The entry nto force of the new mortgage law

The new mortgage law (LCI), 5/2019 of March 15, was published in the BOE on 16/03/2019. It came into force three months after its publication, on June 16, 2019. (BOE: Official State Gazette)

It is a highly awaited law that should have been enacted three years ago. You will already know from the press that it was approved at the last minute and under the risk of sanctionfor this delay. We already warned about this risk in a publication of  January 10^th  2019, entitled: “Directive 2014/17/EU on Mortgage Lending”.

But the government has not only fought against a possible sanction. Equally well known is the judicial collapse, which the avalanche of lawsuits for expenses and clauses related to real estate loans, has produced. The daily paper El Pais published that the specialized Court of Madrid 101bis, received more than 25,000 lawsuits for 10 judges. (News of October 7, 2018 “This is the 101 bis, the court of land clauses of Madrid”). This is only in Madrid, and as we already anticipated, that the situation has not yet improved.

It remains to be seen if the new law will be the solution. In the meantime, we would like to inform you of the main changes that entails, regarding those extremes that have been conflicting:

Object and Scope of the Law

The law applies to mortgage loans in which the borrower, co-signer or guarantor, is an individual acting as a consumer.

And what is a consumer? Article 3 of the General Law of Consumers and Users defines consumers as:

“The individual who acts with a purpose unrelated to his or her commercial or business activity, trade or profession”. It also considers consumers to be “legal persons, and entities without legal personality, who act without a profit motive, in an area unconnected with a commercial or business activity”.

In addition, the mortgage loan must be on “residential property”, which by law includes a house, garage and storage room.

Contract Form and Content

The contracts regulated by the LCI, will be formalized in paper or other durable support. If they are guaranteed with property located in national territory, they must be formalized in a public deed. (Art. 22 LCI).

What is the information required to meet the transparency criteria?

Prior to the signing of the contract, the LCI requires the lender to deliver, at least 10 days before the formalization of the contract, the following documentation:

• The “European Standardised Information Sheet” (FEIN-Ficha Europea de información normalizada) Regulated in art. 14.1 a LCI, relating to rules of transparency in the marketing of Real Estate loans. The standard content of the FEIN appears in Annex I of the Law. It basically details the economic conditions of the business, quotas, terms, interest, expenses…
• The Standardized Warning Sheet (FiAE: Ficha de Advertencias Estandarizadas) Also regulated in article 14 paragraph 1.b. This sheet will inform of the existence of relevant clauses, which must include, at least:

o   The reference rates used to set the applicable interest rate.

o   The existence of minimum limits on the applicable interest rate and the consequence of its downward variation.

o   The possibility of early maturity of the loan as a consequence of the default and the expenses derived from it.

o   Distribution of the expenses associated with the loan.

o   Whether it is a foreign currency loan.

• If it is a contract subject to a variable interest rate: A separate document with reference to the periodic payments to be made in the different scenarios of interest rate evolution. (14.1.c LCI)
• A copy of the draft of the contract (14.1.d LCI)
• Lender and borrower expense information (14.1.e LCI)
• The conditions of the insurance of damages on the property, or in guarantee of the fulfillment that in its case the lender demands (14.1.f LCI)
• The lender’s warning that the borrower must receive personalized advice from the Notary in loans formalized in a public deed. (14.1.g LCI)

The borrower must appear before a notary public at least the day before the public loan deed is authorized. In that act, the “transparency verification act” will be issued, accrediting the previously listed requirements of Article 14 of the LCI. (Art. 15 LCI). The notary will not only check the FEIN and FiAE clauses, but will also provide individual advice. The borrower will also take a test (before the notary) in order to verify the documentation and information provided.

Without the conformity certificate, the notary cannot authorize the loan deed (art. 22.1 LCI). Nor may the registrar record it, if the deed of loan does not contain the identification of the verification act.

New Regulation of Early Expiration

It is regulated in article 24 of the LCI for loans subject to the LCI and does not admit any modification through agreements between the parties. The early maturity of the contract will occur if the following requirements are jointly met:

• That the borrower is in default of payment of part of the principal of the loan or of the interest.
• That the amount of the due and unpaid fees are at least equal:
  • To 3% of the granted capital, if the delay occurs during the first half of the duration of the loan. The quotas due and not satisfied must be equivalent to the non-payment of twelve monthly payments.
  • At 7% of the amount, if the default occurs in the second half of the loan period. Overdue and unpaid installments must equal fifteen monthly payments.
• That the lender has made the previous payment request. Granting at least one month for compliance, warning that, if not attended, it will claim the total reimbursement of what is owed.

Regulation regarding the delay interest (art. 25 LCI)

The interest for late payment will be a maximum of the remuneration plus three percentage points. Late payment interest is accrued only on the expired and unpaid principal and cannot be capitalized.

The rules relating to interest on delay contained in article 25 LCI do not admit agreement to the contrary.

Value set by the parties for the type of auction

It is established in the third section of the Final Disposition 1ª LCI that modifies the article 129 Mortgage Law.

The value for auction, must coincide with the valuation, and must be equal to that of the extra-judicial sale (before a notary) and direct execution.

Expenses

Please note that with respect to LCI contracts, according to Article 14, the lender is responsible for the following ones:

• The costs of the authorization of the notarial deed,
• Those of registration.
• The expenses of ITPAJD, without prejudice to compensation in case of subrogation in the position of the creditor.

There has been almost no time to implement the law, so we don’t know what impact it will have. There is already talk of a rise in the cost of mortgages, with respect to the countries around us. If it seems clearly protectionist towards the consumer, and resolves issues, so far diffuse, or without specific legislation. However, given this protectionism that we are talking about, we should ask ourselves, from now on, will mortgage loans be more expensive? The law imposes two appearances before a notary. Are you sure that these notary fees will be paid by the bank? Despite the Supreme Court’s rulings regarding IAJD at the borrower’s expense, the law imposes its payment to the lender, again, It is certain that the banks are going to pay? The same goes for the registration fees. But won’t the banks try to adjust their business to absorb these new costs? We don’t know exactly how the lenders will deal with this new situation, but we are afraid that they will think of something. And the solution doesn’t seem very complicated.

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)