Next Shoe to Drop on Spanish Banks

from Wolf Street:

Thursday, April 7, 2016, could go down in history as a great day for Spanish mortgage holders and a very grim one for many Spanish banks, thanks to a new ruling that the so-called mortgage floor-clauses that were unleashed across the whole financial sector in 2009 are abusive (but not illegal) and lack transparency.

These floor clauses set a minimum interest rate — typically of between 3% and 4.5% — for variable-rate mortgages, even if the Euribor drops far below that figure. In other words, the mortgages are only really variable in one direction: upwards!

Following the latest ruling, the banks named in the suit must reimburse clients all the money they’ve surreptitiously overcharged them since May 2013.

And if they want to continue applying floor clauses in the future, the banks must do so in an open and transparent manner, which pretty much defeats the purpose, since if banks were completely up front about the inclusion of floor clauses in their contracts and what that actually means to the mortgage holder, no one in their right mind would accept them.

Thursday’s ruling comes on the heels of a similar sentence by Spain’s Supreme Court in October 2013. But whereas the Supreme Court ruling applied to just three banks, the new one applies to almost all of them. It is also the first time that such a large class action suit, with over 15,000 claimants, has been successful. It is now broadly assumed — meaning by everyone except the banks and their lawyers — that the ruling has set a legal precedent that should now apply to all of the 2.5 million mortgage holders affected by the abusive (but not illegal) practice.

“The banking system is going to resist, but we can tell every client not to pay a single euro more to the banks,” warned Manuel Pardos, the president of the Spanish Association of Consumers and Users of Banks, Saving Banks, Insurance and Financial Products (Adicae), the driving force behind the legal battle to ban floor clauses.

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