Spain removes barrier to enforcement by Spanish investors in non-performing loans

After years of Spanish non-performing loan (NPL) sales, a significant hurdle preventing purchasers from enforcing the underlying loans has now been removed.

One of the main obstacles faced by investors in Spanish NPLs arises from a lack of underlying mortgage documentation. To use Spain's expedited judicial foreclosure procedure, loan purchasers must hold the relevant notarial deed. However, during the property boom, control systems were relaxed and security documents were often misfiled or misplaced. The situation was compounded by bank restructuring and the sale of distressed asset portfolios, where the absence of documentation had a direct impact on price, with prospective purchasers estimating and deducting the consequent additional costs that would be incurred on enforcement.

Under Spanish procedural law, a creditor is entitled to commence judicial foreclosure proceedings following a debtor's default in repayment of its secured obligations. As part of the process, the creditor is required to append to the writ of claim what is known as an enforcement deed. This is an enforceable first notarial copy of the mortgage deed or a second copy issued either pursuant to a court order (with notification to any interested person to whom this may be detrimental), or with the agreement of the parties to the mortgage deed.

Historically, in cases of loss or unavailability of the enforcement deed, purchasers of NPLs did not have standing to obtain enforceable copies of such deeds, which was reserved to the creditor who was party to the original document, impacting the purchaser's ability to enforce the mortgage.

However, a resolution of the Spanish General Directorate of Registries and Notaries dated May 19, 2018, now entitles purchasers of NPLs to obtain an enforcement deed if both the following conditions are satisfied:

1. An enforcement deed has not previously been obtained by the purchaser for the purpose of enforcing the relevant mortgage.

2. The purchaser evidences that it is the legal owner of the relevant debt and security.

It is expected that the introduction of the resolution, which removes a significant barrier to enforcement for NPL purchasers, will increase the appetite to invest in the Spanish NPL market.