NAMA is likely to seriously distort the property market because its powers are so draconian and wide-ranging, the EU Commission warned in a previously unseen report.
The concerns are raised in a 40-page document seen by the Irish Independent, but not disclosed when NAMA (National Asset Management Agency) got the green light in February.
The report says NAMA will have "powers, rights and exemptions" that are likely to distort competition and leave other companies, investors and banks at a disadvantage. And concerns over "distortions" of the market will provide ammunition to those who may seek to legally challenge NAMA's powers later this year, when liquidations of assets get under way.
When the toxic loans agency was approved by the commission in February, the Government only published a short press release.
But the full approval document reveals that the EU raised major competition issues over NAMA, which the Government has been forced to address.
NAMA and the Government now have to produce a code of conduct making sure the rights of others are not "degraded".
The EU's largest concern is that NAMA will be allowed get money from insolvent companies and developers "ahead of other creditors" and won't face any legal challenge over this.
"The commission views this power as potentially highly distortive as it directly affects other market competitors and third parties," says the document.
The Government promises to consult the EU if it exercises this power -- and would only use such powers if other creditors behaved "aggressively" in securing payment. The EU also highlights that NAMA is exempt from stamp duty and this is a form of state aid.
The NAMA Act allows the Government to get information on borrowers directly from the Revenue Commissioners, but the EU said it has been assured these powers will not be used.
And while the EU will allow NAMA to hoard land to avoid so-called "fire sales", it says it will still have to obtain the specific agreement from other banks, many of them foreign owned, to hoard these assets.
It raises concerns over powers NAMA has to "unilaterally amend" contracts and says this could effect other parties. It points out that NAMA even has the power to sell assets when this is forbidden under the original loan documents.
The Government will now have to report to the commission and the Irish Competition Authority over the use of all these powers.
The EU is not changing its overall approval and does not criticise the Government for valuing assets based on "long-term economic value". It also rejected a complaint from Fine Gael Senator Eugene Regan who claimed NAMA did not comply with state aid rules.
The EU also highlights powers held by NAMA to compulsorily purchase land and buildings, but the Government told the commission this power would only be used for isolated strips of land. The commission would have to be "consulted" about any wider use.
The documents warns that the EU and the Irish Competition Authority are entitled to take "any actions they consider as adequate'' if NAMA uses its powers in a way that distorts the property market.