Spanish banks find themselves yet again in the limelight of another scandal. The Supreme Court has given them until 31st July 2013 to review the floor clauses in their mortgage loan contracts to evaluate whether or not they comply with transparency requirements. If the outcome is negative, the clause must be eliminated altogether.
As you know, a mortgage loan is made up of capital and interest that is repaid to the bank in monthly installments. Depending on the type of loan you take out, the interest rate may vary, increasing or decreasing as the case may be but the “floor clause” determines a minimum interest rate that would apply throughout the life of the mortgage. The floor clause was introduced by banks to compensate any economic loss they may suffer because of variable interest rates and many applied a floor clause of about 3,55% (or higher) so when Euribor reached historical lows, many did not benefit from it because the floor rate determined in their contract was higher.
Just as there is a minimum rate established, there is also a maximum, in many instances is set at 12% which the Supreme Court has also deemed abusive because even when the interest rate was at a high, it did not exceed 5,5% a long way off from the 12% ceiling many banks applied.
Currently in Spain, there are approximately 1,7 million mortgage loans that include a floor clause, the main culprits being BBVA, Novagalicia and Cajamar or at least these three banks have been singled out in this controversy. If BBVA for example were forced to eliminate the floor clause from 425.000 of their mortgage loans, it would result in annual losses for the bank in the region of 420 million euros.
The Supreme Court has outlined the following causes of complaint by the consumer as valid:
- A lack of information regarding the nature of the floor clause or it is presented in a way that makes it seem irrelevant so the applicant doesn’t fully comprehend the impact it will really have in the long run.
- The bank does not provide simulations to show or explain how the interest rate may affect them further down the line.
- The bank does not provide clear and concise cost comparisons about other mortgage alternatives that do not involve the floor clause.
- The floor clause in the mortgage contract is lumped in with a lot of other information so its importance is not apparent and the client’s attention is not immediately drawn to it
If the consumer can show that this is true in their case or the bank cannot disprove the claim, they have reason for complaint and many argue that there were never made aware of such a clause in the first place.
As mentioned, it would seem that there are three banks at the centre of this new debate but how are other banks faring the storm? Banco Sabadell (Solbank) and Banco Popular so far are refusing to eliminate this clause from their contracts alleging full transparency and disclosure of the conditions and characteristics to all their clients. Even though this may be true in general terms, records show that individuals have proved otherwise at court and won. However, the Supreme Court’s ruling applies to all banks, so their arguments must still be evaluated.
What can you do if the floor clause appears in your mortgage loan?
- Approach the bank in question and ask to speak to the manager
- If this initial meeting is not successful, you can write a claim to the bank’s complaints investigator who must respond within 2 months in a legal manner that must outline a valid line of argument
- If the response is negative still, you can contact the Banking Ombudsman of the Bank of Spain, charged with resolving this type of dispute. Their response must be issued within 4 months and the final report may be used in court if it determines the floor clause to be abusive
Before you rush madly to your local branch screaming and shouting, an important point to remember here is that not all cases are classed as abusive, especially if the floor clause was disclosed beforehand and even if a judge rules the clause to be abusive, it does not necessarily mean that compensation will be granted for losses sustained when the official interest rate fell below the floor rate established in contract.
