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A Law to Strengthen Borrower's Guarantees

| News | Real Estate

Maria Chornet talks on the new law regulating real estate credit contracts that enters into force on June 16 in an article by El Economista

On 16th June, Law 5/2019, of 15th March, regulating real estate credit agreements, enters into force. It was published to comply with the obligation to transpose, with considerable delay, Directive 2014/2017 of the European Parliament and of the Council on credit agreements concluded with consumers for real estate for residential use.

But this Law on Real Estate Credit Contracts goes one step further than the content of the Directive, because, in addition to introducing a detailed regulation of the legal regime of credit intermediaries, it also tries to give a legislative response to the questions in the matter relating to real estate credit agreements that have caused more litigation, with mostly contradictory jurisprudence.


On this point, it should be noted that the Law, in using the powers granted by the Directive itself, extends its scope of application to loan contracts that are guaranteed by mortgage (or any other right in rem) on immovable property for residential use when the debtor, guarantor or guarantor is a natural person (not necessarily a consumer), establishing a series of provisions with the aim of "enhancing legal certainty, transparency and understanding of the contracts and their component clauses", in relation to these contracts, as indicated in the explanatory memorandum itself.

Thus, the Law regulates the entire phase prior to contracting in detail, indicating (i) what basic information has to appear in the advertising of real estate loans, (ii) the obligation to register the clauses that form general conditions of contracting, (iii) the offer, by means of a standardized form, (v) the pre-contractual information and documentation to be provided at least ten days prior to the signing of the loan, among other obligations..

In addition, prior and mandatory notarial intervention is required, since it is indicated that the borrower, bondsman and/or guarantor must appear before the notary of his choice before the formalisation of the contract in order to obtain in person individualised advice on the matters that the law itself relates to, and that the prior documentation has been delivered by the lender within the legally stipulated deadlines has to be verified too. The notary must draw up a deed of all this (free of charge), at the latest on the day prior to the authorisation of the public deed of the loan contract, without which the public deed of the loan cannot be authorised, as expressly indicated in the Law.

In short, what the Credit Contracts Act deals with in this point is to regulate all pre-contractual obligations of information and documentation in order for the borrower, bondsman or guarantor to be able to make an informed and well-founded decision on the contract to be formalised, also seeking to reinforce compliance with transparency control. On the other hand, it should be noted that the Law seeks to strengthen some aspects of the legal regime of mortgage contracting, through the introduction of certain mandatory rules that affect the content of some of the clauses that have caused more jurisprudence.

In this regard, to mention some of the most relevant issues established by the Law, it is determined what is the distribution with respect to the expenses related to the granting of the contract. It also stipulates the borrower's ability to repay all or part of the amount due. It also establishes the regulation relating to the early maturity of the contract, the general prohibition of the sale of products linked to the loan, the legal determination of interest on arrears or the prohibition of modifying the interest rate of the loan, unless both parties agree in writing.

With regard to the temporal scope of application, it is expressly established that the Law will not apply to loan contracts entered into prior to its entry into force, except for those contracts that are subject to novation or subrogation after its entry into force, although an exception is established regarding the application of certain rules. For example, the borrower's right to early repayment of outstanding capital is recognised in all cases, as well as the application of the provisions relating to early maturity (unless this had taken place prior to the entry into force of the Law), if the provisions of the signed contract do not worsen.

Finally, it is important to note that, once the Real Estate Credit Contracts Act comes into force, the possibility of filing an extraordinary opposition incident based on grounds relating to the abusive nature of a contractual clause that constitutes the basis for performance or that would have determined the amount payable is established for certain cases. The different legal operators have received this as good news, in general, the publication and upcoming entry into force of this Law that seeks to strengthen the guarantees for borrowers in the contract and harmonize, for the sake of legal certainty, issues that until now were controversial and were resolved in the courts with greater or lesser fortune. We will see if its application will reduce the litigiousness in the matter of real estate loans.

You can download the article in PDF in the following enlace.

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