The much expected judgment by the European Court of Justice (EUCJ) on Spanish interest rate floor clauses (the "Judgment") was issued today. The EUCJ confirms that floor clauses are null and void because they prevent clients from fully benefiting from a decline in the reference interest rates, but this had already been stated by the Spanish Supreme Court in 2013. The key to the Judgment is that it overturns the Spanish Supreme Court ruling which had capped banks' liabilities going backwards from 2013. The EUCJ states that Spanish banks now have to repay customers beyond what they had lost since May 2013. For Spanish Banks, this has a potential liability which has been calculated by analysts as somewhere in between at EUR 3,000 to 7,000 million.
Does the ruling imply that banks have to return monies automatically?
No, it just means that all Spanish Courts will have to apply the EUCJ decision when a consumer affected by a floor clause demands repayment of undue amounts, but it does require legal action on the part of the consumer. If clients do not actively claim then the bank is under no obligation to return the excess interest received motu proprio.
Since the right arises from the nullity of a clause deemed to be unfair, claims will not be time-barred and may be exercised at any time. The existence of a floor clause applied before 2013 may also be used as an argument to suspend the foreclosure of certain mortgages. In this last instance, the affected consumer will not need to expressly allege the existence of the clause, the court is entitled to suspend the procedure by itself.
Having said that, the fact that a mortgage - or indeed any other financing agreement with consumers – includes a floor clause does not automatically mean that such clause will be found to be unfair and, as a result, null and void. The circumstances of each case, the expertise of the consumer and his ability to influence or negotiate the contents of the clause may result in the clause not being found to be unfair.
It is yet unclear how this may affect – and indeed if it may affect at all – any hedging agreements which the lenders may have entered into to cover their positions with respect of variable interest loans with floor clauses up to 2013.
Impact on purchasers of loans (or credit rights arising out of loans)
Whether a loan purchaser acquired non-performing or performing loans, the Judgment may have a serious impact on their position:
- Where the purchaser acquired the full contractual position of the former lender of record, it will, for all intents and purposes, have stepped into the shoes of the former lender. Therefore, subject to the contractual protection it sought from the former lender of record at the time of acquisition, the new owner of the loan may find itself receiving claims for the reimbursement of all excess interest paid by borrowers in the past under the floor cap clauses that were nullified. This may result in: (1) the outstanding principal balance being less than the loan purchaser expected (to the extent that the former lender of record had capitalised unpaid interest and such interest was higher than it should have been because it was determined on the basis of the floor clause); and, in the worst case scenario, (2) having to actually fund the payment of monies back to borrowers, or former borrowers, if the amount of excess interest is now higher than the remaining outstanding principal balance.
- Where the purchaser acquired the credit rights and related security interests stemming from the loan (but not the full contractual position of the former lender of record), again the new owner of the loan may find itself receiving claims for the reimbursement of all excess interest paid by borrowers in the past under the floor cap clauses that have been nullified. This may result in: (1) the outstanding principal balance being less than the loan purchaser expected (to the extent that the former lender of record had capitalised unpaid interest and such interest was higher than it should have been because it was determined on the basis of the floor clause); and, in the worst case scenario, (2) having to defend the case in court that it did not actually step into the shoes of the former lender and therefore should not be paying any monies back to borrowers or former borrowers, if the amount of excess interest is now higher than the remaining outstanding principal balance.
As a result of the above, we would recommend that the loan acquisition agreements be reviewed to determine the loan purchaser's remedies in respect of these matters, among others:
- seller liability with regard to outstanding principal balance (to the extent it included capitalised interest, which can often be the case)
- any protection provided by the seller relative to laws having been complied with at the time of inception of the loan
- caps on sellers' liability and liability periods available
- third party claims clause: provisions around who can direct proceedings and which costs are borne by which party
- where deferred consideration was agreed: ability to set off potential seller liabilities arising in connection with this issue against consideration pending to be paid to the seller.
We will be happy to advise on these matters or indeed any matters related to the Judgment at your request.
If you are interested we can forward a copy of the full text of the Judgment which is not yet available to the public and has just been officially notified to banks concerned. Unfortunately there is only a Spanish version available at the time of this note.
