Over the last few weeks there has been much reporting on the situation of abusive clauses written in Spanish mortgage deeds.
What is deemed a an abusive clause
By far the most prolific of these clauses is the incorporation of minimum floor rates which is where the interest rate a client is charged cannot fall below a certain level; this is immaterial of what the current variable rate is.
In Spain most Banks offer variable trackers. They charge a margin above the 12 month Euribor or other specified indexes and then each year review the rate against prevailing Euribors. The margin remains static for the lifetime of the loan. In a rising interest rate market payments will go up each year and if the index falls clients would expect payments to go down.
Many borrowers were unaware of the fact that embedded within their deed however was a minimum rate. If a loan was taken out a few years ago the Euribor was at one point as high as 5.75%, today this is 0.54%. At annual reviews the clients expected to see significant drops in their overall payments as the Euribor has steadily fallen for the Last 3 years.
Why if a client is on a variable rate have the mortgage payments not fallen
On investigation as to why a reduction in monthly payments has not happened in a falling interest rate market, clients have found that in the small print of their deeds was a clause that stated the rate would never fall below a certain amount immaterial of what happened to the Euribor or their index during the life of the loan.
What is happening currently to ensure this activity stops
In Andalucía alone there are currently over 1000 cases in the court where customers are looking to the legal system to ensure removal of the minimum rate clause from their mortgage, and to try and get compensation for the amounts deemed to have been overpaid.
Due to a number of successful court actions key Banks like Santander, Banco Popular and BBVA along with others have now rather begrudgingly removed the clause from any new loans granted, and are reviewing what to do in the instances of existing clients. The process of removing minimum rates will have a big effect on earnings next year for those Banks who used this clause extensively.
Whilst a few banks in Spain are pro-actively taking action a number will only take action in the event they are questioned by the client directly about removal of the clause.
Why is there nothing in place that removes the minimum rate clause for everyone
There has to date been no hard fast ruling by the courts or the government in Spain ,the like of which we have seen in the UK over miss-selling of PPI etc. This means any actions are viewed on a case by case basis by the Banks themselves or by the courts.
The incorporation of floor rates themselves has not been outlawed in Spain and neither have the courts said in every instance it is abusive. In order to have the floor rate removed legally and to be liable for compensation the client needs to prove the clause was not made clear to them at completion and that they were not aware that the floor rate was part of the deed they were signing.
So if the clause was not made clear how can the bank argue it
Not knowing about a clause in a Spanish mortgage deed for someone buying in Spain can be difficult to prove as at completion all parties or a power of attorney must attend the Notary and one of the questions asked by the Notary is have you read and understood the terms of the deed you are signing.
Given a mortgage deed is many pages long, and in Spanish, many people did not read it in full but the banks use the Notary system as their rationale for stating that the client must have known and signed the deed in full knowledge of the terms.
The courts are not in all instances accepting this argument, and where the client can prove it was not made clear to them before completion, are starting to err in favor of the mortgagee.
Are all banks in Spain taking action to remove abusive clauses?
The Sabadell group, unlike most others, is still insisting that they have always made their minimum rates transparent and that their quotes outline them clearly. For this reason they see no reason to take action to remove the clauses from new loans or to deal with existing clauses for current customers. Whether under competitiveness pressure in the long term they do remove minimum rates will remain to be seen. As to whether they take action on existing clients deeds will also be decided on how many court actions they lose.
In what circumstances could you demonstrate the abusive clause was not known by the borrower?
If a client was not in direct contact with the Bank at application they may have much stronger arguments in the courts or with the lender, than those who made direct applications.
For non residents of Spain who speak little or no Spanish it is clear in most circumstances they will have been unaware of the minimum rate issue at completion, unless an offer was made in English and or the intermediary or Bank staff made it clear at application.
So what can be done if a minimum rate is included in the mortgage deed
If a minimum rate clause is in the mortgage deed or other clauses, that the borrower was not aware of, the first point of call should be a legal adviser who can review the deed signed, understand the circumstances by which it was signed and advise on the possible courses of action and the costs of any action taken. The first stage, after an understanding of exactly what the deed states, should be to make an approach to the lender to discuss the circumstances by which the deed was signed and to try to get the clause removed. If during this process it can be proved it was abusive and hidden from the mortgagee then compensation by way of backdated overpayments could be possible to obtain.