Analysis of the new changes introduced by the regulatory Bill on real estate credits concerning responsible lending and creditworthiness

As it is well known, the aim of the regulatory Bill on real estate credit agreements (the "Bill") is to partially transpose the Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014, as mentioned above (the "Directive") into the Spanish law and its ultimate purpose is to regulate mortgage loans so that they are clearer, more efficient and competitive. The intention of the Bill is also to provide a responsible code of conduct for the creditors and enhance the borrowers' protection. It should be emphasized that the Bill extends the subjective scope of application established by the Directive and, therefore, it shall be applicable not only to all natural persons who are professionally involved in the procurement of loans secured with mortgages or with real estate guarantees regarding residential immovable property, but it is also extended to all natural persons regardless of whether they are consumers or not.

One of the main purposes of the Bill is to improve the transparency of mortgage loan agreements. For that purpose, the Bill introduces on the one hand, the basic information that must be included in the advertising of mortgage loans, as set forth in article 5 of the Bill and, on the other hand, it regulates a pre-contractual stage in order to ensure that borrowers have received all the necessary information and are fully aware of the type of product they are going to acquire form the bank.

Among the actions that must be carried out during the pre-contractual stage, the Bill also highlights the obligation of creditors, credit intermediaries or appointed representatives to provide the borrower with the personalised information necessary to reach to an informed decision on whether to sign a credit agreement or not. The personalised information shall be included in the European Standardised Information Sheet (ficha europea de información normalizada - FEIN), which will be published by decree of the Ministry of Economy, Industry and Competitiveness. In order to prepare the personalised information, the borrower should have previously delivered the necessary information on his needs, financial situation and preferences.

Although the Bill does not establish a specific time limit for the delivery of the personalised information indicated above, merely raising the fact that it must be delivered in good time, the truth is that among the transparency rules regarding the commercialization of mortgage loans it is pointed out that certain information and documentation shall be provided (according to article 12.1 of the Bill). Accordingly, this documentation shall include the FEIN, which is mandatory, the Standardised Warning Card (ficha de advertencias estandarizadas – FIAE), which includes the credit basic requirements, and the draft credit agreement, which format will be approved by the Government. All the aforementioned documents shall be provided to both the borrower and the notary at least seven days before the signature of the credit agreement.

Another remarkable aspect of the Bill is the establishment of a mechanism to verify the obligation of transparency by the notary. Notaries shall provide impartial and free of charge advice to the borrower within seven days prior to the signature of the credit agreement. The notary shall clarify any doubts that the borrower may have in relation with the draft credit agreement and shall verify that the deadlines and all the necessary requirements to ensure transparency have been fully met. The notary shall record these circumstances in a notarial act prior to the signature of the credit agreement. Therefore, notaries and Land Registry's officers will contribute to verifying the lawfulness of the operation, as they will not execute mortgage deeds unless the borrower can demonstrate that all the pre-contractual information was provided at least seven days before the signature of the credit agreement.

In this regard, we believe that, in practice, this measure will obstruct and slow down the signature of credit agreements. The fact that the notary has to document the assessment in a notarial act shall mean that the borrower will have to go to the notary's office at least on two occasions: the first time to sign the notarial act at the very latest on the day preceding the execution of the credit agreement deed, and the second time to sign the credit agreement. In any case, due to the function assumed by the notary, it can be implied that the notary will at least make sure that the borrower has a clear understanding of the agreement and of the FEIN, in the latter case, the document have an extension and complexity comparable to the mortgage loan agreement itself, in accordance with the form attached to the Directive.

Finally, the Bill aims to prevent over-indebtedness and the granting of irresponsible credits by including the obligation of creditors to evaluate the borrower's creditworthiness before the conclusion of a credit agreement, regardless of whether or not the creditor is a credit institution. Likewise, the creditor will have to implement specific internal proceedings for these purposes, which will have to be periodically reviewed.

From the date of entry into force of the Bill, the evaluation of the creditworthiness regarding loans with real estate guarantees will no longer be based on the value of the guarantee (except where the purpose of the credit is to construct or renovate residential immovable property), but the creditor will have to take into consideration when assessing the borrower's economic capacity the regular expenses, debts or other financial commitments, as well as incomes, savings, real estate assets and foreseeable incomes in retirement, among other issues.

With reference to the assessment of the creditworthiness, it should be noted that (i) an incorrect evaluation of the creditworthiness (because the analysis was incorrectly conducted or the borrower provided incomplete information) does not entitle the creditor to cancel or alter the credit agreement to the detriment of the borrower, except when the borrower has intentionally withheld or provided falsified information; and (ii) the creditor will only make the credit available to the borrower if the result of the evaluation of creditworthiness is positive, that is, if the analysis indicates that the obligations resulting from the credit agreement are likely to be met in the terms provided under that agreement.

In conclusion, although the will and the purpose of the Bill is to implement the transparency rules to ensure responsible lending and the evaluation of creditworthiness, the truth is that we will have to wait until the Bill is finally approved to find out whether its final drafting and subsequent implementation by the courts will address the failures identified in the industry.