The New Real Estate Credit Act, passed by the Spanish Parliament on February 21st 2019 includes a set of brand new rules that will have a direct impact on the underwriting and modelling processes of secured lenders, namely the buyers of non-performing loans portfolios (NPLs).

The Bill’s first version did not include any provisions regarding the early termination of mortgage loans entered into by natural persons and secured with residential properties. However, the version that the former Spanish Government submitted to the Spanish Parliament within the framework of its parliamentary process did include provisions regarding early termination of this loans, regulation that required the amendment of the Spanish Civil Procedural Act and the Mortgage Act.

Where do we come from and where are we heading?

Under the former Spanish regime, in order to early terminate mortgage loans, the loan must expressly include the power of the lender to early terminate the loan provided that the borrower fails to repay an amount equal to three (3) monthly installments of the loan. Hence, the former regime of early termination of mortgage loans was discretionary (it only applied if it was expressly agreed between the lender and the borrower) and quantitative (early termination was only possible if a specified number of quotas were unpaid).

The new Real Estate Credit Act changes this discretionary and quantitative regime into a compulsory and qualitative one:

  1. Compulsory, as the Act grants the lender, and only the lender, the power to early terminate a mortgage loan encumbering a natural person’s main residence, without the parties being able to revoke this power; and
  2. Qualitative, as the Act allows early termination based on the percentage of overdue and unpaid capital or interest installments over the principal initially granted (i.e. the percentage varies based on the time elapsed from the granting of loan). In this sense, the Real Estate Credit Bill’s first version included percentages equal to 3% and 5% depending on when the default occurred: 3% if the default takes place during the first ten (10) years of the loan, and 5% if the default takes place afterwards.

When does early termination apply?

The final version of the act approved by the Spanish Parliament has changed the referred percentages and has included an alternative additional qualitative approach:

  1. if the default takes place during the first half of the term of the loan, the lender is entitled to early terminate the loan when (a) the percentage of the overdue an unpaid capital or interest installments over the principal initially granted is at least equal to 3%, or (b) the borrower fails to repay an amount equivalent to twelve (12) monthly installments of the loan; and
  2. if the default takes place during the second half of the term of the loan, the lender is entitled to early terminate the loan when (a) the percentage of the overdue and unpaid capital or interest installments over the principal initially granted it at least equal to 7%, or (b) the borrower fails to repay an amount equivalent to fifteen (15) monthly installments of the loan.

This new early expiration affects what type of lenders?

The final version of the act approved by Spanish Parliament is not very accurate in terms of scope. Based on the Statement of Reasons included in the Act, it can be inferred that it only applies to natural persons that subscribe the loans as borrowers or guarantors, regardless of them meeting the condition of consumers (i.e. including self-employed workers). Nonetheless, the Act limits its scope to loans secured by mortgage granted over “residential” properties[1]. Effectively, this entails that, if self-employed workers subscribe a loan and secure it over their office or over properties that, although considered “residential”, they are only buying to sell afterwards (i.e. they have a professional purpose), these properties would not meet the condition of “residential properties” and, consequently, it would result in the Act not applying to loans subscribed with professional purposes.

Is it true that the new early termination applies regardless of the loan’s subscription date?

Yes, it will apply to all mortgage loans which had not been early terminated before its entry into force, including any signed previously, although, in these cases, the new early termination rules will not apply if the debtor pleads that the terms of the loan agreement with regard to early termination are more debtor-friendly.

When is this new early expiration regime applying?

The act will entry into force three months after its publication in the Spanish Official Gazette (BOE).