Spanish market residential loans

During the real estate crash that followed the Great Financial Crisis, thousands of people around the world lost their homes when they became unable to pay their mortgages. This led to a review of the regulatory framework regarding the commercialisation of residential loans aimed at consumers, which in Europe has crystalised in EU Directive 2014/17. For its part the Spanish government announced a reform of the Mortgage Act in order to incorporate EU Directive 2014/17 into national law, but so far the only regulation processed formally, and which incorporates (although beyond the deadline and only partially) the provisions of said directive, is the Draft Act on real estate credits. This Act, which is currently working its way through Parliament, amends the legal framework of real estate lenders, but it also sets out a special legal framework for real estate purchases and their financing. 

Whether through the amendment of the Mortgage Act, or through the Act on real estate credits, the truth is that, based on EU Directive 2014/17, any credit intermediary intending to market loans for the purchase of housing in another country within the European Union (and this includes any real estate company) will have to submit to a verification process carried out by the relevant authority and be supervised throughout by way of prior registration in a registry that in Spain will be supervised by the Bank of Spain. 

Additionally, the activities of real estate credit intermediaries linked to a sole lender will be supervised by the latter, who will be required to answer for any actions or omissions of an intermediary acting on its behalf, before the relevant authority.

Registration requires the following:

  (a)   Obtaining a professional liability insurance or bank surety;

    (b)   Having the minimum required knowledge of the products to be marketed, the level and certification as
       set by the Ministry of Economy, Industry and Competitiveness;

    (c)   Having written procedures in place and the technical and operational ability for compliance with the
      reporting obligations towards borrowers on contractual and pre-contractual matters regarding the
              intermediary itself, its remuneration, advisory services and out of court resolution mechanisms, among
        others;

        (d)   Being intermediaries of a recognised standard;

(e)   Having the appropriate internal means in place for the out of court resolution of claims by borrowers;

(f)    Not having being found guilty of any serious crime, whether against the State or connected to the
                performance of any financial activities; and

(g)   Appointing a representative before the Executive Service of the Commission for the Prevention of
               Money Laundering and Monetary Infringements once money laundering requirements are met.

When a Spanish intermediary wishes to carry out this activity in a different country within the European Union, it will have to inform the Bank of Spain, which in turn will notify the relevant receiving State. The recognition of a real estate credit intermediary by a member State will be valid in another EU country.

Credit intermediaries may not provide services in connection to credit agreements offered by non-credit institutions only to clients from a member State in which said institutions are not authorised to perform their activities.

How will this affect banks and real estate companies?

Clearly, all developments on legislation introduced by this draft will have an impact on banks, albeit that many of the measures mentioned therein are already legally backed by several regulations, which means the impact for the banking sector will not be so severe.

Notwithstanding the above, there are certain aspects that could have a greater impact than others. 

In the case of commissions, the draft sets out as a general rule that the only commissions to be received and expenses charged are those related to services that have been formally requested and rendered in practice, or that are otherwise approved. That is to say, commissions must come from services rendered in practice, or from expenses actually made in the granting of the loan and must be certified. No fictitious figures are to be included that may be prejudicial to the borrower.

On the other hand, opening and early payment commissions are particularly highlighted.  The former will be accrued at a certain time and will have to include all expenses arising from the analysis, processing and granting of the loan, or any other similar payments incidental to the borrower's activity derived from the loan grant. Concerning compensation for early payment, whether in total or in part, it sets out a specific regulation and limits to these, indicating that they must be based on the damage that the entity effectively suffers in practice for enabling early repayment. 

As regards the so-called linked transactions (sale of a bundle made up of a loan agreement and other products), the general rule will be that these are banned unless if the borrower is offered the loan independently of the rest of the financial products in the bundle.

Finally, the draft puts particular emphasis on the training of employees and their remuneration. Obviously, this will force financial entities to thoroughly train their employees so they are knowledgeable about the products and services offered to borrowers, and can clearly explain the transactions. Let's not forget that the information provided by banking employees regarding so-called "preferential shares" was clearly insufficient due to their lack of understanding of these products by those marketing them, among other reasons. Moreover, the draft intends to avoid the fact that the remuneration system of the borrowers' employees promotes entering into a certain type of agreement without taking into consideration the needs and interests of consumers.

In any case we will have to see how other rules of EU Directive 2014/17 of the utmost importance for the banking sector (as regards delays and mortgage enforcement, for instance) are incorporated into our legal system and which measures and control mechanisms are set in order to ensure compliance of said rules.  

With regards to real estate companies, the possibility of acting as real estate credit intermediaries will obviously force them to comply with the aforementioned requirements. However, an interesting period will follow and we will see how they will perform and how their actions on behalf of lenders are articulated when it comes to undertaking loan agreements. They will obviously be duty bound to train their employees to effectively render the aforementioned services.   

Main Legal Developments of the Reform

What are the most significant legal developments of the reform?

As highlighted in the introduction, the main goal of the reform will be to create a more transparent credit market that will increase the level of protection for consumers entering into loan agreements or credits in their purchase or maintenance of residential real estate. 

The aim is to align Spanish legislation with European regulations to ensure consumers have a common framework that encompasses measures such as: (i) banning sales practices linked to loans (with some exceptions); (ii) imposing appropriate and comprehensive reporting obligations regarding concepts that are difficult to understand or that imply excessive risks for consumers, such as the operation and calculation of the AER, or the exchange rate risks of loans subscribed under a foreign currency; (iii) eliminating any potential conflicts of interests of residential credit market operators, decoupling remuneration policies of said operators from the marketing of a particular quantity or type of credit agreements; (iv) ensuring that market operators have sufficient and appropriate knowledge of the products they market; (v) setting out clear criteria as regards general and contractual information provided to consumers who wish to take out loans for the purchase of housing, as well as the obligation to render advisory services oriented towards each consumer's need; and (vi) providing consumers with out-of-court solutions to settle disputes that may arise in the course of their relationship with market operators.

In essence, the reform is intended to restore consumers confidence in the credit market.

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