A clearer view of the horizon for credit servicers in Spain
The passing of a new law often brings unforeseen circumstances that affect an entire business sector. This happened to credit servicers or purchasers of NPLs with the Spanish Law on Real Estate Credit Contracts (LCCI), which made the registration of "real estate lenders" and "real estate credit brokers" mandatory in Spain. The LCCI contained certain ambiguities that set alarm bells ringing for participants in Spanish NPL market and particularly raised concerns in the credit servicing industry about the potential regulatory risk of being forced to register locally. However, the Office of the General Secretary of the Spanish Treasury, in response to an earlier request for resolution filed by GARRIGUES, clarified on May 27, 2021 that servicers do not fall within the lender or credit broker categories, as defined in the LCCI.
This response from the Spanish Treasury has relevance for the entire credit servicing industry, which plays a leading role in the collection of NPLs, a sector in which Spain is the third largest country in the European Union in terms of volume of transactions, after France and Italy. Transactions with these types of loans and the role of the servicers that recover them are unquestionably topical in view of the increase in delinquency resulting from COVID-19 and the continuous pressure from the European Central Bank for Spanish financial institutions to transfer NPLs, thus reducing their coverage for defaults and rationalizing the resources allocated to the recovery of these loans.
In recent years, the Spanish real estate finance market has undergone a far-reaching modernization process, reflected in the emergence and consolidation of new operators, including credit servicers. However, this new reality cannot be met with local regulations that impose different registration and authorization requirements to those established in the work underway for credit servicers in the European Union.
Indeed, the Spanish Treasury's clarification, which was awaited by the sector and comes in response to several requests made by GARRIGUES for the main Spanish servicers, including Altamira, Finsolutia and Copernicus, comes in the context of the preparation of a specific European regulation, which the Spanish Treasury also notes. The aim of this regulation is precisely to organize, promote and regulate the credit servicing industry, including the creation of a specific register for these operators.
Now it is clear that credit servicers operating in Spain do not have to register locally, a question that was not expressly asked in this request, and could raise doubts, is whether the vehicles of the funds that purchase the NPL portfolios should do so.
Indeed, although there is no definitive position from the Bank of Spain or the Spanish Treasury on this subject, as always nuance is important and the devil is in the detail. It is important to remember that the LCCI requires to be registered only those who, as genuine lenders, provide financing to the borrower. And it turns out that, when NPLs portfolios are purchased, the financing was granted years earlier by the originator, and in many cases the loan is in default, has matured, has been called in, or may even be in a judicial foreclosure process.
The reality imposed by the market - and we see this all the time in the sale and purchase of NPL portfolios - is that it may be considered that the fund vehicles that buy them do not acquire the loan contracts as such, with all their bundle of rights and obligations, and therefore it could be argued that the fund vehicles do not place themselves in the position of a proper lender committed to continuing to relate to the borrower, who has inevitably ceased to be a party to a loan contract to become the debtor of a balance due and payable. And if, according to this view, the fund vehicles do not acquire loan contracts, it is hard to conclude that they can simply retain the position of lender and thus be required to register.
The purpose of registration in Spain of “real estate lenders” or “real estate credit brokers” is to protect borrowers in their dealings with those operators by providing remedies against the creditor's activities arising from services related to the lending activity, i.e. from discharging the specific activity of a lender professionally.
But the transparency in contracting and liability coverage sought by the Spanish local registry is displaced in favor of the more complete, direct protection that NPL debtors demand and can obtain: that of the Spanish courts. When the scenario around the loan contract is confined to the borrower becoming a mere debtor and the lender a mere creditor, and the loan contract itself has vanished to give rise to a balance to be claimed in court, it makes sense to avoid hyper-regulation, but that is not all. It is also a question of getting the level of protection for the failed debtor right, which is judicial and not regulatory, since it makes little sense to have a loan contract supervised by a local registry if it has ceased to exist and the balance of the loan is going to be claimed before a judge.