Supreme Court finds "fraud of the law" in the sale of non-performing housing

The Supreme Court of Justice (STJ) annulled, in less than a year, the sale of housing loans made by banks to companies not supervised by the Bank of Portugal, as it found the transactions to be “fraud of the law”.

In two similar rulings, one from October 2024 and the other from May 2025, the STJ assessed whether the “credit assignment” operations carried out by Banco Santander Totta and BPI in relation to specific customers were, or were not, legal.

In both cases, the panels of judges concluded that the banks made irregular sales, in violation of legislation that protects bank customers.

The deals were concluded by financial institutions with non-financial companies, which meant that customers were no longer protected by the rules of the financial system from the moment the credit was sold.

The first case concerns a mortgage loan sold by Santander to the Luxembourg company LC Asset 1 SARL. The second concerns the sale of a loan made by BPI to the company XYQ LUXCO SARL, also based in Luxembourg.

Although the STJ's decisions only apply to specific cases, they are illustrative of the practices followed in recent years by several banks in transactions involving large portfolios of non-performing loans to entities linked to asset management funds that, after acquiring the loan, work with defaulting debt collection agencies to recover the money or take possession of the property of customers who were having difficulty paying their debts.

In its ruling from May this year, regarding the BPI transaction, the court explains why it believes there is a “fraud of the law.”

According to the panel of judges, if a loan taken out for the purchase of a property intended for housing is purchased by an entity not supervised by the Bank of Portugal, the transaction is null and void because the contract “is now excluded” from the protection enshrined in the legislation that regulates bank loans (Decree-Law No. 74-A/2017, of June 23).

For the court, a citizen, by being excluded from this regime, no longer benefits from the "mandatory rules" that protect him when he faces "financial difficulty" or when he enters into "default", no longer being able to exercise the so-called "right to retake" the contract, one of the rights enshrined in this diploma.

The Civil Code allows banks to assign part or all of a credit to a third party, regardless of the debtor's consent, provided that the assignment “is not prohibited by law”.

As Decree-Law No. 74-A/2017 classifies as “fraud of the law” situations in which contracts are “excluded from the scope of application” of the diploma and, for the court, this was what happened in the sale of BPI.

In the STJ ruling, the judges argue that if a customer wants to resume credit, this cannot happen because the purchasing company "cannot grant credit." At the same time, the credit institution can no longer exercise this right.

The understanding was identical to the October 2024 ruling regarding Santander.

The two banks told Lusa that the right of repossession should no longer apply.

An official BPI source claims that if customers so wish, they will ensure this right by reacquiring the loan.

An official source at Santander also understands that the right “is not rendered unfeasible due to the nature of the transferee entity”.

However, in both rulings, the STJ considers that the right is at stake, stressing that the sale of the loan to an entity that is not a credit institution functions, in practice, “as a way of 'escaping' or making more difficult (impossible) the right that the law grants to the debtor” to resume payment in installments.

Meanwhile, there will be new rules on credit assignments. Portugal is late in transposing a directive that creates greater protection for customers, who cannot be left in a worse situation than before the sale.