Spanish banks were dealt a blow today after a European court ruled that lenders must reimburse clients who signed mortgage contracts that prevented them benefiting from a steady drop in interest rates.
The decision comes as Spain’s banking system is struggling with the impact of mounting loan defaults, shrinking credit demand and tougher capital rules.
The Bank of Spain estimates the ruling could cost Spain’s banking sector over four billion euros (USD 4.2 billion), just four years after it received 41.4 billion euros in European Union bailout funds.
Spain’s Supreme Court had ruled in May 2013 that so-called mortgage “floor clauses”, which impose a limit on how far mortgage interest rates can fall in line with a benchmark rate, were unfair as consumers had not been properly informed of the consequences.
But the court said lenders did not have to reimburse clients for any excess interest payments before the date of the 2013 ruling.
Today, the European Court of Justice ruled that the proposed time limit on the refunds was illegal and customers should not be bound by such unfair terms.
“The finding of unfairness must have the effect of restoring the consumer to the situation that consumer would have been in if that term had not existed,” the Luxembourg—based court said in a statement.
Most of Spain’s home loans are pegged to the 12 month—euro interbank offered rate, or Euribor.
The benchmark has fallen, but thousands of clients with mortgage floors did not benefit.
Banking consumer lobby group Adicae estimates between two and four million contracts with mortgage floors were signed in Spain.
“It was a real fraud designed and set up by the banks,” the head of the association, Manuel Pardos, told a news conference.
He was flanked by Rosa Polo, who lost her home after her monthly mortgage which had a “floor clause”, soared by 700 euros to 1,800 euros.
Last year, she was forced to sell her flat for less than she paid for it because she could not keep up with the payments.
“Now, I still have a debt and don’t have a home,” said Polo, who hopes to be reimbursed 40,000 euros from her bank.
Spain’s main opposition Socialist party called on Prime Minister Mariano Rajoy’s conservative government to set up a system to streamline the reimbursement and prevent customers from having to resort to courts to get their money.