Spanish banks were dealt a blow Wednesday after a European court ruled lenders must reimburse clients who signed mortgage contracts that prevented them benefiting from a steady drop in
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 ($4.2 billion), just four years after it received €41.4 billion 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 because 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.
The European Court of Justice ruled Wednesday that the proposed time limit on the refunds is 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 2-4 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 to €1,800.
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 from her bank.
Bank stocks fall
Spain's main opposition Socialist party called on Prime Minister Mariano Rajoy's conservative government to put in place a system to streamline the reimbursement and prevent customers from having to resort to courts to get their money.
Shares in Banco Popular, which estimates the ruling will cost it €334 million, fell over six percent in mid-afternoon trading.
BBVA, Spain's second-largest bank which estimates the decision will cost it €404 million, fell nearly two percent.
Small lender Liberbank took the biggest hit, falling over 13 percent.
Spanish banks lent heavily during an 11-year property boom which went bust in 2008, sparking a sharp economic downturn that caused the unemployment rate to soar to a record high of 27 percent in 2013.
At the height of the boom in 2007, banks issued 1.78 million housing loans worth a total of nearly 300 billion euros, according to national statistics institute INE.
The figure dropped to 372,000 housing loans last year worth around €49 billion.
Thousands of families who were not able to keep up with their mortgage payments were evicted from their homes, sparking a noisy protest movement that saw activists attempt to prevent police and bailiffs from enforcing eviction notices.
“Justice has been restored,” said Ignacio Fernandez Toxo, the head of Spain's largest union, Comisiones Obreras, after the ruling was announced.
But Spain's biggest online property advertising site, Idealista.com, warned the ruling would likely lead to higher mortgage rates in the short term as banks seek to compensate for the extra expense.
By Adrien Vicente with Daniel Bosque / AFP