Floor Clauses: When the Bank Goes Down

One of most sadly known facets of our country’s economic crisis is the cascade of harmful consequences derived from mortgage floor clauses. These clauses, which are present in many variable-rate mortgage loan contracts, proliferated starting in 2009 as part of the banking industry’s plan to counteract successive drops in the Euribor, with the aim of blocking the possibility of the mortgage interest rate falling. To date, they still haven’t made their way through the courts, but it is estimated that one million Spanish home loans contain floor clauses.
 
The wave of lawsuits which demonstrated the invalidity of such clauses due to being unfair, since they were not completely clear to the average consumer, led to a much talked-about ruling by the Supreme Court (dated May 9, 2013) which determined the definitive unfair nature of floor clauses, at the same time declaring them invalid as long as the consumer hasn’t been informed of the relevance of the floor clause in determining the monthly installment to be paid. However, the ruling had two big “buts”: it didn’t affect mortgage loans with a final judgment, nor those with money paid before May 9, 2013 under these clauses. These two major obstacles triggered a significant reaction not only from thousands of bank customers, but also in the Spanish courts, which filed ten preliminary rulings before the Court of Justice of the European Union. On December 21, 2016, it overthrew the Supreme Court’s exceptions in favor of the full repayment of the money.
 
Specifically, the EU court established that article 6, section 1 of Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts must be interpreted as precluding national law which places a temporal limitation on the restitutory effects linked to the declaration of unfair nature, as in article 3, section 1 of said Directive regarding a clause contained in a contract signed with a consumer by a professional; limiting such restitutory effects exclusively to the amounts unduly paid pursuant to said clause following the pronouncement of the judicial ruling declaring the clause in question to be unfair in nature.
 
As stated by European law, Member States shall establish that under the conditions stipulated by their national laws, they shall not bind consumers to unfair clauses contained in a contract signed between them and a professional, and shall provide that the contract remain compulsory for both parties under the same terms, if it can persist without the unfair clauses. In addition, contractual clauses which have not been individually negotiated shall be considered unfair if, despite the requirements of good faith, they cause a significant imbalance between the rights and obligations of the parties arising from the contract.
 
Weeks later, on February 24, 2017, the full Civil Chamber of the Supreme Court upheld the EU doctrine, ruling against BBVA when, upon declaring a floor clause invalid, it granted full restitutory effects (from the signing date of the mortgage loan). This confirmation by the Supreme Court has meant a “death sentence” for these stipulations and the start of a new era in banking with regard to mortgages, since the doctrine established by this ruling is applicable to all mortgage loans with floor clauses that are considered unfair for which there has not already been a final judgment. In fact, on April 4, the Supreme Court dismissed a request for review of a final judgement that had rejected the full restitutory effects of the invalidity of the floor clause, in which mortgage debtors had only recovered what had been unduly paid after the Supreme Court’s ruling on May 9, 2013, but not what had been paid prior to that date. With the law as it stands, it is not possible to obtain a review of a final judgment solely because new jurisprudence has emerged. In exceptional cases, a final judgment can be reviewed, but only if a ruling by the European Court of Human Rights declares that a right recognized in the European Convention on Human Rights has been violated.
 
However, before the Supreme Court took this step forward in terms of the definitive protection of mortgage debtors, the Spanish government had positioned itself with Royal Decree-Law 1/2017 of 20 January, on urgent measures for consumer protection in relation to floor clauses. The Royal Decree creates a voluntary channel which facilitates reaching an agreement with the lending institution for the repayment of the money, thus avoiding the proliferation of civil litigation and subsequent gridlock in the courts, although it seems that some banking institutions will prefer to go to trial since they aren’t offering satisfactory out-of-court settlements.
 
In regards to the tax treatment of the returned money, which has already been written about extensively, as explicitly stated in the Royal Decree, in general, the refund will not be included in personal taxable income, nor will the interest. However, in its first final provision, the law establishes three special cases, which can be summarized in that they are included in personal taxable income if this interest was part of the primary residence deduction.
 
In any case, before contacting the banking institution you signed your mortgage with, it is always advisable to discuss your case with a specialist lawyer in order to determine whether your mortgage contains any floor clauses and learn how they affect the amounts paid, as well as how to recover the amount that was unduly paid, since not every floor clause is unfair; they must be assessed on a case-by-case basis. 
 
We are undoubtedly facing a new era in terms of relationships between customers and institutions, which would have been unthinkable a few years ago. The confidence that people had in their lifelong bank is long gone. 
 
The flip side of this change in roles is a more than likely increase in the prices of housing loans. Be that as it may, it’s good news that consumers are no longer the weakest party in the equation, moving to occupy a safer and more balanced position.
 
 
Cristina Aguilar
Associate at ICN LEGAL

931 596 272