The plenary session of the First Chamber of the Supreme Court meets this Wednesday to settle two issues closely related to mortgages. The judges will have to study various cassations, on the one hand, on the validity and eventual replacement of a highly controversial index to which some old loans, the IRPH, were referenced, and, on the other, on the agreements between banks and their clients to modify the floor clause.
What is the IRPH?
The IRPH was an official index, prepared by the Bank of Spain since 1994 from a ministerial order that enabled it to calculate it according to the data provided by the entities. Like any other index, it could be used to determine the interest rate at which the debt contracted with a mortgage loan must be repaid. To do this, banks add to the index, which varies over time, a fixed spread, or margin.
How is it calculated?
The IRPH is calculated according to the average of the interest rates on the mortgage loans granted by banks and savings banks or other entities for three or more years. On the contrary, when calculating the most used index, that is, the Euribor, three levels of sources are taken into account. The first is the interest rate that the 18 banks that are part of the role of the managing body of the index (the European Institute of Monetary Markets, EMMI, for its acronym in English) apply to lend money to each other. In the second, historical operations are considered and, in the third and last level, theoretical prices. Each of the panel entities uses the three cascading levels daily, that is, if the first one fails because there are not enough operations, it will use the second and, if this is not enough, it will go to the third.
Why was it used?
At the time of its boom, a few decades ago, the entities assured that the IRPH was more stable than the other indices. However, it was also shielded from the drops in interest rates that occurred from 2013 on and was at all times above the Euribor, the benchmark that began to be adopted in 1999. In 2004, one in ten contracts mortgages were linked to IRPH. Now it is in disuse and, in 2018, it was only in 0.28% of mortgages, according to the latest available data.
What do the judges have to decide?
After having suspended the ruling on this same matter on September 30, the Supreme Court will rule on the validity or nullity of the IRPH in five cases: two of them correspond to mortgages with Caixabank’s IRPH, another two to Kutxabank and a fifth , to Liberbank. “One of the Caixabank procedures comes from the Jaén Provincial Court on behalf of an IRPH Entities + 0.25% that was declared valid; the other comes from the Badajoz Provincial Court, which also declared it valid. In the case of Kutxabank, one of the procedures comes from the Álava Provincial Court, which declared the IRPH clause null, and, the other, from the Cantabria Provincial Court, which, on the contrary, ruled the validity ”, they point out from the Association of Financial Users (Asufin).
In the latter case, the Supreme Court will have to establish the validity or invalidity of a Liberbank loan differential integrated into the 2005 State Housing Plan. The case comes from Badajoz and the magistrates of the Provincial Court declared it valid by referral to the Royal Decree Law that protects said plan.
What is the background?
Consumer associations and companies whose activity consists of bringing their clients’ complaints against banks to court argue that the Supreme Court should harmonize its doctrine with that of the Court of Justice of the European Union (CJEU). With a sentence pronounced on March 3, Luxembourg left the decision to establish in each case whether the clause of the mortgage contract contained in the IRPH is abusive to the Spanish judges. It is, said the European justice, when the user has not been clearly explained how the interest rate is calculated with that index or if the bank has not provided the user with its historical evolution (without it being necessary to show a comparison with the Euribor) . Almudena Velázquez, legal director of the claim platform Reclamador.es, says she is convinced that “these are criteria that no bank met.”
If the IRPH is canceled, how is the interest rate calculated?
Another question to which the judges of the Supreme Court will have to answer is what index takes over from the IRPH to calculate the interest rate on those mortgages in which it is declared null. Upon hearing the ruling of the CJEU on March 3, the Spanish Banking Association stressed that “even though a judge could consider that in a specific case the clause [que contiene el IRPH] it was not transparent, the effect will be the substitution of the IRPH Cajas (or the IRPH Banks, as the case may be) applied, by the IRPH Entities, whose value is practically identical ”.
And this is indeed what happened several times, something that the president of Asufin, Patricia Suárez, calls “nonsense.” Only 17 Provincial Courts have so far ruled against the user, and 30 have done so in favor. But some “have replaced the IRPH Cajas y Bancos with the IRPH Entities, which is a clear detriment to the consumer,” he says.
The ball is now in the court of the Supreme. The judges will decide “if, once the IRPH is abolished, the loan is left without interest – something allowed by our Civil Code, which provides for the existence of free loans in which only the capital must be returned – or, on the contrary, to apply a substitute interest and what is this, if the IRPH Entities, as the banks defend, or the Euribor ”, summarizes Velázquez. From Asufin they point out that most of the sentences handed down in favor of the consumer substitute the IRPH for the Euribor. “And there are already cases, such as the judgment issued on April 24 by the Toledo Provincial Court, in which it has been considered fair to leave the loan unpaid,” they add.
How many are affected by IRPH?
There are no official records of how many loans still have interest rates that take the IRPH as a reference, but according to the Reclamador.es platform there are about 300,000. Other firms, such as Collective Complaints, believe that there may be 800,000 credits with IRPH, approximately. Asufin calculates that the households affected by the judgment may be around a million and the average over-cost that each of them had to bear for having a mortgage whose interest rate was calculated from that index reaches 25,000 euros.
What is the floor clause?
The floor clause is a provision —whose existence in mortgage contracts was frequent at the beginning of the century and in the years of the Great Recession— by which a loan with a variable interest rate could not be cheaper below a certain limit. In many cases it went unnoticed by users, until they realized that the Euribor was falling sharply but its monthly fee did not reflect the decline.
What are rookie agreements?
Following the legal proceedings of hundreds of thousands of clients, in 2013 the Supreme Court established that the floor clause had to be declared void as abusive if the bank had not correctly informed the client about it before signing. However, he denied that the effect of that pronouncement had a retroactive effect.
The entities then began to propose to clients whose mortgages had a floor clause a novation, that is, a modification of the contract. In these cases, the bank eliminated this provision, which could eventually have been the subject of a declaration of nullity by a judge, to replace it with another, according to the indications of the Supreme Court. In exchange for this, however, the user agreed to renounce any type of legal action aimed at the old or new clause. The intention of the entities was to avoid litigation (and reimbursements) that could arise from a possible change in judicial criteria.
What does the jurisprudence say?
The turnaround finally took place in 2016. At that time, the CJEU ruled that consumers had the right to claim the amounts they had unduly paid before 2013 as well, although it was only on July 9 last when it ruled that the non-binding agreements signed after 2013 in which users gave up going to court are only valid if the client was well informed, understood the consequences of what he subscribed and had the effective ability to influence the renegotiation of his loan.
What is the Supreme going to settle?
In the cases on which it ruled this Wednesday, the High Court “should accommodate its doctrine to that of the CJEU” as regards novation of the floor clause, in the words of Velázquez. “In pure logic they will have to declare that they will only be valid when they have actually been informed prior to the signing of the consequences and, above all, of what it means to renounce the exercise of actions,” he predicts.
This lawyer recalls that, on the contrary, until now the Supreme Court “has considered that if these agreements were included in a public document of novation [es decir, se firmaban ante un notario], they were valid without more, so that the Court of First Instance and Instruction number 3 of Teruel raised a preliminary question, wondering if this doctrine was in accordance with the transparency requirements that any contractual clause and the right of defense must preside over ”. What the CJEU resolved with its aforementioned sentence, on July 9.