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Removing mortgage floor clauses. What does it change?

The mortgage floor clauses are back in the news. After a decision of the Supreme Court two years ago, invalidating some of these clauses in mortgage contracts for lack of transparency, the European Commission recently ruled for the total abolition of floor clauses with retroactive effect. The debate starts while it is still unclear to people affected by this mortgage floor clause.

A floor clause or “cláusula suelo” in Spanish, is a clause that the bank can include in a mortgage upon signature and which establishes the type of minimum interest that the customer will pay, thus limiting interest rate cuts. Hence, if the Euribor – group of interest rates of the Euro currency widely used in Europe – goes down below the floor clause, customers will not be able to track the European index and will always pay the same sum. An example: according to the daily paper ABC, currently, the Euribor fell to 0.50% and the average clause imposed in the contracts is 3.12%. People with a floor clause continue to pay off their mortgage with a high interest rate while the European index is low. This allows banks to guarantee their profits and to establish minimum interests.

What are the banks which have abolished floor clauses?

The Supreme Court declared in May 2013 floor clauses to be null, without retroactivity and with nuances, for lack of transparency. Since the announcement, entities such as BBVA, Cajamar or Abanca have immediately stopped to apply the mortgage floors. More recently, banks like Bankia, and CaixaBank, have also removed gradually this clause. Bankiter and Banco Santander said they had never applied such a clause in mortgage contracts. However, Banesto, former subsidiary of Banco Santander and now absorbed by the latter, was proposing this service. Banco Popular, Sabadell, Banco Mare Nostrum (BMN), Liberbank, Unicaja Ibercaja are also still offering, floor clauses, according to Cinco Días.

How many people are affected?

About two million people are affected by the floor clauses. All are waiting for a sentence from the European Commission to enable them to review their contract and possibly receive compensation. If the decision considers that these clauses are void from the beginning, compensation could reach 15,000 euros per person, according to El Mundo, which incorporates an estimate of the association of banks and credit unions ADICAE. Multiplied by two million, the total figure would be about 30 million euros, a sum “as destructive for the sector as unrealistic,” said the Spanish daily.

How to apply for the nullity of the clause?

For those who feel they have not been sufficiently informed by their bank on the floor clause in their mortgage, the first possibility is to go to the entity granting the loan and try to renegotiate the terms of the mortgage. Some banks advocate direct negotiations with each client. If the bank refuses, other solutions exist. If the Supreme Court clears the bank of any opacity about floor clauses, you can submit a claim to the Customer Service of the entity in question. If the claim is found to be non-compliant, you can then ask the support of the claims department of the Bank of Spain. However, the resolution of the latter has no authoritarian character, it can only put pressure on the bank. The final solution is to go through the courts.

And what about retroactivity?

There is nothing obligatory on this point. According to El País, a recent report of the European Commission goes against the decision of the Supreme Court to condemn the three banks (BBVA, Cajamar and Abanca) to refund to customers the additional cost of the floor clauses since May 9, 2013. Brussels wants the money earned by the banks via these clauses be repaid in full, that is to say since the beginning of the credit, not only since May 2013. For the moment, therefore, the whole issue remains unclear. The beginning of an answer could emerge when the judge of the Commercial Court number 11 of Madrid will take a decision on the application or not of retroactivity of the floor clauses to the 15,000 people affected, supported by ADICAE, who decided to appeal to court.

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