Mortgage Lending Directive 2014/17/EU

Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 (LAW 2640/2014) on credit agreements concluded with consumers for residential immovable property and amending Directives 2008/48/EC (LAW 6793/2008) and 2013/36/EU (LAW 10339/2013) and Regulation (EU) No. 1093/2010 (LAW 24815/2010), determines a mandatory and common environment with respect to consumer credit contracts that are secured by mortgage or other security in respect of residential real estate.

How much longer does it take for Spain to implement the reform of the Mortgage Law?

As is already known, Spain has been delaying for more than two and a half years the mandatory reform provided for by Directive 2014/17/EU. The latest news states that it could be approved before Christmas. And with the forecast that it will come into force in March 2019.

This Directive of February 2014, imposes on Member States in its Article 42.1:

“1. Member States shall adopt and publish, by 21 March 2016 at the latest, the laws, regulations and administrative provisions necessary to comply with this Directive. They shall forthwith inform the Commission thereof. “

At first, the EC had some consideration for the repeat calling of the elections in 2016. However, a year later, the Commission’s patience ran out by proceeding to refer the country to the CJEU.

However, the complaint does not seem to have had the desired effect, since the beginning of its processing until today, there has been little progress. This implies a high risk of an imminent sanction, with three possible scenarios:

• More than 900 days (accumulated delay) of fine, at a rate of 106,000 euros per day. Which would undoubtedly entail the worst case scenario.
• A fine of €106,000 per day from the day after the ruling of the Judgment.
• Approval of the rule prior to the ruling of the Judgment, with the possibility of Brussels withdrawing the complaint.

Obviously, the third of the scenarios would be the most advantageous, but we will have to wait for its actual approval.

On the other hand, what effects will the application of the Directive have in Spain, will it be a new blow for banks, will it make access to loans more difficult or will they become more expensive? Below, we will see the most relevant content of the Directive, and the problems that banks will have to face.

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Foreclosure Opposition

In procedures for the execution of mortgaged or pledged assets, only the grounds for opposition set forth in art.696 LEC can be included. They are four

Relevant content of Directive 2014/17/EU

The aim of transposing this directive is to offer greater protection to mortgages against possible bank abuses. That contracts are guaranteed with the confidence that banks act responsibly and professionally.

With this Directive, both the measures of conduct and transparency are reinforced. Notaries and Registrars will also play a more important role during the contracting process.

Regarding behavioral measures during the contracting process:

The entity must deliver a file with all the characteristics of the loan, called FEIN. And it will have the character of a binding offer for a period of seven days.

Linked sales will be prohibited. In other words, the granting of a loan may not be linked to the taking out of insurance.

The mortgagor will be able to reimburse all or part of the capital loaned without any commissions other than the financial loss during certain periods. Maximum percentages will also be established, which the entity will not be able to exceed.

Regarding transparency measures:

The Lender will be obliged to deliver a Warning Sheet (FIAE) on all relevant clauses and their risks.

If a variable interest loan is contracted, a separate document must be provided. And in which special emphasis will be placed on the periodic installments to be paid and with simulation of different possible scenarios.

In addition to these measures, and as we were saying, the Notaries and Registrars see their functions extended. Thus, during the previous seven days, the client will visit the notary to receive an explanation of the loan clauses. In addition, he/she will have to sign a notarial act where he/she assures to have received the advice and to have understood everything. If this document is not signed or if an abusive clause is detected, the notary will not be able to authorize the signature. The same will happen to the Registrar, who will have to annul the formalization if abusive clauses are detected in the contract.

Other changes in the closing of Mortgage Loans:

Extension of the delay period prior to the application of the early maturity clause:

With the new Mortgage Law, the delay periods necessary to be able to initiate the foreclosure process are extended. In order to do so, the following requirements must be met:

• When the default occurs in the first half of the mortgage, the unpaid overdue installments will be equivalent to at least 2% of the amount of the loan. Which implies, at least, the non-payment of 9 monthly installments.
• When the default occurs in the second half of the mortgage, the unpaid installments must be 4% of the principal amount. Which implies, at least, the non-payment of 12 monthly installments.
• In addition to the above, it is required that the lender has required the debtor to pay, granting a period of 15 days for compliance. And the debtor must be warned that, if he does not comply with the requirement, the full amount borrowed will be claimed.

Limitation on interest on late payment:

Default interest may not exceed three times the legal interest rate. The aim is to ensure that it is adequate to guarantee the objectives, without going beyond what is necessary. That is to say, it is a question of avoiding an economic abuse before a contract imposed by the bank, without possibility of negotiation by the borrower.

Multi-currency mortgages:

Finally, those contracting multi-currency mortgages will be able to choose to switch them to the euro at any time.

It should be noted that the new law will not be applicable to loans prior to its entry into force, unless there is a subsequent novation or subrogation. Exceptions are also made for repayment and early maturity clauses, which will be governed by the new law, even if they are included in contracts prior to its entry into force.

Negative impact only on banks?

The transposition of the Directive is undoubtedly a new blow for financial institutions. In the first place, the limits on the amount of commissions for early repayment will considerably reduce the income that mortgages provide to the banks. During the first three years they will not be able to exceed 0.5%, and 0.25% during the following two years, and from the fifth year onwards they will disappear.

Another economic disadvantage will be reflected in the controversial late payment interest that banks charge their clients. While banks used to charge an average of approximately19%, this will now be limited to three times the legal interest rate. Therefore, since the legal interest rate is currently 3%, the “punishment” will not be able to exceed 9%.

In our opinion, the biggest problem they will encounter will be with the foreclosure of mortgages. Above all, on the basis that they already have a daily struggle before the Courts. For some time now, there has been an increase in the number of oppositions to foreclosures due to abuse in the application of early maturity. And when the truth is that the bank could have applied the clause after suffering three consecutive defaults. With the change, the bank will have to wait 9 or 12 defaults (depending on the phase of the mortgage) to be able to initiate the foreclosure.

A priori, it might seem that with the reform only the banks will be harmed, being all advantageous for the consumer. However, nothing could be further from the truth.

All these restrictions introduced will affect everyone who wants to access a mortgage. If banks are going to have to wait for a minimum of 9 months of non-payments to foreclose, they will be stricter when granting them. They will make an exhaustive study of the conditions and profile of the client, considerably reducing access to individuals. On the other hand, the restrictions on commissions and the reduction of default interest could make the loan more expensive in other areas. For example, in the loan formalization costs, it is required that the process be transparent, with the costs borne by each party being clearly established. However, the maximum costs to be borne by the client and the bank are not fixed, so the borrower could be obliged to pay a significant amount in mortgage origination fees.

Conclusions

• Spain is risking a high fine for having delayed the transposition of Directive 2014/17/EU for more than two and a half years. It seems that it will be approved before Christmas this year.
• The aim of the Directive is to provide greater transparency for those who want to buy a home. And give a relief to people who can not cope with the payment of the mortgage.
• Its approval will imply a reinforcement of both conduct and transparency measures. Likewise, an increase in the functions of Notaries and Registrars.
• Part of the mortgage clause will also be modified with regard to commissions, early maturity and late payment interest.
• Linked sales will be prohibited and if a multi-currency mortgage is contracted, the change to the euro may be requested at any time.
• The new Law will not be retroactive. With the exception of early expiration clauses and commissions for early repayment. Cases of subsequent novation or subrogation are also exempted.
• Banks will suffer economic losses due to the reduction of commissions and late payment interest and will not be able to initiate the foreclosure of the mortgage until at least nine months of non-payment have elapsed.
• Consumers, although they benefit from a large part of the reform, will also be affected. Banks, faced with the risk of having to wait at least nine months of non-payment before foreclosing, will be stricter in granting loans.
• The new Law may imply an increase in the cost of loans to individuals, who may have to pay high formalization costs. In addition, they will have to prove more rigorously that they have the financial means to pay the loan installments.

If this article has been of interest, we also suggest you to read the following article published on our website:

The new Mortgage Law (2019)

The entry into force of the new mortgage law

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