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Mortgage Loan Reference Indexed (IRPH) clauses. The ECJ rules that they are not abusive per se but it puts the ball back in the Spanish Supreme Court's court

The ECJ issued yesterday its judgement in connection with case C-125/18 regarding the potential abusive nature of a clause governing a floating interest rate indexed to the Mortgage Loan Reference Index (IRPH) included in a mortgage loan agreements granted to a consumer. 

The judgment decides on a preliminary question raised by the first instance court number 38 of Barcelona that was deciding over a mortgage loan agreement to acquire a dwelling entered into in 2001 and it follows, in the main points, the conclusions held by the General Advocate Szpunar last September 2019.

The ECJ has concluded that IRPH index floating interest clauses cannot be considered abusive per se but they fall under the transparency control requirements set out in Directive 93/13 (the Directive). Consequently, Spanish Courts will have to carry out this control in order to determine if the relevant clause included in the agreement is unfair and consequently null. That transparency control has to be made on a case-by-case basis and considering the circumstances at the time the relevant mortgage loan was granted. However, key issues remain yet unresolved under this judgement, such as if a mortgage loan agreement can subsist without the interest clause or, if not, which the replacement index will be.

Judgement of the ECJ on case c-125/18

The ECJ main conclusions are the following:

  • IRPH index floating interest clauses included in mortgage loans executed between a consumer and a professional fall under the scope of application of the Directive. The exception set forth in the Directive by virtue of which contractual terms, which reflect mandatory, statutory or regulatory, provisions, are not subject to the provisions of the Directive does not apply to the case at hand. The ECJ concluded that Spanish national legislation does not impose the imperative use of IRPH regardless of the choice made by the parties in the contract or its subsidiary application in the absence of other agreement set out by the parties.
  • In order to comply with the Directive’s transparency requirements, IRPH index floating clauses must be grammatically and formally legible but also must enable an average consumer (well-informed and reasonably attentive) to understand the way the IRPH index is calculated and to assess the potential substantial economic consequences on its financial obligations.
  • Only national courts can carry out the relevant checks in the light of all the circumstances surrounding the execution of the contract and determine whether the consumer received proper information so that it could assess the total financial cost of its loan. For these purposes, the ECJ finds very relevant: (i) that, considering the publication of the calculation method of the index in an official journal (as was the case for the IRPH), essential information relating to the calculation of the index is easily accessible for anyone intending to enter into a mortgage loan; and (ii) the provision by the relevant financial entity of information regarding the evolution and fluctuation of the index in the past. Please, note that in this case, according to the Spanish regulations in force at the time of entering into the loan, lenders had the obligation to inform consumers of the evolution of the IRPH during the period of two years preceding the date of granting of the loan.
  • Where a mortgage loan agreement cannot subsist without the unfair term (in this case the IRPH index floating interest clause) and provided that the annulment of the agreement in full would expose the consumer to particularly unfavourable consequences, the national court could remove the index by replacing it with a supplementary index set forth in the national legislation, unless the parties have agreed otherwise.
    The ECJ concluded that if the First Instance Court determines that: (i) the IRPH index floating interest clause is unfair; (ii) the loan agreement cannot subsist without this clause; and (iii) its annulment in full exposes the consumer to particularly negative consequences (i.e. the requirement of an immediate repayment of the principal of the loan); then the clause could be substituted by the index foreseen in Law 14/2013, provided that according to Spanish law such index can be considered as supplemental.
  • The financial consequences of the potential declaration of this type of clauses as unfair for the entities and the financial system as a whole cannot be determined solely based on the interpretation of EU law. Therefore, it is not appropriate to limit in time the effects of this judgement as requested by the Spanish government.

Impact on IRPH litigation proceedings

Following this ECJ judgement, Spanish courts will be able to run a transparency control of the IRPH clauses. They will hence decide, on a case by cases basis and in light of the circumstances under which the loan was granted (including, but not limited to, the publicity and information provided at the time to the claimant by the relevant lender), whether the lender complied with the information obligations under the national transparency legislation implementing the Directive applicable at the time, (Circular 8/1990). As the Spanish procedural system does not contemplate class actions, each borrower wishing to claim in respect of its IRPH index provisions will have to file an individual court claim, and such claim will have to be evaluated by courts in light of its own circumstances. Consequently, it is likely to expect a substantial number of litigation proceedings on this regard, with a variety of outcomes depending on the circumstances that are considered to be duly evidence in each dispute.

In addition, this judgement is not aligned with Spanish Supreme Court's upheld position in its decision of 14 December 2017, which determined that the IRPH, as such, could not be subject to transparency control requirements set out in the Directive on the basis that it was an officially regulated index. As it happened with ECJ ruling dated 26 March 2019 on early termination clauses (cases C-70/17 and C-179/17), the IRPH ruling leaves in the hands of the national courts, and, in last instance, in the hands of the Supreme Court the final decision on whether a mortgage loan agreement can exist without the interest rate clause or not. Borrowers’ claims will aim to establish first that the transparency control over the IRPH failed and therefore the provision is unfair and secondly, that the loan agreement can subsist without the interest rate clause, as this outcome would enable the borrowers to keep the loan in place on an interest free basis. Whilst the first claim will depend on the facts of each case, we will need to see what the Spanish Supreme Court rules in connection with the subsistence of the loan without the interest rate clause.