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Loan agreements secured by real estate assets. The latest developments for entrepreneurs and consumers.

Oct 25 2016

Authors: Antonello Corrado, Silvia Viceconte, Giovanna Canale

Recently, new provisions favorable to banks or other entities authorized to grant credit to the public have been introduced into our judicial system, implementing the so-called Consolidated Banking Act (Legislative Decree 1 September 1993, no. 385) so as to provide the creditor with the most effective instruments for recovering the funds granted to the borrower, being either entrepreneur or consumer.

Antonello Corrado
Silvia Viceconte
Giovanna Canale

Such procedures, profoundly different from one another by derivation and content, contained in two separate law provisions, pursue the common purpose of offering creditors alternative measures to the lengthy litigation procedures of real estate enforcement, with the main objective of resolving the problem of loan defaults and the relative effects on the resulting ability to grant the credits.

«Corporate financing secured by transferring real estate, subject to conditions precedent» - new art. 48bis of the Consolidated Banking Act.

Art. 2 of Law Decree 3 May 2016, no. 59, in force since last May 4 and recently converted into Law 30 June 2016 no. 119, introduced the possibility to include in the loan agreements signed between bank and entrepreneur a transfer clause of the ownership of an immovable property or other rights in rem, in favor of the creditor or of the company controlled or connected to the same, conditioned to default of the debtor.

Said clause can be included in future loan agreements as well as on agreements existing at the date in which the provision in question was enforced, by modifying the contract terms through a notarial deed.

Once transcribed in the Real Estate Registry, the agreed upon “transfer agreement” prevails over any mortgage or subsequent registration made on the pledged property; if, instead, the clause should be affixed to the agreements already in existence at the date of enforcement of this Decree, the agreement replaces the original mortgage on the property and prevails over the transcripts and registrations executed after the mortgage.

An important regulation - to safeguard the commissoria lex ban enforced in our legal system - allows the creditor to avail itself of the effects of the transfer agreement provided that the balance between the estimated value of the property and the amount of the unfulfilled debt is remitted to the owner.

To further protect the debtor, the regulation provides that the transfer agreement cannot be applied to real estate used as main residence of the owner, his/her spouse or his/her relatives up to the third degree; it may instead applied to any other property or right in rem owned by the entrepreneur or any third party.

The law defines in detail the cases of default of the borrower, namely:

  • when the default in payment continues for more than nine months after the expiration of at least three installments, not necessarily consequential, if the loan agreement provides for the repayment obligation in monthly installments;
  • for more than nine months after the expiration of even one installment if the reimbursement term of the agreement is superior to the monthly period;
  • for more than nine months after the reimbursement deadline if the repayment in installment is not foreseen (the so-called bullet loan);
  • the default period is raised from nine to twelve months if on the date of the first expired installment the debtor has repaid at least 85% of the financed capital.

The transfer procedure is activated through the notification of a declaration signed by the creditor stating his/her intention to invoke the effects of the agreement, to be addressed to the debtor or, if different, to the owner of the right in rem in immovable property as well as to those who possess rights deriving from the title registered or transcribed on the property, specifying the amount of remaining credit.

After sixty days from the notification of the declaration, the creditor files a petition before the president of the court in which the property is located for the appointment of an expert to estimate the right in rem object of the agreement, carried out with a sworn report and in compliance with the criteria set out in art. 568 of the Italian Code of Civil Procedure.

Within sixty days from his/her appointment, the expert is required to forward via certified email the valuation report to the interested parties, who have ten days to submit their observations; within the following ten days, the expert files the final report containing clarifications and answers to the observations of the parties.

The condition precedent of default necessary for the transfer of the property is deemed fulfilled when the creditor receives the notice of the estimated value of the property, or, if the estimated value is greater than the amount of the unfulfilled debt at the time of payment of the price balance to the entrepreneur. For this purpose, the loan agreement signed pursuant to the provisions in question must contain the explicit provision of a designated bank account held by the owner of the right in rem, on which the creditor will pay the amount equal to the balance between the estimated value and the amount of the unfulfilled debt.

The procedure described above terminates with a statement, even unilateral by the creditor, to be made through notarial deed, of the debtor’s unfulfillment and the fulfillment of the condition precedent to the transfer of the property, which must be followed by the cancellation of the condition precedent in the Real Estate Registries.

  • «Default of the consumer in the real estate mortgage agreements» - new art. 120 quinquiesdecies of the Consolidated Banking Act

After the favorable opinion of the Finance Committees of the Chamber of Deputies and Senate, the Legislative Decree of 21 April 2016, no. 72 has recently been approved, implementing Directive 2014/17/EU (the so-called Mortgage Credit Directive - hereinafter, for brevity, “Directive” or “MCD”), aimed at introducing a European-wide harmonized legal framework on mortgage agreements for consumers.

These new regulations, which add a new Section I-bis to the Consolidated Banking Act (i.e. Articles 120-quinquies and 120-novesdecies), are generally applicable to mortgage agreements relating to residential immovable property enforced after July 1, 2016 between banks or other authorized financing institutions and consumers, and are aimed to implement the level of transparency of costs, conditions, and risks of the loan agreement in the bank-customer relationship, by imposing further verifications upon the interested professionals.

The most relevant innovation, and the most discussed during the decree’s evaluation phase, however, concerns art. 120-quinquiesdecies, entitled “Default of the consumer”, which introduces for the first time in our legal system an enhanced protection mechanism for lenders who deal with serious defaults of consumers, an alternative to the current judicial procedures of real estate expropriation.

Since the enforcement of such provisions, the parties of the mortgage agreement may agree, specifically, either at the signing of the agreement or subsequently, that in the event of default by the consumer for an amount equivalent to 18 monthly installments – even if not consecutives – the debt is extinguished with the transfer of the mortgaged property to the lender or with the proceeds from its sale.

This procedure, however, will be feasible only under certain conditions and will be subject to the compliance with some cautionary measures set out to protect consumers; in particular:

  • the value of the property object of the guarantee must be assessed in a fair and impartial way by an expert chosen by both parties, who makes a technical report after the default;
  • if the assessed value, or the proceeds obtained from the sale, is greater than the debt, the excess must be in any case assigned to the borrower; conversely, if such amount is insufficient to repay the debt, the obligation to pay the remaining amount shall start again six months after the conclusion of the enforcement proceedings on the property;
  • the lender cannot force the consumer to pay the expenses resulting from the default that exceed those necessary to compensate the costs incurred for the default itself;
  • the transfer clause of the mortgaged property (the so-called bankruptcy discharge clause) cannot be agreed upon in case of mortgage agreement stipulated in subrogation of a previous contract (given that the new regulation does not apply to existing agreements but only to those signed after the enforcement of the Decree in question);
  • if the mortgage agreement contains the clause in question, the consumer has the right to be assisted by its consultant in order to evaluate the benefits of the clause.

It must be noted that the above mentioned provisions will be applicable and effective only after 60 days, from the publication by the Ministry of Economy and Finance of the implementing decree, which, together with the Ministry of Justice and the collaboration with the Bank of Italy, will have 180 days from the date of enforcement of this Decree (i.e. July 1, 2016) to apply the regulation in detail.

It must be also pointed out that the use of this expropriation mechanism will not be automatic, but will operate on a voluntary basis as the result of an agreement between the parties, taking into account that - in accordance to the Law - the lender will not affect the enforcement of the agreement at the signing of the bankruptcy discharge clause.

In absence of such an agreement, the current ordinary regime remains applicable, with the possibility for the lender to declare the default and termination of the mortgage agreement after seven unpaid installments and proceed with the normal real estate expropriation procedure through foreclosure and judicial sale of the mortgaged property.

Major differences between the two regulations (entrepreneurs and consumers)

 

New art. 48 bis of the Consolidated Banking Act (banks – entrepreneurs relationships)

New art. 120 quinquiesdecies of the Consolidated Banking Act (banks – entrepreneurs relationships)

Right of the bank / lender institution

Right to transfer the asset mortgaged by way of guarantee, subject to the condition precedent of the debtor’s default.

Right to transfer the asset or to make claim upon the proceeds of the sale of the asset. The automatism of the condition precedent does not apply.

Default of the borrower

• when the default in payment continues for more than nine months after the expiration of at least three installments - not necessarily consequential - in case of repayment obligation in monthly installments;

• for more than nine months after the expiration of even one installment, in case the  reimbursement term is superior to the monthly period;

• for more than nine months after the reimbursement deadline if the repayment in installment is not foreseen.

Failure to pay 18 monthly installments not necessarily consequential.

Type of asset mortgaged by way of guarantee

Property or other right in rem in immovable property, owned by the entrepreneur or any third party, with the exception of real estate used as main residence of the owner, his/her spouse or his/her relatives up to the third degree.

Residential real estate or property rights in land or in a built or designed property.

Application of the regulation

To future loan agreements as well as agreements existing at the date of enforcement of the regulation, by modifying the contract terms through a notarial deed.

Only to agreements signed after the enforcement of the Decree in question. The credit agreements  stipulated in subrogation of a previous one are also excluded.

Procedure

Notification to the interested parties and appointment of a judicial expert who shall draft a sworn report pursuant to art. 568 of the Code of Civil Procedure.

Appointment of an expert chosen by the parties, or otherwise, appointed by the Judge of the competent Court.

Enforcement

Enforced since May 4, 2016.

After 60 days from the publication of the implementing Decree by the Ministry of Economy and Finance (to be issued within 180 days from the date of enforcement of this Legislative Decree).

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