Spanish banks lose European case over mortgage floor clauses

In the past years there has been a lot of controversy regarding Spanish variable mortgages. At the core of this controversy are the so called floor clauses or “clausulas suelo” in Spanish. Spain’s banking sector suffered an unexpected blow on Wednesday when the European Court of Justice ordered lenders to hand back to their clients all the money they made on “unfair” mortgage floor clauses.

A floor clause sets a minimum interest rate for variable-rate mortgages. This means that even if the Euribor (or the applied index) drops to historical lows (which has been the case), the rate applied in the mortgage will never go below the “floor”. The issue is that many of these “floors” are quite high, so in reality these mortgages are only really variable in one direction: upwards.

As a loan can be agreed based upon fixed or variable interest rate, the loans agreed with variable rates are usually linked to an official interest rate (in the UK the LIBOR, in Spain the EURIBOR) plus an extra amount (known as spread or margin). Thus, what the mortgagee actually pays the bank every month is: a portion of the capital plus the benchmark or interest reference plus the spread.

The Supreme Court issued a historical Judgement (May 9th 2013) ruling illegal all floor clauses entered in the mortgage contracts from BBVA and two other Spanish banks. The conclusions of this document works like a handbook on the use of floor clauses in fair contracting:

• The Courts must protect the weaker party in an agreement, usually the consumer against the lender.A clause is abusive when: a) it limits only the rights of the consumer, and b) it has not been negotiated and discussed individually between the parties.
• The professionals (the banks) must prove that they offered to discuss the essential clauses individually, and has offered the consumer (the borrower) alternatives.
• Any clause deemed abusive must be taken off the agreement, retroactively, i.e. not from the moment it’s declared abusive, but from the date the contract was agreed.

What can you do?

1. If you have a floor clause in your mortgage rule number one is to not sign anything from your bank. Many banks have tried to get people to sign new conditions in exchange for an improved rate or other improvements. The problem is that when you sign these improved conditions, you usually also sign away your right to take legal action against the bank at any later stage, even though this can be declared void as well, so if you have sign with your bank, you can still take actions.
2. If your mortgage agreement contains cap & floor clauses, please don’t hesitate to contact us. As we can help you to remove this clause and more important, we can recover all the money you paid extra from day one.