This article provides a general overview of current trends in the Spanish non-performing loan ("NPL") market and highlights the main legal issues of these transactions from a practical standpoint.
From 2011, Spanish financial institutions have sold large portfolios of secured and unsecured NPLs to investment funds through several competitive processes. These transactions have also given birth to an ancillary-servicing industry focused on the management and enforcement of NPLs and the management of the awarded real estate ownerships (the "REOs").
Addressing the NPL overhang has been essential for the recovery of the Spanish banking sector and has catapulted Spain into becoming one of the main hotspots in the European NPL market.
There remain attractive opportunities for both domestic and international investors and two recent factors will shape the future of the Spanish NPL market:
- The final guidance on NPLs to financing institutions published by the ECB on March 20, 2017, which fosters the early management of defaulting loans and the true sale of NPLs. Although currently non-binding, all Spanish financial institutions take the guidance into account when managing NPLs and implementing any potential competitive processes for sales to third-party investors.
- The new models on classification and measurement of credit risk established by Circular 4/2016 of the Bank of Spain, which will be effective for financial years beginning on or after January 1, 2018. The models focus on the continuous valuation of the effective collateral and establish loss allowances for expected credit losses not covered by such effective collateral. It will likely lead to: (i) unsecured NPL transactions subsequently being launched in the market, as the schedule of loss allowances for doubtful risks (more than 90 days past due or reasonable doubts regarding total recovery) has been strengthened for the first nine months, but has been extended to 21 months to reach 100% coverage; and (ii) secured NPL transactions being more difficult to implement, as the credit allowances might be lower than those currently calculated by the Spanish financial institutions (i.e., sales of secured NPLs at low prices will have a higher impact on the P&L account).
The vast majority of NPL transactions in Spain are structured as a sale of (i) the contractual position under the NPLs (by the purchaser's subrogation into any rights and obligations held by the seller thereunder, which requires the borrower's prior consent, except where the financing agreement contains express authorisation from the borrower), or (ii) the credit rights under the NPLs upon their acceleration (which, according to the Spanish Civil Code, generally does not require the borrower's consent).
In a sale, it is always necessary to notify the debtor of the assignment in order to: (i) avoid payments being made to the seller; (ii) mitigate the risk of any set-off against the former holder of the NPLs; and (iii) comply with Spanish data-protection regulations (see Data Protection section below).
Alternatively, the NPLs transactions can be structured as a sub-participation, an assignment of the economic rights (cesión de las resultas o de los derechos económicos), or as a securitisation; however, these structures are not customary in the Spanish market.
SPAs contain typical representations and warranties (e.g., validity and existence of the NPLs and their personal guarantees and security interests, capacity of the borrowers and accuracy of specific data relating to the NPLs), as well as other important commercial representations depending on the nature of the portfolio.
As Spanish financial institutions always carry out competitive processes for the sale of NPLs, there is increasing scientific evaluation of NPLs during the due diligence process, where the determination of a recovery strategy and mitigation of risks play a key role for investors. This may allow the investor to minimize any requests for additional representations and warranties from the seller and afford a competitive advantage in a market in which sellers' leverage is continuously increasing.
Any actions and rights to which the purchaser may be entitled in the event of dispossession (evicción) or hidden defects (vicios ocultos) under the Spanish Civil Code and other applicable legal provisions are commonly replaced by a specific liability regime established in the SPA:
- In the event of any misrepresentation, the corresponding NPL will be deemed defective, and the seller will be entitled to opt for either: (i) the repurchase of the defective NPL; (ii) the payment of direct damages; or (iii) the replacement of the defective NPL (replacement is seldom accepted as the remedy by the bidders due to the complexity of the process).
- In the event of the seller's breach of its obligations under the SPA, the seller will pay direct damages to the purchaser.
- Parties are not entitled to terminate the SPA.
- The seller's liability is limited as follows:
- Liability under the SPA is capped at a certain percentage of the purchase price.
- The seller will not be liable until the total liability exceeds a specific threshold (which can be negotiated as either deductible or tipping basket).
- The seller's liability under the SPA will expire after a certain period following the closing date.
- Trends for the above limits are summarized in the table below.
|Transaction||Threshold||Liability period||Maximum limit|
2011-2015: between 1% and 3%.
2016-present: between 1% and 3%.
2011-2015: 18 months.
2016-present: between 12 and 15 months.
2012-2015: Between 75% and 100%.
2016-present: distinction between fundamental R&Ws (up to 100%) and non-fundamental R&Ws (between 20 and 75%).
2011-2015: tipping basket, between 1% and 3%.
2016-present: between 3% and 5%.
2012-2015: between 18 and 24 months.
2015-present: between 15 and 18 months.
2015-present: Not higher than 75%.
If an NPL is deemed litigious pursuant to article 1,535 of the Spanish Civil Code, the debtor will have a put-back right (derecho de retracto) at the price the NPL was sold for, plus interest and costs.
This right is increasingly asserted in secured NPL transactions, although effectively exercised, due to the fact that: (i) according to prominent legal scholars, the right only applies if the NPL is litigious due to substance grounds (motivos de fondo) and not due to purely procedural grounds (motivos de forma) as at the effective date; and (ii) the debtor must exercise the put-back right and pay the corresponding amounts during the nine days following the date on which it was notified the sale price of the NPL.
According to Spanish data-protection regulations, the processing and assignment of information on debtors or guarantors who are individuals (personas físicas) requires that:
- The assignment has either been consented by the individuals or falls under any other legitimate ground.
- Individuals are properly informed of: (i) the assignment; (ii) the new data controller (i.e., the purchaser); and (iii) the purposes for which the data will be processed.
The Spanish Data Protection Authority is highly active in NPL transactions and several sanctioning resolutions have been imposed in recent years that have resulted in administrative fines of up to EUR 300,000.The Spanish Data Protection Authority is currently focusing on unlawful incorporations of the personal data of debtors in blacklists and the quality of the personal data of debtors transferred to the purchaser.
Main Tax Implications
- No Spanish VAT should be payable, as NPL transactions are neither subject to, nor exempt from, Spanish VAT. If the acquiring entity is not based in Spain, the analysis should also be made in its country of residence.
- The acquisition of unsecured NPLs is not subject to Stamp Duty.
- The acquisition of mortgage-secured NPLs is subject to Stamp Duty of between 0.25% and 1.5% (depending on the autonomous region in which the underlying asset is located).
Although the traditional Stamp Duty basis was the total mortgage liability secured by the loan, the Spanish tax authorities have recently issued various rulings stating that the Stamp Duty basis should be the outstanding principal of the NPL, plus the mortgage liability guaranteeing ordinary interest, late-payment interest and other expenses and costs on a proportional basis.
Consumer loans. Brief comments on enforcement
In recent years, protections afforded to debtors and mortgagors has been reinforced, especially when; (i) the mortgaged asset is the debtor's main residence; and/or (ii) when the mortgagor is at risk of social exclusion.
The following are the most important measures affecting the enforcement of consumer loans:
- Judges can decide whether or not a contract contains unfair clauses. Additionally, the existence of unfair contractual clauses has been included as a new ground to challenge foreclosures. In both cases, if a clause is found to be unfair, either the foreclosure will be dismissed, if it was based on the contractual clause in question (i.e., acceleration clause), or it will proceed without the unfair clause (i.e., default-interest clause). This rule is, in principle, only applicable to consumers and for both mortgage foreclosures (judicial or non-judicial) and ordinary monetary enforcement.
- Default interest on mortgages on a debtor's main residence has been legally limited to three times the statutory interest rate and cannot be compounded.
- If the mortgaged property is the debtor's main residence, the enforcing creditor may request that the asset be awarded for 70% of its reference price (or 60% if the debt is below 70%).
- If the foreclosed asset is the debtor's main residence, the costs of the proceedings cannot exceed 5% of the sum claimed. This rule applies to both mortgage foreclosures and ordinary monetary enforcement.
- When the amounts obtained at public auction (either in mortgage foreclosures or in ordinary monetary enforcement) are lower than the debt, the debtor remains liable for the outstanding amount. If the foreclosed asset is the debtor's main residence, Spanish law establish specific conditions under which the foreclosed borrower may be released by paying a percentage of the outstanding debt (60% of the debt in five years or 80% of the debt in ten years). Additionally, if the creditor is awarded the debtor's main residence, the outstanding debt will be reduced by 50% of the gain obtained on a sale made within ten years of the repossession.
Moreover, the following recent amendments may also affect the recovery strategy:
- If the lender is a credit institution that has voluntarily adhered to the Code of Good Practice for restructuring mortgage loans on principal residence, both mortgagors and mortgage guarantors below the social-exclusion threshold may benefit from specific measures established therein: (i) debt restructuring; (ii) release of debt; and (iii) debt-to-asset swaps (dación en pago).
- To manage reputational risk, sellers tend to establish specific restrictions in the SPA for the purchasers' management of this type of NPLs.
- Some individual debtors may, under certain circumstances, propose an out-of-court payment agreement (acuerdo extrajudicial de pagos), resulting in the prohibition or halting of enforcement proceedings in respect of unsecured claims. The enforcement of secured claims may be commenced or continued insofar as the security does not involve assets that are necessary for the continuity of the debtor's business or the individual's main residence.
- Specific regional laws and regulations grant regional and local authorities rights of first refusal and/or pre-emptive rights over, among others, properties awarded in foreclosure proceedings and social housing.