Buying bad/doubtful credit rights of mortgage from loans (non-performance loan,NPLs) as an alternative to the direct purchase of the property: the rights andobligations of the creditor of a mortgage loan (e.g. bank) are acquired that can be exercised, eventually by going to a public auction and get the propertyawarded as a highest bidder.

The assignor – creditor in a pre-existing loan –transfers to the assignee (usu. in exchange for consideration) the rights thatthe former holds against the debtor, so that, without extinguishing the loan, the assignee is subrogated in the assignor’s position as credito vis-à-vis the debtor, who will be obliged to the new creditor.

Following the reform of procedural legislation with Law 42/2015, of 5 October, the regulation of procedural succession is improved, since enforcement may be dispatched or continued to whoeverproves to be the successor of the one who appears as the executor in the enforceable deed against whom it is proven that he is the successor of theperson who appears as enforceable in said title.

The assignment of receivables in general doesnot require consent or even prior notification to the debtor (it does requirecommunication to the debtor for the effectiveness of the assignment against thedebtor). However, in the case of mortgage loans, it is mandatory, either due tothe debtor's consumer status and the nature of the asset (e.g. housing), especially in some regions such as Catalonia, and the existence of possible rights of first refusal or withdrawal of the debtor, so it is more than advisableto analyze in detail the clauses of the contractual documentation of the mortgage loan to be assigned and the applicable state law,  regional, local.

It can be agreed in a private contract, but the transfer of ownership of the mortgage that guarantees it (and is in theinterest of the assignee) will not take effect against third parties until itis incorporated into a public deed and registered in the Land Registry. Likewise,as a mortgage loan in all cases is formalized in a public deed, assignmentrequires public deed as well. The assignee is subrogated to all the rights ofthe assignor and the debtor’s obligations will not increase or be altered in respectof the original loan.

The regulatory framework in this area has been largelydetermined by Law 1/2013, of 14 May, ("Law 1/2013") and Law 5/2019, of 15 March, ("Law 5/2019").

Prior to the entry into force of Law 1/2013,default interest was between 18 and up to 29%, so – and this is what thebusiness has consisted of – if the mortgage foreclosure procedure is prolongedover time, the mortgage debt significantly increases its value in favour of thecreditor-assignee and the legal costs were not subject to limitation:  In an assignment of a portfolio of unpaid mortgageloans at a discount on the principal of the credit, e.g. 20%, the assignee, nowthe subrogated creditor, could claim 100% of the outstanding debt plus interestfor late payment – depending on the case between 18% and 29% and costs.

For an investor, the purchase of unpaid mortgage loans offers several business strategies:

- A financial transaction, based on auction bids higher than the cost acquisition.

- A realestate transaction: to be awarded the property at a good price. This impliesparticularly high risks that increase as the target size and costincreases:  such as studying theoperation very well taking into account the restrictions on access toinformation – normally there will only be accessible registry information, andit is not possible to access the property to perform a due diligence ofthe asset, among many other unknowns and contingencies.

- Negotiating an agreement with the debtor, such as obtaining the property as a dation inpayment in exchange for the extinction of the debt and interest.

- Forward assignment or re- sale.

Following Law 1/2013, the range of margin forthe investor was conditioned:

1. Maximum default interest: With this lawand especially Law 5/2019, late payment interest may not exceed 2% of financialinterests.

2. Legal costs in auctions of primary residence: Debtor will be liable for this concept but only up to 5% of the sumclaimed in the enforcement action.

Currently, and in view of the legislative landscape,apart from the business risks inherent to the underlying asset – the realestate property– different types, location, physical state, legal situation,etc. – purchase of NPLs present legal challenges to be addressed:

- Withdrawal of disputed credit: Thedebtor may, within a few days of becoming aware of the assignment, extinguishhis debt by paying the Assignee a sum equal to the sum the Assignee paid to theAssignor plus the expenses and interests.

-  Debt redemption: At any time during the mortgage foreclosureprocess, including auction, the debtor can redeem the debt by paying thearrears (not all the debt) and the accrued interest – both financial and delayinterests – with the assignee continuing as a creditor for the rest of the loanterm.

- Difficult applicability of early maturity clauses: Currently, and in the case of consumers and housing, a minimum of 12 or15 unpaid monthly payments or 3% or 7% debt are required to activate earlymaturity clauses, depending on whether the default occurs in the first orsecond half of the duration of the loan.

4. Abusive interest: After theauction when making the interest appraisal, the defendant, debtor can appeal italleging that the interest clause is abusive, which will further prolong themortgage process in addition to the uncertainty about in the final courtdecision. If the default interest clause is declared abusive, the creditor willbe left with the ordinary, financial interest agreed in the mortgage loan.

In any case, as a result of the doctrine of EUjustice, in particular the CJEU Judgment of 17 May 2022, Exp. C-600/19 which acceptsthe possibility of declaring the unfairness of a clause of a loan that is thecause of enforcement, even after the auction has been concluded at a finaldecision, both Spanish doctrine and jurisprudence (STS 379/2023,  of 16 March, 1215/2023, of 4 September and1216/2023, of 7 September, and STC 26/2023 and 172/2023) agree that, after thetransfer of the property to a third party in the process of enforcement, thenullity of clauses of the loan contract cannot be opposed to it or force therestitution of the property transferred under final award from an auction,  without prejudice to the fact that the bankmust indemnify the debtor for the damages suffered as a result of the annulmentof the abusive clause.

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©amber legal & business advisors This document is legalinformation for general use and should not be considered legal advice. For specific information andadvice you can contact us at info@amberbas.com andwww.amberbas.com

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