Real estate credit agreements. New regulations.
Buying a new home or renovating or maintaining your present home and need a loan? Need money and thinking about mortgaging your home, storeroom or parking space? If so, you need to know that Law 5/2019 regulating real estate credit agreements (Spanish version, opens in a new window) was passed on 16 March and will come into force three months later.
The new Law establishes a series of rules on borrower protection and requires that lenders and real estate credit intermediaries act honestly, impartially, transparently and professionally, respecting at all times their clients’ rights and interest.
The key new features include, in particular, new regulation of the pre-contractual stage, which seeks to ensure that customers receive the information and the advice necessary to understand the elements that make up the loan.
As regards transparency, the Law regulates:
- The pre-contractual information documents: the European Standardised Information Sheet (FEIN by its Spanish abbreviation) and the Standardised Warning Sheet (FiAE by its Spanish abbreviation).
- These are personalised documents that must refer to the specific person and transaction concerned.
- The lender must deliver these documents to you at least 10 calendar days before the loan is signed.
- The FEIN replaces the personalised information sheet (FIPER by its Spanish abbreviation) and is legally binding.
- The FiAE informs the borrower of the main clauses or elements of the loan.
- The advice that the Notary Public must give the borrower to ensure that he/she understands the obligations being assumed (compliance with material transparency). Thus, for the purposes of execution of the deed of loan or credit, the following conditions must be met:
- The bank must have delivered the pre-contractual information documents (the FEIN, the FiAE and others required by law) in due time and form.
- The borrower must necessarily have attended the Notarial office, at least one day before the loan is signed, to receive individualised advice, free of charge, from the Notary Public on the main clauses of the agreement and to answer questions on the information he/she has received on the transaction. (Any guarantor who is a natural person will also have to attend the Notarial office before the deed is signed).
The Law also establishes a series of rules of conduct for lenders and credit intermediaries. For example, it requires that staff of lenders and credit intermediaries have at least a minimum awareness and knowledge of the products being sold, and that their remuneration does not depend on the number of loan applications they accept.
Lastly, the Law amends certain aspects of the existing regulations:
- Early termination. Stricter requirements are established for cases in which lenders may demand full repayment of loans in the event of default:
- If the default occurs during the first half of the loan term, early termination is only allowed if the default amounts to 3% of the capital provided, or in any event if it amounts to 12 monthly instalments.
- If the default occurs during the second half of the loan term, early termination is only allowed if the default amounts to 7% of the capital provided, or in any event if it amounts to 15 monthly instalments.
- In addition, the lender must grant the borrower a period of at least one month to pay the amounts outstanding before early terminating the loan.
- Late payment interest. The ordinary interest rate applicable plus 3 percentage points on the principal amount outstanding and unpaid
Late payment interest will only be charged in the case of a residential mortgage or a mortgage on a storeroom or parking space, and provided the borrower is a natural person.
- Early repayment, that is, amounts paid to the lender by the borrower when he/she repays all or part of the principal amount outstanding ahead of schedule. In addition, the Law establishes a more advantageous system when early repayment is used to swap from a floating to a fixed interest rate.
The Law regulating Real Estate Credit Agreements will apply to all agreements signed subsequent to the date of its entry into force. However, it will also apply to agreements signed previous to that date in the event of:
- Changes to a loan or credit agreement, by means of novation or subrogation.
- Change from a floating to a fixed interest rate by means of interest rate novation or subrogation of lender.
- Early termination owing to default once the Law has come into force, although the borrower may opt to have the clause contained in his/her agreement applied if it is more favourable.
The Law is very long and highly detailed. In this post we have set out some of the main points. In subsequent posts we will analyse other aspects of interest to bank customers.