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

Consumer organizations have challenged the 'fix rate' clauses in the courts and in the streets over the last years [ADICAE]

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).

The EU Court of Justice is looking into a case referred by a Spanish judge last April on fixed-rate clauses (“cláuslas suelo”). A minimum interest rate is applied to mortgages regardless of any variation in the Euribor rate. This clause meant that millions of consumers did not take profit of the ECB’s low interest rates over the the crisis, increasing their mortgages up to €3,000 yearly in some cases, according to consumers’ organizations.

Spain’s Supreme Court ruled in May 2013 that Spanish banks should pay back the excess only from that day onwards, when one of these clauses was declared “abusive”. The Spanish judges considered that a full implementation of the retroactivity clause would have caused a “major disruption of the economic system”.

However, according to the EU law, the consumers’ rights should be fully restored, and therefore the retroactivity should not be limited, the EU executive underlined in a legal opinion drafted last September.

In the letter sent to the EU Court of Justice, the Commission argues (in legal language) that the termination of the use of a particular clause declared invalid by being abusive “is not compatible with a limitation of the effects of such invalidation, unless such limitation it is necessary to preserve the principle of res judicata.”

The document adds that, according to the directive on unfair terms in consumer contracts, “it is not possible that national courts can moderate the repayment of amounts already paid by the consumer under a clause declared null since the beginning, due to imperfect information and/or transparency.”

According to some estimates, there are over two million mortgages in Spain with these clauses, although not all could be seen as “abusive”. Otherwise, the Spanish banks could be forced to pay back up to €36 billion.

The Commission’s legal observations are part of the standard procedure in the preliminary period of a EU´s top court ruling. The hearing could take place by the end of the year or early 2016.

European sources explained that in very few cases the EU judges have ruled against a decision of a member state’s top judges, as it would be the case in this matter.

A Commission spokesperson said that this opinion represents an “interpretation of the EU law” but it is “not binding” for the EU judges. “The ultimate say rests within the court in this matter”, the spokesperson added. The EU executive later clarified that the issue of financial stability was not put to the consideration of the Commission. However, it may be discussed during the court hearing, if the EU judges were to consider it relevant to address the questions asked by the Spanish court.

The Commission has also conducted a wider assessment of the Spanish legislation on consumer protections. The institution has welcomed recent changes to improve their rights. Nevertheless, it is yet to be determined if the Spanish rules on civil proceedings, including on mortgage enforcement proceedings are fully in line with the directive on unfair terms in consumer contracts. The Commission is currently analysing the clarifications sent by the Spanish authorities last June.

The ruling is highly anticipated in Spain, where thousands of claims have been put forward against the numerous banks using these fixed-rate clauses. Some financial institutions, such as Bankia and CaixaBank, have opted for scrapping these clauses, while others still maintain them as they argue they do not represent any wrongdoing.

Spain concluded its 38.8 billion euro financial assistance in January 2014. In the latest post-programme surveillance released last May, the Commission and the ECB underlined that the stabilization of the financial sector was progressing well. However, some challenges remain as the declining stock of credit and the current low interest-rate environment pose risks to the long-term sustainability in banks’ profitability.

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