Professor Oscar Elvira asks through a story if it was really an abusive condition
To understand well the issue of the judicial ruling of the Court of Justice of the European Union on whether the ground clauses are abusive, I would like to explain a story to see what they think about it.
Year 1998. Fernando and Marina want to buy a flat in Barcelona. Since the purchase price is high (250,000 euros), they need bank financing, and their bank offers them a mortgage of 200,000 euros. When setting interest rates they offer two alternatives: it could be a fixed rate of 5.5% at 20 years or a variable rate Euribor + 2% at 25 years, reviewable annually (that day the Euribor was at 4). %).
What does it mean? That with the first option they know what they have to pay during the life of the loan , in contrast with the second, what they have to pay will depend on how the interbank interest rate is on the revision date. If the Euribor were at 4% they would pay 6% or if they were at 5.5% they would pay 7.5%, on the other hand, if they were at 1% they would pay 3%.
Fernando and Marina had done a market study, the prices offered by the other banks, and they think that the 2% differential is excessive, so they ask if there is any economically more favorable alternative for them. The bank says there is a third option, reduce the spread as long as they agree to pay a minimum interest rate. Specifically receive the following offer: Euribor + 0.50%, with a minimum of 3.5%.
What does it mean?
They have just reduced the interest rate they will pay during the life of the loan, because if Euribor is at 4%, they would pay 4.5%. But if the Euribor is at 1%, they would pay 3.5% (and not 1.5%). Fernando asks why they charge a minimum of 3.5% and the bank responds that it must cover a minimum of infrastructure expenses (offices, salaries, and general expenses) like any company or family.
They think about it and see that it is coherent and that it is a good deal since, in exchange for improving the differential, they accept a minimum that is below the fixed rate of the mortgage that they offered to 20 years. Finally, they accept the minimum interest rate in exchange for improving their differential.
Well, this 3.5% is the floor clause , the minimum interest rate that you have agreed with the bank (remember that they had two initial offers that they rejected).
The years pass and on December 21, 2016 the Court of Justice of the European Union invalidates the ground clause for lack of transparency. And I ask myself: Can all families really say that it is an unfair clause and that in their contracts, signed before a notary, there was not enough transparency? Did not they sign it because they improved the initial interest rate? Did not they find out?
In this case I do not see the explicit “bad faith” of the banks as it did in other products such as the preferred shares of the years 2009 and 2010. It would have been different if a bank had offered a variable rate mortgage with a competitive spread, and that at the time of going to the notary to sign the mortgage it would not be clear that the price had a floor clause.
That is to say, as you all know, when getting into debt before a notary we are interested in verifying three things: amount, term and price or interest rate . If at the time of referring to the variable interest rate, a clause was placed in an annex that was difficult to understand and was clearly on a page of writing away from the paragraph where the interest rate is agreed, we might think that we want to hide a clause that is detrimental to the client.
That’s why my question is:
Did all the mortgages try to hide it ? I do not think so. And what impact
does this have on banking? Exactly nobody knows. The Bank of Spain figures in about 4,200 million euros the impact of the sentence for banks. It would be the additional provisions that banks should make. According to the ruling, 1.5 million customers are obliged to compensate, and banks have to return to clients what they have overpaid throughout the life of the loan. This means compensation for the period from 2009 to 2013.
For now, a first impact has been the drop in the price of the shares of listed banks. The most penalized were Liberbank and Banco Popular . The final impact will depend on how many affected claim before the courts because the bank is not willing to automatically compensate all customers. The Supreme Court has only nullified those that can be proven to be non-transparent. It will be resolved case by case before the courts. Thus, those affected will not be only those who have a current mortgage loan. It will also be those who have already paid 100% of the debt, who can claim what they have overpaid.
The final bill will depend
on whether the courts end up considering all the ground clauses abusive and not just those that were established in an opaque manner and without transparency towards the client. For example, Banc Sabadell has already stated that the resolution does not affect them because the application of the clauses was completely transparent. From Brussels it is expected that Spanish banks have been prudent and have recognized the losses with provisions already made and that the impact is less than what is thought. I believe that the impact will be much less than the 4.2 billion. In any case, it will not be a short way. The banks will have to be sued, case by case, and a judge will agree with the client.