Mortgage floor clauses: Another black hole for spanish banks?
General remarks on the Spanish housing sector
Since the financial crisis in summer 2007, Spanish banks have permanently lived in the eye of the storm. The sharp plunge on the value of real estate assets caused huge loses in the vast majority of them, leading to subsequent bailout funded by the EU of a total amount of around €39.5bn, which aimed to cure the balance sheets of the banking sector.
However, the thunderstorm is not over for banks. Apart from coping with the painful hangover caused by real estate bubble, another serious problem is threatening the banking sector, consisting in the potential invalidation by civil courts of the so – called floor clauses included in housing loans secured through mortgages.
Spaniards are extremely keen on owning their “own castle”. As per the official statistics, home ownership stands at around 83per cent while only 17 per cent rent their dwellings. This affection for ownership, which has ancestral causes that are too long to be explained in this piece, has lead in turn to a great demand for credit and a very significant exposure of Spanish banks to real estate. Moreover, between 1996 and 2007, banks entered into a kind of “fools race” to gain market stake, offering increasingly lower interest rates (which usually were indexed to EURIBOR plus a margin which was becoming narrower day-by-day).
Thus, over the “war on interest rates” margins applied by most banks did not even cover their financing costs, so they began to include within their mortgage loan deeds the so – called “floor clauses “ (in Spanish, “Cláusulas Suelo”), by which the drop of the variable interest rate applied to any given loan was limited up to a certain fixed rate (which was usually set around three or four per cent). As a result of such clauses, many individuals and households who entered into mortgage loans indexed at a variable rate, are not enjoying the current extremely low interest rates (to date, EURIBOR is at 0,53 per cent) as they are stuck in the fixed rates arising out of the floor clauses they signed.
The storm begins: the ruling of the Supreme Court cast on 5 May 2013.
In early 2010, a consumer-defending association (AUSBANC), filed a claim before the Courts of Seville against three banks (Banco Bilbao Vizcaya Argentaria, NGC Banco, S.A.U. and Cajas Rurales Unidas), asking for the floor clauses included in several loan mortgages granted by such entities to be declared null and void on the grounds of non-completion by the banks of the information duties set out in the EU Directive 93/13. Such a claim was definitively settled by the ruling of 9 May 2013, by the Spanish Supreme Court, by which floor clauses that had been contested in the procedure were declared null and void, according to the following grounds:
- The infringement by sued banks of their duties of information on the inclusion of the floor clauses as they had failed to prove that they complied with the information standards imposed by the EU Directive 93/13 and the Spanish statutes on general contacting clauses and consumer protection.
- By introducing floor clauses into mortgage loans, banks were transforming de facto loans granted at variable rates into fixed rate loans with the vast majority of the clients entering into such loans unaware of the inclusion of floor clauses or not sufficiently informed on its potential consequences in the event of a sharp drop in interests rates (as eventually happened). Thus, bank clients were in fact misled and were not fully aware of the consequences of what they were signing.
- The unbalance between the level of floor clauses and cap clauses imposed within the same loans. As a common practice was to set a floor clause (around three to four per cent) along with a cap clause (which could vary between a scope of 15 to 20 per cent), the Supreme Court resolved that cap levels were unbearably elevated compared to floor rates, so that loan conditions were bluntly biased in favor of banks.
Nevertheless, the Supreme Court dismissed the petition by which plaintiffs were seeking an order for sued banks to pay back to their clients the amounts unduly collected by application of the floor clauses. In a contested provision of its above-mentioned ruling, the Supreme Court resolved that the declaration of nullity of the floor clauses did not have any retroactive effects, so banks were not obliged to pay back the amounts unduly collected, founding such decision in the necessity to preserve legal certainty and to avoid consequences against country’s economic stability and general interests. Most of the legal community has openly considered the lack of retroactive provisions as a breach of the general rule set out by Article 1.303 of the Spanish Civil Code by which the nullity of a contractual provision implies the obligation of the parties to give back or to undo all what they have received by virtue of the null provision.
In its turn, such ruling has triggered another huge potential undermining contingency for the balance sheets of Spanish banks, as banking local authorities requested banks to inform on their exposure level resulting from a hypothetical general suppression of the floor clauses.
First Instance Court rulings in favour of retroactive effects of the nullity
Meanwhile, lawsuits filed by individuals and households demanding the nullity of the floor clauses along with an order to the sued banks to pay back the amounts unduly collected are being ruled by the First Instance Courts. The rulings so far have mainly accepted the claims in full, condemning banks to pay back the amounts. Even the First Instance judgments after the Supreme Court ruling casted on 5 May 2013, fully accept the claims. So we are in fact assisting in a sort of revolution as the lower Courts do not apply the criteria set out in the mentioned Supreme Court ruling (ie, rulings cast by First Instance Court 2 of Malaga on 23 May 2013, and by the First Instance Court of Bilbao on 19 June 2013).
Most of the rulings of the first instance courts are based on the general provision set out in Article 1.301 of the Civil Code, whose application was avoided by the Supreme Court on the grounds of the preservation of general interest. Over the last few weeks, this tendency of the lower courts to entirely accept the claims in spite of the referred Supreme Court ruling seems unstoppable.
All the foregoing puts on the table some interesting and concerning questions: what is the actual exposure of Spanish banks to floor clauses contingency? Does this result in even worse borrowing conditions in Spain, which could undermine the economic recovery? And last but not least, how is the inconsistency on the retroactive effects of the nullity of the floor clauses between Supreme Courts and lower courts going to end? Only time will provide the answers.