Increasing litigation in Spain regarding abusive clauses in mortgage loans
There is a growing tendency in recent years for borrowers in Spain to file claims alleging that certain provisions included in their mortgage loans are abusive or unfair. In addition, there is a very strong trend in Spanish case law that leans towards declaring the abusiveness of many clauses standardly used by financial institutions in the mortgage market. These decisions affect all banks granting loans to consumers in Spain, and also hedge funds investing in mortgages in Spain. The tendency regarding abusive clauses in mortgage loans may reduce appetite to invest in a structure with assets including Spanish mortgages granted to consumers.
There are many different clauses in mortgage loans which have been declared null by recent decisions in Spain.1 This article focuses on three different types of clause, which are all important provisions in mortgage loans.
Rounding-up clause
This is a standard clause in floating interest mortgage loans and facilities, whereby the lender is entitled to always round up an interest rate to the nearest full percentage point. The Spanish Supreme Court (SCC)2 has ruled this type of clause to be unfair on the basis that it generates a significant contractual imbalance between the parties.
Default interest rate clause
Under the amendment of the Spanish Mortgage Act in 2013, the applicable rate of default interest, on a secured loan for the acquisition of a debtor’s main residence and secured by a mortgage on such property, must not exceed three times the “legal” rate of interest (interés legal del dinero) and will only accrue on the principal pending payment (not also on the unpaid interest).
The legal rate of interest is a rate published by the Bank of Spain for the purpose of calculating the amount which must be paid by a debtor in default of its payment obligations in cases where such rate has not been explicitly agreed. The legal rate of interest currently published by the Bank of Spain for 2016 is 3%.
If a clause specifies a default interest rate more than three times the legal rate of interest (measured as at the date of default), it shall be declared abusive. However, as confirmed by a recent SCC judgment,3 the fact that a clause establishes a default interest rate less than three times the legal rate of interest does not exempt it from an abusiveness analysis. Such a clause may still be declared abusive should it be deemed to imply a disproportionate burden on the defaulting party.
Early termination clause
Early termination of loan agreements has been declared valid by the SCC. However, the SCC has subjected the validity of such provisions to stringent requirements. These requirements are established in the SCC Judgment of 23 December 2015. In particular, in order to be valid, an early termination clause must: (i) modulate the severity of the breach that triggers the default according to the term and amount of the loan (ie the breach must be proportionate to the term and amount of the loan); and (ii) allow the consumer to avoid the early termination by remedying the breach.
A failure to pay a minimum of three monthly instalments is required by law in order for a lender to be allowed to accelerate a loan in full.4 So, a clause which triggers the early termination of a loan for failure to pay less than three instalments would be declared abusive. Note however that by waiting for three instalments to be unpaid, even if the clause provides for acceleration upon the failure to pay only one instalment, a bank may enforce the loan. Such enforcement would, if carried out strictly in accordance with the abusive clause, be invalid.
However, even if the clause should only trigger an event of default upon the failure to pay three instalments, this would not render a potential enforcement automatically valid. Any enforcement is subject to the higher standard set by the SCC Judgment of 23 December 2015.
Contract lives on without the “abusive” provision
A matter of great concern relates to the consequences of these clauses being declared abusive. The legal consequence of a clause being declared abusive under Spanish law is the nullity of the clause, but the contract lives on as if the clause never existed. It is not possible for the Spanish judge in the case where it finds that an unfair term in a contract concluded between a seller or supplier and a consumer is void, to modify that contract by revising the content of that term.5 The contract must continue to function, if possible, without any other modification other than the deletion of the clause. Any matters regulated by the clause rendered null are then regulated by supplementary laws. Should: (i) the contract not be able to function with the removal of the clause in question; or (ii) the application of supplementary law prejudice the consumer, the contract would be declared null in its entirety. Applying this rule to the above clauses:
- If the rounding-up clause is rendered null and void, aside from being removed from the contract and according to the SCC judgment of 2 March 2011, the bank is obliged to repay the excess amounts it has collected as a result of the operation of the clause.
- If the default interest clause is rendered null and void, aside from being removed from the contract and, according to the SCC judgment of 22 April 2015, default interest would be replaced by ordinary interest.
- If the early termination clause is rendered null and void, it will be removed from the contract. This will impact the ability of the lender to trigger acceleration of the loan in case the borrower fails to pay, notwithstanding its ability to claim the outstanding amounts if the borrower fails to pay under the relevant provisions of Spanish Law. In a recent decision , the Spanish Supreme Court cautioned that given that a contract cannot be amended by a Spanish judge in the case where it finds that an unfair term in a contract concluded between a seller or supplier and a consumer is void, a court must be cautious about rendering early termination clauses as null and void as this may have the unintended effect of a restriction on the access to consumer housing loans.
This tendency regarding abusive clauses in mortgage loans may reduce appetite to invest in a structure with assets including Spanish mortgages granted to consumers.
Footnotes
1. Some examples, apart from those examined in this article, are a clause providing for an interest floor (see previous EFLR article) or a clause which specifies certain scenarios in which a lender may accelerate the loan.
2. SCC judgment of 2 March 2011.
3. SCC Judgment of 23 December 2015.
4. Pursuant to a 2013 change in the Spanish Procedural Act.
5. SCC Judgment num. 705/2015.
