Floor-clauses (Clausula suelo)

A clause that is ruled “Abusive” under Spanish law, inflicts harm on the consumer and benefit the professional who drafted the contract.

A clause can only be branded "Abusive" if ruled to be so by a Judge.

Variable-rate mortgages or Tracker mortgages are common in most countries and are designed to protect both the lender and borrower from unpredictable volatility by reflecting the cost to the lender of borrowing on the credit markets.

If interest rates are high then the cost to borrow is high. Conversely, if interest rates fall, the cost to borrow falls.

Over the last decade, more than 400,000 Brits have bought a Spanish property, many took out variable-rate mortgages that track the Euribor or European Interbank Offered Rate.

The Euribor is a daily updated reference rate that averages the interest rates in the Eurozone.

As mortgages tend to run for a significant amount of time, a variable-rate mortgage which tracks a particular market or index will rise and fall, in theory, balancing out over the life of the loan, making it fair for both lender and borrower alike.

However, many Spanish banks introduced clauses into their agreements which adversely affected the balance of this mechanism, unfairly weighting it in their favour.

The “floor clause” (clausula suelo) which banks added to the small print of up to 4million contracts and was common in loans taken out between 2007 and 2009, set a limit on the minimum interest rate a lender can charge, so regardless of how low the Euribor base rate fell, borrowers continued to pay interest at the fixed minimum rate, around 3%, despite having variable-rate mortgages.

Euribor collapsed with the economic crisis in September 2008, dropping from 5.38% to 1.26% in September 2009 and has been mostly negative since February 2016.

When Euribor falls below 2%, where it has been for most months since March 2009, it leaves millions paying far more interest on their loans than they should be.

Now, Spanish mortgage holders, including thousands of British and Irish, are due for a massive windfall as a result of judgements passed by the European Court of Justice and the Spanish Supreme Court, which found the Spanish banks treatment of their customers was “abusive”.

Estimates are that there is about €4bn in refunds waiting to be claimed with every Spanish bank potentially implicated and the average British buyer due to collect €15,000 or more.

Although floor clauses in themselves are not illegal, the scandal has been, they were not adequately explained, or even not mentioned at all to borrowers, many of whom were unaware these clauses were buried in the small print of their mortgage contracts.

Foreign borrowers, in particular, were likely to be unaware of the existence and implications of floor clauses, thanks to language barriers and living outside Spain in many cases.

In 2013 the Spanish Supreme Court ruled that any “floor clauses” that had not been properly explained were deemed to be “abusive” and therefore null and void, entitling mortgage holders with these clauses in their contracts to claim a full refund for overpayment going back to 2013.

In December 2016, after much lobbying by consumer groups, the European Court of Justice ruled that all such cases had full retroactivity and therefore no time limit. Borrowers can now claim for overpayment of interest on their loan, going back to the commencement of the mortgage.

That may work for residents and fluent Spanish-speakers in legal matters, but how easy will it be for foreign owners to navigate their way through bank bureaucracy, in a foreign language, from 1,000 miles away, and to persuade them to cough up thousands of euros?

On January 20th 2017, the Spanish Government passed a Royal Decree 1/2017 that set out an extra-judicial process for “floor clause” claims.

Although it was anticipated as a measure that would protect consumers, making the claim process quicker and cheaper by avoiding litigation, in reality it massively favours the banks, once again leaving borrowers at a disadvantage.

The Spanish government has announced that banks must set up departments to deal with such claims and inform clients with floor clauses about the reclaim system.

The bank must then calculate the amount to be returned and, if the client agrees, make the payment.

The whole process must take no longer than three months.

If the client does not agree and pursues the bank through the courts, they face the prospect of having to pay legal costs if the court does not improve on the offer made by the bank.

This procedure, intended to protect consumers rights, in fact, strengthens the position of the banks, with customers fearing that offers of compensation will be lower than expected.

Anyone wishing to claim for overpayment of interest must follow the extra judicial process or face the threat of legal fees and court costs if they don't.

Banks get to decide what settlement to offer, based on their own criteria and with no penalty for not offering full compensation.

How many foreign borrowers, though, are in a position to know if settlements are just or not?

How many foreign borrowers will be able to calculate how much they've really been overcharged in interest payments due to hidden “Floor Clauses” and how many will be able to deal with the extra judicial process or even understand it given the language barrier in many cases.

The decree doesn't oblige banks to pay claimants in full and when lenders can pay any settlement they deem fit, it is believed that many people will be left with no alternative but to take court action.

This ruling contradicts the opinion published last July by the Advocate General of the Court of Justice, Paolo Mengozzi, supporting the Spanish Supreme Court’s ruling for Banks to return the amounts collected only after May 2013.

The European High Court has avoided, with its judgement, dealing a substantial blow to the basic principals of law.  The CJEU has ordered total retrspectiveness of refunds, ruling against the opinion of Paolo Mengozzi.

Claims cannot be limited in time.  Not only applying since May 2013, but since the contract was signed. As a result the banks involved will have to repay more than 3 million customers the amounts they have overpaid.   This is anticipated to involve between  5 and 7,000,000 (5 - 7 billion) euros.

This is a blow to Spanish banking still recovering from the bailout suffered in 2008.

The CJEU has protected the much greater interest of their customers against the power of the banks, that Paolo Mengozzi was seeking to safeguard.

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