The present contribution would like to give some insight in the measures adopted by the Spanish government to tackle the economic crisis caused by the shutdown under the state of alarm, that notably include a loan debt moratorium (for a more detailed analysis see Zunzunegui, 2020). A precedent for this measure could be found in the proposal issued during the financial crisis of 2008 by the Spanish Ombudsman to prevent evictions (see p. 107 of the report), which was finally not included in the Royal Decree-Law 6/2012 of 9 March on urgent measures to protect mortgage debtors without resources. The adopted regulation, that gave a minimal protection of those at risk of social exclusion, has been used by the banks as an argument for the government not to approve a mortgage debt moratorium due to COVID-19 similar to that which took place in Italy (see Remolina, 2020: p. 10).
The debt moratorium has been regulated in section IV of chapter 1 of Royal Decree-Law 8/2020 of 17 March on urgent special measures to tackle the economic and social impact of COVID-19, amended by Royal Decree-Law 11/2020 of 31 March, which supplements the former “with technical adjustments to facilitate its application”, according to its preamble. Only a mortgage debt moratorium had originally been regulated. This is regulated again and also expanded to include a non-mortgage debt moratorium. However, the reform has not taken the opportunity to provide systematic regulation. With a pronounced lack of legal technique, mandates are repeated, and rules are duplicated, which hinders understanding of it and damages legal certainty.
The purpose of the original regulation of the mortgage moratorium was, according to its preamble, “to guarantee the right to housing for mortgage debtors in a situation of special vulnerability, whose income has been reduced as a consequence of the health crisis”. Despite the fact that we are not dealing with a financial crisis but instead a temporary shutdown of economic activity, the government took as a reference the measures to protect mortgage debtors without resources adopted after the 2008 crisis, emphasising the legal protection of the right to housing. Although during the financial crisis the aim was to tackle a major economic depression lasting several years, the objective regarding the COVID-19 shutdown is quite different. The aim is to jump forward in time to overcome the shutdown and restart economic life as if nothing had happened. It is not a social bailout; it is a measure to help restart economic activity. It seeks to give the most affected debtors breathing space to overcome the impasse.
Accordingly, the regulation reforming and expanding the moratorium takes on a new perspective and reformulates the aim of the moratorium. Going beyond protection of housing as an indirect objective, the immediate aim of the credit moratorium is now, according to the preamble, “to ensure that citizens are not excluded from the financial system due to not being able to temporarily fulfil their financial obligations as a consequence of the COVID-19 health crisis”. It is seeking to provide a mortgage debt moratorium for “those having extraordinary difficulties in making payments as a consequence of the COVID-19 crisis” (see article 7 of Royal Decree-Law 8/2020). The intention is to guarantee liquidity and prevent financial exclusion, which would hinder the resumption of economic life after the break caused by the health emergency. It is intended to be “economic relief”, to give breathing space to households affected by the shutdown of the economy, especially the neediest who are in a situation of economic vulnerability.
In this situation, what the regulation is seeking is to apply a political economic measure to prevent the shutdown from becoming an economic crisis. With this aim in mind, it entitles the debtor to request a moratorium. However, not all debtors are affected by the state of alarm, only those who, as a consequence of the shutdown, are in a “situation of economic vulnerability”. Although, in principle, all debtors may be deserving of this moratorium, since they are all affected by force majeure, the regulation limited its scope to those who have been most affected and are in a situation of vulnerability. In this way, it seeks to reduce the impact of the moratorium on lending institutions and prevent a systemic risk. One must take into account that the measure is also adopted in the interests of the banks themselves, since the preamble in the original regulation states that “it helps limit bad debts”. The moratorium suspends the agreement, by prolonging its term, which in principle does not affect the solvency of the lending institution, which therefore does not have to make provisions (see European Banking Authority, 2020). In short, it is not a regulation that provides a social bailout but instead a bridging regulation, which seeks to prevent the COVID-19 shutdown from affecting the right to housing and the continuity of family and business life. For this reason, it is not appropriate to interpret its contents in light of the doctrine on the protection of mortgage debtors that arose from the 2008 crisis. It is a different system in which the vulnerable customer may request a moratorium and the bank may implement it, i.e. put it into operation by suspending the loan.
- Objective and subjective scope
The moratorium applies to all loans from financial institutions. Loans with or without a mortgage guarantee are covered, including consumer loans, albeit with a special regulation.
The mortgage debt moratorium includes home loans, but following the reform it also includes loans to acquire properties used for the economic activity of business people or professionals in a situation of economic vulnerability and buy-to-let homes when the landlord has a mortgage debt and has ceased to receive rent due to the health emergency.
The subjective scope is defined by “economic vulnerability”. The beneficiaries of the moratorium are debtors who are in a situation of economic vulnerability due to the health emergency, as well as the principal debtor’s guarantors, with regard to their principal place of residence.
The original regulation does not list “requirements” for economic vulnerability, nor does it stipulate that they will be applied cumulatively. It merely lists the “requirements” that must be used to prove a “situation of economic vulnerability”, which is the basis for requesting a moratorium. It leaves it up to the banks not only to process the applications and implement them, but also to decide how long the moratorium will last. It thus leaves it up to the banks’ social responsibility to handle applications and provide a sufficient duration to overcome the break in economic activity created by COVID-19. The regulation modifying the moratorium is configured as a right that the debtor holds, which it may exercise when it meets the requirements, with sanctions for a financial institution that breaches the obligation to implement the moratorium.
In order to be considered vulnerable for the purpose of the mortgage debt moratorium, it is necessary to cumulatively meet four requirements:
- Unemployment or, in the case of a businessperson or professional, having suffered a substantial loss of income or a fall in turnover of 40%.
- The household income in the month prior to applying for a moratorium does not exceed a certain amount.
- The mortgage repayment, plus expenses and basic utilities for the principal place of residence does not exceed 35 per cent of the household’s net income.
- Due to the health emergency, the household’s mortgage repayments, as a proportion of its income, has multiplied by at least 1.3.
These are independent requirements, although they may overlap and in many cases they do. In fact, loss of employment or a fall in sales may result in a substantial fall in household income that also affects loan repayments as a proportion of income. However, the regulation is clear in requiring the debtor to “comply with all of the requirements” and it is necessary to “jointly” meet these conditions. In claris non fit interpretatio, we cannot agree with these arbitrary interpretations that, under the new legal framework, are seeking to combine requirements in order to expand the group of customers that can access the moratorium. There is a clear political decision expressed in the regulation with the status of law to leave the majority of vulnerable debtors out of the moratorium, which contrasts with the European Banking Authority’s position in favour of this kind of moratorium in the current situation (see European Banking Authority, 2020: page 6).
- Proof of the subjective conditions
The applicants may prove that they are in a vulnerable situation through a “responsible declaration”, i.e. a self-declaration, justifying that they are unable to provide other documents at the moment due to the COVID-19 crisis (see article 17 of Royal Decree-Law 11/2020). Given the state of alarm and economic shutdown, which is a public fact, and the urgency of applying the moratorium, it must be presumed that a responsible declaration is the most effective way to access the moratorium. The lender institution bears the burden of proof for the ease of access to documentation when it comes to rejecting the application. In fact, it is envisaged that, once the state of alarm comes to an end, the beneficiaries of the moratorium will have one month to provide the expressly listed documents they were unable to provide.
- Application and granting of the moratorium
The lending institution must grant the moratorium to the beneficiaries that apply for it when they prove that they meet the legal requirements. This may be performed through a responsible declaration. With regard to the deadline for the application, the beneficiary may request the moratorium up to 45 days after the lifting of the state of alarm (see article 12 of Royal Decree-Law 8/2020).
Once the application has been received and it has been proven that the relevant requirements have been met, the lending institution must implement it within a maximum of 15 days. It is an urgent measure. The moratorium must be applied immediately, as soon as the application has been processed and proof that the requirements have been met has been verified. Its application is not conditional upon formalisation of the relevant contractual modification. In fact, it does not require agreement between the parties or a novation of the agreement in order to take effect. However, since it is a measure that suspends the agreement, it must be formalised in a public deed and registered in the Land Registry. The agreement can, of course, be modified by exercising freedom of will and the customer can be given benefits that go beyond the legal moratorium. The notarial and registry fees arising from formalisation and registration are borne by the lending institution and are discounted.
Once the moratorium has been applied, the institution must notify the Bank of Spain for administrative control purposes. In fact, each day, they must notify the supervisory body of the details concerning the application of the moratoria.
- Effects of the moratorium
The moratorium suspends the term of the agreement for three months and extends it for the same period, although the government has been authorised to extend the suspension. Consequently, the debtor will not have to pay the mortgage repayments during that three-month term. Moreover, the loan agreement does not accrue interest during the suspension of the agreement and the lending institution “cannot demand payment of the mortgage repayments or any of the items included in it (repayment of principal or payment of interest)”. In addition, “it cannot apply default interest during the term of the moratorium” with “the consequent non-application during the moratorium’s term of the early termination clause”. These reiterations reflect the degree of distrust in financial institutions, as if calling into doubt their compliance with the regulations.
- System of penalties
The consequences for breach of the moratorium system are determined for both the lending institution and the applicant.
With regard to institutions, they are regulatory and disciplinary rules and breaching them is subject to the penalties stipulated in the Law 10/2014 of 26 June 2014 on the regulation, supervision and solvency of credit institutions (a provision that is taken from article 15 of Royal Decree-Law 6/2012, although the categorisation of the breach as serious is not mentioned). As it is common in banking regulations, the civil consequences of the breach are not specified and the liability rules in the Civil Code apply.
The applicant’s civil liability for breaching the moratorium system is specified. A debtor who has benefited from the moratorium without meeting the requirements or who has simulated a situation of vulnerability “shall be liable for the damages and losses that may have arisen, as well as all of the expenses generated by the application of these flexibilisation measures, notwithstanding any other liabilities to which the debtor’s conduct may give rise.” In order to make it easier for the financial institution to file liability action, the amount of the indemnity is set at the “amount of the damages, losses and expenses, which may be no less than the benefit unduly obtained by the debtor by application of the regulation”. However, the burden of proof that there has been simulation of vulnerability is borne by the institution.
This is a forceful warning, which may discourage applications given the risk of aggravating the situation of vulnerability of someone who is financially dependent at the worst of times. There is a strikingly different tone concerning breach, when breach by a professional is always more serious than that of an inexperienced person who was ignorant of his or her regulatory compliance and in a situation of vulnerability due to the health emergency and economic shutdown. This system applies the traditional doctrine that seeks to avoid the abuse of a benefit by a person who does not need it. However, given the academic and economic shutdown, we cannot distinguish between debtors acting in good or bad faith. The worsening of economic life has affected all of us and one cannot attribute bad faith to an unprecedented event outside of our control. There may be isolated cases of people unduly taking advantage of the moratorium, but they will be marginal in a context of a general shutdown of economic activity. There are no opposing interests between the debtor and creditor here, since the creditor bank itself is the party with the greatest interest in avoiding bad debts and moving forward.
We are dealing with an urgent regulation that was rushed through and had to be modified a few days later to fill gaps and complete its scope. It is a minimal regulation, which the banks must take advantage of to overcome the temporary shutdown of economic life and which is particularly affecting loan debt. At this critical time, the banks must act in the service of society. This is no time for bargaining (see Zunzunegui, 2020), although the first example of this happening was when the government required the application requirements to be cumulatively applied, thus excluding the majority of debtors affected by the economic shutdown associated with the health emergency from being beneficiaries.
Professor Fernando Zunzunegui (Universidad Carlos III of Madrid)