Consumers affected by mortgage floor clauses can now seek their removal

Thousands of people have been mis-sold mortgages with hidden floor clauses

Steps for removing a floor clause without going to court
A major ruling this year has changed the rules relating to the application of floor clauses in mortgages. Basically, the Euribor rate, by which European borrowing levels are dictated has reached historic lows, but many consumers have been unable to benefit from this situation and continue to pay high interest rates on their mortgages, because their banks have applied floor clauses on the mortgages, preventing the interest rates from falling to reflect current market levels.

Many consumers claim that they were unaware their banks had pre-set floor clauses in their mortgages and believed they had contracted variable rate mortgages which would be dictated by the level of the Euribor, so thousands of people are paying higher mortgages than necessary as a result.
A ruling from the Supreme Court on floor clauses has set a precedent by declaring such clauses void in cases showing a lack of transparency for the customers. A large number of people have been affected by this type of clause and have been unable to benefit from the historic fall of the Euribor. There are free alternatives to court action, although they do not always guarantee a result.

1) It is possible to ask the bank manager to remove this type of clause
The first step that someone affected by a floor clause should take is to pay a visit to the bank and speak with the branch manager to try and have the clause removed.

2) If such a meeting proves fruitless, the mortgage holder can ask for the clause to be removed by the banking customer watchdog
This body is obliged to reply within a maximum of two months and its response must be supported by the law.

3) If the response is negative, the affected party can turn to the Bank of Spain
If the response from the bank is negative, the affective party can turn to the Commissioner for the Defence of Banking Service Customers of the Bank of Spain, a body responsible for resolving complaints, claims and queries related to banks. It must issue a report in four months. If that report is in favour of the affected party, the financial entity should remove the pertinent clauses from the contract. It is not obliged to do so however because the report is not binding, but the bank will run the risk of the customer taking that report into the legal system.

Mortgage holders can remove floor clauses from their contract at no cost to them within an average period of six months. Javier Sevillano recalls that the removal of clauses is not automatically accompanied by economic compensation resulting from the inability to benefit from a low Euribor.

4) As a last resort, court action is always a possibility



Banks not required to return money from floor clauses by order of the Supreme Court
The Supreme Court has reiterated the nullity of floor clauses in cases lacking the contractually required level of transparency for the consumers, not because they are illegal. However, it adds that the nullity does not affect the mortgage contracts nor amounts already paid, meaning that the banks are not required to return any money charged under this type of clause.

The First Chamber of the Supreme Court has set a precedent on the validity and possibility for legal control of the abusive nature of floor clauses included in loan contracts between banks and consumers with a mortgage guarantee and variable interest rate loans signed with consumers and users.

The court accepts the validity of such clauses when they meet the special transparency requirements needed in contracts signed with consumers. Furthermore, consumers must be informed that when the interest rate falls below certain levels, the mortgage holders will not benefit from any further fall in the baseline rate (usually the Euribor).

The high court also states that they must be informed in a clear and unambiguous manner, without the possibility of the clauses passing unnoticed by the consumer among the many other clauses contained in such a complicated contract.

Moreover, the consumer must be informed of other products so they can make a comparison and choice after receiving sufficient information to do so. However, in the corresponding legal proceedings, the Supreme Court declares the removal of floor clauses on grounds of a lack of transparency and information to the consumer.

AUSBANC brings legal action against three financial entities

The Association of Banking Service Users (AUSBANC) brought legal action against BBVA, Cajas Rurales Unidas, S.C. and NCG Banco S.A.U. to claim the removal of floor clauses from mortgages. The Supreme Court has declared the invalidity of floor clauses because of a lack o f transparency, as it claims this type of clause is not illegal (they are void because of a lack of transparency and not because they are illegal). Specifically, the high court ruling determines such clauses as void in cases involving:

- the creation of the appearance of a variable rate loan contract in which downward fluctuations in the baseline rate will lead to a reduction in the price of the money

- the lack of sufficient information to state this is a defining aspect of the main purpose of the contract

- the creation of the appearance that the floor is compensated by the establishment of a ceiling

- their inclusion among an overwhelming amount of information in which they are hidden and consumer attention is diluted, in the case of those used by the BBVA

- the absence of various scenario simulations related to reasonably foreseeable behaviour by the interest rate at the time of contracting the product and during a pre-contractual phase

- non-existence of clear and comprehensible warning about the comparative cost against other products from the same entity

However, in spite the removal of floor clauses, the high court explains that the mortgage contracts will remain in force and the ruling will not be retroactive. In other words, it will not affect those "situations definitively decided upon by judicial rulings res judicata nor the payments already made at the moment the ruling is published". Therefore, the Supreme Court absolves the banks from any obligation to return amounts already received under floor clauses.

OCU believes ruling benefits banks

The OCU criticises the Supreme Court ruling, claiming that the law has been "twisted" to avoid the banks being required to pay back money to their customers by stating in its ruling that "it is known that any retroactive application of the ruling would generate the risk of serious disorder with an effect on public economic order".
The consumer association believes that if a clause is declared void, "it should be as if it never existed". Hence they believe that the banks "should return any extra amounts changed by applying such clauses to all affected consumers". According to OCU estimates, this figure would be somewhere between 6,000 and 8,000 euros on average for a loan with a floor of 3.5%.

The OCU considers this situation "unacceptable" because "the ruthless legal machine is set in motion and often ends with an eviction" when a consumer stops repaying a loan but, "when the bank fails to follow the rules, they are forgiven so as not to affect public economic order".