% of the early repaid amount.
Under no circumstances may these fees exceed the amount of the financial loss that the lender may suffer.
The Act encourages the conversion of mortgage loans contracted at floating interest rates to fixed rate loans (Art. 23.6). Also, the Act fixes lower early repayment fees in the event of novation of the applicable interest rate or subrogation of a third party in the creditor's rights, provided that this involves the application of a fixed rate in substitution of a floating rate during the rest of the term of the agreement. Therefore, if the conversion occurs within the first three years of the term of the loan, the early repayment fee can be included in the loan agreement but limited to 0.15% of the capital repaid early. On the contrary, if the conversion is carried out at a later stage, no fee may be applied.
 
This incentive to convert to fixed rate agreements will apply regardless of whether the contract was concluded before or after the entry into force of the Act.

3. Default interest (Art. 25)

The Act provides that in loans or credit facilities concluded by individuals and backed by a mortgage on real estate properties for residential use, default interest will be calculated in any case by adding three percentage points to the ordinary interest. This rule does not admit agreement to the contrary.
This amendment introduced by the Act also entails the alteration of Article 114, third paragraph of the Mortgage Act, which is reworded as follows: "In the case of a loan or credit facility concluded by a natural person that is backed by a mortgage on real estate property for residential use, the late payment interest shall be the ordinary interest plus three percentage points throughout the period in which the interest is due. Late payment interest may only be earned on the principal due and payable and may not be capitalized in any case, except in the case provided for in Article 579(2)(a) of the Civil Procedure Act. The rules relating to late payment interest contained in this paragraph shall not admit agreement to the contrary".

4. Changes in interest rate (Art. 21)

The Act establishes that the interest rate may not be altered to the detriment of the borrower during the term of the contract, except by mutual written agreement. In any case, in floating interest rate transactions, a downward limit to the floating interest rate cannot be set out although the interest paid on these transactions cannot be negative.

5. Formal and material transparency (Arts. 14 and 15)

The current standardised sheet becomes a European sheet: the European Standardised Information Sheet (ESIS). Schedule I to the Act includes the ESIS template and instructions to complete it. Until 21 March 2019, the Personalised Information Sheet and the pre-contractual information sheet provided for in Order EHA/2899/2011 of 28 October on banking services transparency and customer protection may continue to be used in lieu of the ESIS.
Aside from the ESIS, the following information requirements, among others, are added:
  • Standardised warning sheets containing particularly sensitive clauses.
  • In the case of floating rate loans, the delivery of a separate document specifying the different periodic instalments in different interest rate evolution scenarios.
  • A minimum period of 10 days prior to the signing of the agreement is laid down, period in which the borrower must go to the notary to receive free advice.
  • Strengthened supervision by notaries who, by means of a notarial act, will certify that all legally required prerequisites have been fulfilled. The contents of this act shall be presumed to be true and complete and shall be evidence of the advice given by the notary and of the statement that the borrower understands and accepts the contents of the documents described in order to comply with the principle of transparency in their material aspect.
  • The loan agreement deed cannot be authorised (by the notary) if the timely and formal fulfilment of the lender’s transparency obligations provided for in the Act have not been documented or the borrower has not appeared to receive free advice from the notary by the afternoon of the day before the formalisation of the agreement in front of the notary.

6. Distribution of expenses (Art. 14)

The Act imposes what will be the distribution of expenses between lender and borrower, in the following terms:
  • Property valuation costs: to be paid by the borrower.
  • Management paralegal fees: to be paid by the lender.
  • Notary fees for the mortgage loan deed: to be paid by the lender.
  • Charge for notarial copies: to be paid by the person requesting them.
  • Land Registry fee: to be paid by the lender.
  • Stamp Duty: in accordance with the applicable tax legislation (where Royal Legislative Decree 1/1993, of 24 September, approving the Stamp Duty (Recast) Act, after the amendment performed by Royal Decree Law 17/2018 of 8 November, generally attributes the status of taxpayer to lenders). However, if during the term of the loan one or more subrogations take place, in accordance with the Act 2/1994 of 30 March on Subrogations and Amendments of Mortgage Loans, the subrogee lender must be reimbursed by the subrogor in the proportional part of the tax and the expenses corresponding to him at the time of the loan is granted.

7. Conversion of real estate loans into foreign currency (Art. 20)

The Act gives the borrower a right to convert these loans to an alternative currency, which may be:
  • The currency in which the borrower earns most of the income or in which the borrower has most of the assets, as indicated at the time of the most recent credit worthiness assessment for the loan agreement; or
  • The currency of the Member State in which the borrower was resident on the date the loan agreement is granted or is resident at the time the borrower requests the conversion.
The borrower shall opt for one of these alternatives at the time of requesting the conversion. The exchange rate to be used is that in force as published by the European Central Bank on that date, unless otherwise contractually agreed.
 
Only those borrowers who are not considered consumers may agree on a system for limiting the exchange rate risk to which they are exposed instead of the right to request conversion.
 
The breach of the requirements set out in Article 20 shall mean, when the borrower qualifies as consumer, the nullity of the multi-currency clauses and shall allow the borrower to request the amendment of the agreement so it shall be deemed to have been granted from the first moment in the currency in which he or she earns the bulk of his or her income.

8. Tying practices (Art. 17)

The Act, with some exceptions, generally prohibits tying practices (i.e., where the loan is not offered separately and in order to subscribe the loan the purchase of other differentiated products or services is compulsory required). However, the Bank of Spain is authorised to lay down criteria for the uniform application of the practices relating to permitted tied selling by means of a Circular. The competent authorities (i.e. the Bank of Spain or the competent body of each Spanish region) may authorise specific tied sales when it is demonstrated that the products jointly offered represent a clear benefit to the borrowers. Any contract tied to a loan that does not comply, to the detriment of the borrower, with the requirements of the Act will be void and null. The nullity of loan clauses affecting tied products does not imply the nullity of the loan.
 
As an exception to the foregoing, the borrower may be required to take out an insurance policy guaranteeing compliance with the obligations under the loan, an insurance policy for damage to the real estate property and any others, as established in mortgage loan legislation. The lender is obliged to accept alternative policies with levels of coverage equivalent to those already proposed by the lender without this leading to a worsening of the terms and conditions of the loan.
Likewise, and provided that they serve as collateral for the transactions of a loan, the loan may be linked to the borrower, spouse, common-law partner or relative by consanguinity or affinity up to the second degree contracting certain financial products.
 
Subject to the limits foreseen in the Act, bundling practices (i.e. those offers of a loan and other differentiated products or services when the loan is also offered separately) are permitted. Notwithstanding this, the lenders are obliged to present, as a transparency measure, two budgets: one that includes the loan and the rest of the products combined and the other separately.

9. Legislative changes

The Act introduces important changes in twelve pieces of legislation, fundamentally for their accommodation to the new regulation.
 
We highlight, for example, the amendment of the Mortgage Act in all the aspects mentioned above and also amends, among others, Article 129(2)(a), which regulates the enforcement action by out-of-court sale, increasing the minimum price for the auction which may not be different from that set for direct judicial enforcement, nor may it in any case be lower than the one set out in the valuation. The Mortgage Act in its wording prior to the entry into force of the Act sets the limit at 75% of that value.
 
Likewise, a new Additional provision 22nd is added to Act 9/2012 of 14 November on Recovery and Resolution of Credit Institutions concerning enforcement proceedings filings made by the Spanish ‘bad bank’ SAREB. In accordance with this new additional provision, when the SAREB does not have any copies with enforceable effects and those copies cannot be issued in its favour, in accordance with the provisions of Art. 517 LEC, the filing for enforcement proceedings may be accompanied with an authenticated copy of the deed (even partial) issued under this provision and together with the certificates of the land registry proving the registration and subsistence of the mortgage shall be sufficient for the purposes of Art. 685 LEC. This is without prejudice to the debtor’s right to object on the grounds of double enforcement.

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