Spanish banks ordered to repay mortgage interest

Spanish bank stocks fell strongly yesterday after a European court ruled lenders must reimburse clients who signed mortgage contracts that prevented them benefiting from a steady drop in interest rates. The decision marks another blow for Spain’s banking system, which is already reeling from the impact of mounting loan defaults, shrinking credit demand and tougher capital rules.

The Bank of Spain estimates the ruling could cost Spain’s banking sector over four billion euros ($4.2 billion), just four years after it received 41.4 billion euros in European Union bailout funds. Spanish bank stocks suffered heavy losses with small lender Liberbank leading the fall, down over 11 percent in early afternoon trading. Spain’s Supreme Court ruled in 2013 that so-called mortgage “floor clauses”, which impose a limit on how far interest rates in a variable rate mortgage can fall in line with the benchmark rate, were unfair because consumers had not been properly informed of the consequences.

But it decided that any reimbursements should only be retroactive to May 2013, the date when it ruled that mortgage floors needed to be removed. Consumers had asked for the repayment of the sums they claim have been unduly paid to banks from the date they signed their mortgages. The European Court of Justice ruled that the proposed time limit on the refunds is illegal and customers should not be bound by such unfair terms.

“The finding of unfairness must have the effect of restoring the consumer to the situation that consumer would have been in if that term had not existed,” the Luxembourg-based court said in a statement. Most of Spain’s home loans are pegged to the 12 month-euro interbank offered rate, or Euribor. The benchmark has fallen, but thousands of clients with mortgage floors did not benefit. Spain’s main opposition Socialist party called on Prime Minister Mariano Rajoy’s conservative government to quickly put in place a system to streamline the reimbursement of money to the roughly two million people it estimates are affected.

‘Justice restored’

“It is going to be a very controversial question,” Erick Berguer, a lawyer who specializes in bank law, told AFP. The European court ruling “will apply to court cases that are still open but there is a doubt in the case of lawsuits that have already been closed,” he added. Spanish banks contributed to the property bubble in the 2000s by easing access to mortgages, sparking a construction frenzy across the country.

At its height in 2007, banks issued 1.78 million housing loans worth a total of nearly 300 billion euros, according to national statistics institute INE. The figure dropped to 372,000 housing loans last year worth around 49 billion euros. The property bubble finally burst at the beginning of 2008, sparking a sharp economic downturn that caused the unemployment rate to soar to a record high of 27 percent in 2013. —