EU high court could qualify Spain mortgage pricing as abusive

A general view of the entrance of the European Court of Justice (Court of Justice of European Union) (ECJ) in Luxembourg, 10 January 2019. [EPA-EFE/JULIEN WARNAND]

Spain’s mortgage interest rate index – known as IRPH – could be considered abusive, advocate general of the Court of Justice of the EU warned in his conclusions on Tuesday (10 September), which are contrary to an assessment of Spain’s Supreme Court. 

In a response to a local Spanish court inquiry, advocate general Maciej Szpunar said that IRPH – an alternative to Euribor to set mortgage rates – falls under the scope of application of the EU’s directive on unfair terms in consumer contracts.

Spuznar argued that the directive is applicable to the contract clause establishing the index used to calculate the interest rate in a loan and therefore it could be challenged in court.

In particular, he pointed out that banks are not bound by this index and have alternatives. Furthermore, Spuznar said that, in particular, IRPH’s “mathematical calculation formula is complex and not very transparent for an average consumer.”

Determining whether the consumer received enough information to fully understand the functioning of the index that often resulted in higher rates than Euribor is a matter for the Spanish courts, Spuznar argued. 

Courts in Spain, including the Supreme Court, have rejected consumer appeals against the index for years, arguing that the IRPH was not covered by the directive. The opinion of the EU’s Court advocate general challenged this.  

Nevertheless, Szpunar’s conclusions are only a preliminary analysis and a final decision is expected by the end of this year or early 2020. 

Hundreds of thousands of mortgages were granted using this index, particularly between 2007 and 2008. According to the Organisation of Consumers and Users (OCU), those who contracted a mortgage using the IRPH index paid between 1.5% and 3% more. 

If the assessment is confirmed, Spanish lenders could suffer a heavy financial impact as a consequence of potential litigations. Caixabank, Bankia, Santander and BBVA are among the most exposed banks. 

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High financial risk 

If a ruling not favouring banks is confirmed, Spanish lenders could be heavily impacted and might be forced to pay billions in compensations to affected consumers. 

DBRS estimates that 7.6% of the mortgages granted in Spain since 1999 used the IRPH index. 

According to the assessment of Goldman Sachs, for lenders, the cost of an adverse decision of the European court would be between seven billion and 44 billion euros.

As the advocate general conclusions were published, shares in Spanish lenders that are particularly exposed, Caixabank and Bankia and Banco Sabadell, went down between 2% and 3%. 

In its latest post-programme surveillance report, the European Commission already warned Spain on the potential impact a decision of the EU court could have on the country’s credit institutions. 

“Litigation costs have been significant for many banks in the aftermath of the financial crisis mainly due to misselling practices. This has led to compensation to consumers following some court rulings,” the Commission pointed out. 

“Although costs linked to litigation concerning preferential debt or shares are already paid or provisioned, some potential risks on administrative costs or applied interest rates (i.e. IRPH) could be emerging and, depending on further court decisions, could affect the profitability of some affected banks,” EU executive warned. 

Spanish banks may have to repay billions in 'abusive' fixed-rate mortgages

The European Commission welcomed the end of the bailout programme for Spanish banks, but now may be putting the country’s financial stability at risk, as it seeks further action against ‘abusive’ mortgage clauses, it was reported on Tuesday (27 October).

[Edited by Zoran Radosavljevic]

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