On 17 June 2019 the new Mortgage Law entered into force in order to adapt, with years of delay, our legislation to the EU directives approved back in 2014. This European regulation sought to harmonize the legislation of the member countries with the objective of providing security for banks but mainly for their clients when accessing to finance.

Article 3 of the Law establishes the inalienable nature of the provisions of the law, so that the parties cannot agree to something different and the waiving of these rights recognized to debtors are considered void and null.

Lets analyze what are the main changes and how they affect our clients:

1.- Pre-contractual information. The bank is obliged to provide the prospective client with personalized information on his/her loan through two new documents, the European Standardized Information Sheet (ESIS or FEIN in the Spanish acronym) and the Standardized Warning Sheet (FiAE in the Spanish acronym). These replace the old FIPER. This information, once the interested party has given the information to the bank about their needs, financial situation and preferences, must be provided by the bank at least 10 days before signing any contract and/or loan offer. A loan repayment schedule must be provided, with interest rates, installment amounts, periodicity, simulations of various scenarios according to potential different interest rates when it is variable, etc.

2.- Obligation of the bank to evaluate the creditworthiness of the borrower: This solvency test, that should not have any cost to the client, must be carried out with sufficient rigor and depth to ensure that the applicants, based on their income, jobs, assets, indebtedness and future expectations, can borrow the required amount under the offered conditions and are in a position to deal with the mortgage payments. The bank must deny the request otherwise.

3.- Who pays the expenses? The cost of valuation or appraisal of the property correspond to the borrower, but unlike what happened until the entry into force of the new law, now ALL management fees, stamp duty (AJD), notary fees and Land Registry fees for the constitution and registration of the mortgage correspond to the lender entity.

4.- Services that the bank can charge. The bank will only be authorized to charge for those services or expenses related to the loan/mortgage that have been specifically requested, or expressly accepted, by the borrower and only when these services have been effectively provided or the expenses have existed and can be shown. In relation to the opening fee or commission, it may be charged only once and must include all the costs of studying, processing and granting of the loan.

5.- Double visit to the notary public. The borrower must visit the Notary Public during the aforementioned period of 10 days so that he/she can go through and explain the documentation that must be signed later, verifying the absence of abusive clauses or deviating from what is prescribed by law and responding to all the borrower questions. The notary will perform a test on the borrower’s ability to understand all the documentation that has been given to him/her and the loan that will be signed. The notary must draw up a notarial document (“acta”), at no cost to the client, which will be subsequently mentioned and referred in the mortgage deed that can be signed before the same notary from the day following the date of the issuing of such “acta”. The process of visiting the notary in this first instance can be done personally by the borrower or by someone representing him/her with a Power of Attorney and that will also sign later the mortgage deeds on his/her behalf.

6.- Prohibition of associated products. The granting of the mortgage cannot be associated with the borrower subscribing to other products of the bank or credit entity, such as credit cards, life insurance, pension plans, deposits, etc. There are some exceptions though as the bank may require an insurance policy to guarantee the compliance of the loan payments as well as an insurance against damage with regard to the mortgaged property. However the bank cannot require this to be done with the insurance company proposed by them as long as the borrower provides an alternative with the same coverage.

Bonuses in the interest rate of the loan or in the fee for the subscription of combined products (insurance, deposits, credit cards, pension plans, etc.) are allowed, but the bank must clearly specify the differences between contracting the products or not.

In other words, banks cannot link the granting of the mortgage to the subscription of other products but they can reduce the interest or give other bonuses to those that subscribe this combined products offered.

7.- Loans in foreign currency. This is actually the case for all and every foreign investors who request a mortgage in Spain in Euros and reside in a country that does not have the Euro as currency and receive their main income or have their assets in a currency other than the Euro.

The law in its article 20 states that for loan contracts in foreign currency the borrower may request that the loan is converted to the currency in which the borrower receives most of the income or has the majority of the assets or to the currency of the country in which the borrower was a resident on the date of signing of the loan contract or is resident at the time the conversion is requested.

In practice, this has been a blow to foreign clients as banks are very worried of the potential risk of having to convert the loans to a foreign currency subject to fluctuations with the Euro. For that reason many of them are only granting mortgages to residents in countries where the Euro is the official currency and that receive their income in that currency. Some banks are currently making some exceptions with residents in the U.K., Scandinavian countries or in the United States.

8.- Prohibition of the clauses that guarantee to the bank a minimum interest (“clausulas suelo”). Article 21.3 of the Law establishes that in operations with a variable interest rate, a minimum interest rate limit cannot be set. Banks used to establish a minimum fixed interest in those cases when the variable interests fell below a certain limit established in the mortgage deed.

Point 4 of the same article establishes that in any case the remuneration interest cannot be negative, which avoids that in case the variable interest is below zero (as has happened recently) the bank must pay interest to the borrower.

9.- Commissions that the bank can charge. The new law only allows to charge the following commissions:

  • In loans with variable interest, 0.25% of the total or partial capital advanced repayment during the first three years of the loan contract, or alternatively, 0.15% but in this case over the first five years of validity of the contract.
  • In fixed interest loans, compensation of up to 2% of the total or partial capital advanced repayment during the first ten years of the contract may be requested, and after that period will fall to 1.5% until the end of the loan life.
  • The change of a variable to fixed interest during the term of the loan may only accrue a commission in favor of the bank of 0.15% during the first three years of the contract.

10.- Interest on late payment. They may not exceed three percentage points on the remuneration interest that is being paid at that time. It will only accrue on overdue and unpaid capital and cannot be capitalized.

11.- Transferring a loan from one bank to another (subrogation of the creditor). It ceases to be exempt from taxes, although the Stamp Duty (AJD), which accrues on the outstanding amount of the principal plus interest, will be paid prorated by the two financial institutions and not the borrower.

12.- Foreclosure. Banks may only initiate it against debtors when:

  • during the first half of the term initially agreed, 12 installments have been unpaid or the amount of unpaid installments exceeds 3% of the initial debt.
  • during the second half of the term initially agreed, 15 installments have been unpaid or the amount of unpaid installments exceeds 7% of the initial debt.

Does the new law affect my old mortgage? No, except for the issue of commissions that may accrue for early cancellation, change of conditions or subrogation. Not so in the claim of expenses paid in its constitution.

 

Luis M. Vicente Burgos
VICENTE & OTAOLAURRUCHI ABOGADOS