Mortgages

Real estate loans: new mortgage lending regulations.

We're kicking off a series of articles with this one intended to address the most important issues covered in the recently approved draft law regulating real estate loan contracts, published in the Official Gazette of the Congress of Deputies on March 7, 2019, and therefore pending publication in the Official State Gazette (BOE).

The misnamed reform of the Mortgage Law, This legal text on real estate loans does not replace the current Mortgage Law (it merely amends certain provisions—specifically those we will address in this article), as it regulates a different matter; specifically, as indicated in its own explanatory memorandum, it transposes European regulations that Spain had long failed to incorporate into its domestic legal system, and it is intended to enhance legal certainty, transparency, and understanding of contracts and their clauses, as well as a fair balance between the parties

The bill contains 48 articles and numerous additional, transitional, repealing, and final provisions aimed at amending a wide range of legal provisions that will be affected by this highly significant piece of legislation.

The law will apply only to purchases made by individuals for residential use, and therefore the Law—and consequently the provisions regarding early maturity that we are discussing—can only be applied in cases where an individual has taken out a personal loan to purchase a home that will serve as their primary residence.

The First Final Provision contains a series of provisions that affect the Mortgage Act Some of these issues are of extraordinary practical importance and have been the subject of numerous legal disputes in recent years; they primarily concern the early maturity clause and the late-payment interest rate clause.

Both issues have given rise to countless court rulings, and on this website Carlos Baño Leon Law Firm in Alicante,  We have written articles on these topics in the past and have also commented on court rulings pertaining to both issues.

Let's start with what are known as early termination clauses, specifically the one that provides for unpaid loan debt, which will allow the bank to initiate legal proceedings to demand early repayment of the entire outstanding loan.

EARLY LOAN REPAYMENT

Once the Act takes effect, the bank will not be able to terminate the contract early unless the borrower owes an amount in unpaid and past-due installments equivalent to 31% of the principal borrowed, provided that the loan is in the first half of its term.

In addition to this formula, it is important to note that this requirement is deemed to be met in the following circumstances:

1. If, during the first half of the loan term, the borrower owes an amount in overdue and unpaid installments equivalent to 12 monthly payments, or a number of installments that indicates the borrower has gone at least 12 months without making a payment.

2. If you are in the second half of the loan term, the same applies, but the minimum payment is increased to 31% of the principal amount granted.

If these requirements are met, the borrower runs the risk that the bank will terminate the contract and demand payment of all outstanding amounts in addition to the amount owed, which will result in foreclosure on the mortgage.

In any case, there are two essential requirements for the bank: first, it must have previously issued a demand for payment to the debtor one month in advance; if no such demand was issued, this scenario does not apply, and therefore the bank cannot file a claim until it provides proof of the demand.

Upon receipt of this demand, the borrower has until the end of that month to pay the full amount owed; if he does so, the bank’s right to take legal action will be extinguished.

The law makes no mention of the borrower exhausting their right to deferment; it follows, therefore, that whenever the borrower is in default and pays the outstanding amounts, they do not run the risk of forfeiting that right to prior payment.

This is reminiscent of the right to suspend enforcement in favor of the tenant recognized in Law No. 2971994 of November 24, on Urban Leases, unlike the provisions for urban leases regarding overdue debts: provided that a demand for payment has been issued, payment alone shall suffice, and the bank may not take any further action.

INTEREST ON LATE PAYMENTS

The new legal provision stipulates that the late payment interest rate shall never exceed 3% of the interest rate applicable to principal repayment, which, as is well known, is the rate set for such loans.

This important provision is incorporated into the Mortgage Law through an amendment to Section 114 of the Mortgage Law.

The definition of this type of delay reflects the criteria previously established by the Supreme Court.

To begin with, it’s worth recalling—so we can see just how much things have changed—that mortgage loan agreements used to stipulate extremely high late fees, and nothing ever happened; it was never questioned until a flood of claims backed by the European Court of Justice began to pour in.

The Mortgage Law itself had set an upper limit of three times the statutory interest rate; however, in recent years this limit has been gradually reduced, leading up to the recent ruling by the Supreme Court’s Civil Chamber (Plenary Session Ruling 671/2018) of November 28, which established, in accordance with the doctrine of Court of Justice of the European Union (CJEU) that default interest could not exceed two percentage points above the standard interest rate.

Taking advantage of the need for amendments, this cap has now been legally established. This is a long-standing demand among consumers, and it is now clearly established in the legal framework, so that any violation will be deemed illegal as soon as the rate exceeds the interest rate by more than three percentage points., but this scenario will never arise, among other reasons, because of the role as guardians of the law that the law assigns to notaries and property registrars—not only in identifying and detecting unfair terms but also in addressing provisions that are manifestly illegal.

A key point common to both subjects is that the maturity clause and the late payment interest rate are mandatory provisions; they are by law and are non-negotiable; therefore, they fall outside the parties’ scope of negotiation, and these two extremely high and insurmountable thresholds will always remain in place when it comes to agreeing on the terms of the mortgage loan.

In this regard, the new legal regulation that will apply sets a higher percentage, and compliance with this requirement is mandatory.