Supreme Court gives first ruling on minimum interest rate provisions in floating rate mortgage agreements

Judgment of the Supreme Court, First Chamber, 9 May 2013

The Plenary of the Civil Chamber of the Spanish Supreme Court has declared that an interest rate “ground clause” (which specifies a minimum interest rate in a floating rate loan) included in a mortgage loan is valid provided it is transparent and sufficient information was provided to the customer at the time the mortgage agreement was entered into.

Before the economic crisis the interest rates in many Spanish mortgage loans were based on a financial index, mainly on Euribor, plus a margin. When Euribor was between 3% and 5.5%, most mortgages only had a small margin (ie 0.18% to 1%) so the banks introduced "ground clauses" which provided that, irrespective of Euribor, there was a minimum interest rate to be paid by mortgagors.

Between 2009 and 2013, Euribor dropped to levels between 0.5% and 2%. Many ground clauses become effective so borrowers had to pay a minimum interest rate (usually between 2% and 3%). Many mortgagors challenged the legality of these ground clauses. On 9 May 2013, the Supreme Court gave judgment on this issue for the first time.

Transparency requirements

The Supreme Court held that ground clauses are valid provided they meet certain transparency requirements under Royal Decree 1/2007 16 November enacting the Defence of Users and Consumers’ Act.

A mortgage containing a ground clause must state that, when the relevant index interest rate drops below a certain level, the mortgage becomes a fixed rate loan so that the borrower will no longer benefit from any further drop in rates of the relevant index. The mortgage should explain the risks of a ground clause and the consumer must be informed of other products (eg fixed-interest mortgages) so that each consumer can reach a fully informed decision.

The Supreme Court ruled that the ground clause in question was null and void as it did not meet these requirements.

This decision is intended to be appealed before the Constitutional Court.

Effects of this decision

When this decision was first issued, few banks indicated their intention to voluntarily remove all ground clauses, however it seems now that most banks have decided that their loans fulfil the transparency requirements set out by the Supreme Court.

Consumers’ associations are preparing and filing class actions against financial institutions in order to challenge ground clauses.¹ However, it may be difficult for class actions to proceed given that the court would need to examine each case on its own merits, to decide whether the particular type of clause in question meets the transparency requirements, and also to decide whether sufficient information was provided to the customer in advance of the mortgage being entered into.

Footnotes

_{1. La banca seduce con rebajas trampa a afectados por el suelo" at http://www.elmundo.es/elmundo/2013/07/15/ http://www.afectadosclausulasuelo.org/ suvivienda/1373879225.html and consumer association website,}