March 3, 2020 / 9:07 AM / a month ago

UPDATE 3-Spanish banks rally after EU court sends mortgage dispute back home

* European Court says IRPH mortgages should be transparent

* Ruling leaves door open to individual litigation in Spain

* Shares in Spanish banks rise

* Up to a million consumers affected by IRPH mortgages

* Spanish listed banks hold 15.5 blns euros in loans with IRPH (Adds bank exposure to IRPH, consumer association, banking industry comment)

By Jesús Aguado

MADRID, March 3 (Reuters) - Europe’s top court on Tuesday sent a dispute over Spanish mortgages back to national courts, opening the way for individual claims but shielding banks from a worst-case scenario that could have meant billions of euros of upfront costs.

Hundreds of thousands of home loans were sold in Spain, mainly in 2007 and 2008, based on a mortgage rate index (IRPH), at interest rates that tended to be higher than interbank benchmark rate Euribor.

The rates on these mortgages also did not fall as much when the European Central Bank cut borrowing costs.

Spain’s listed banks still hold 15.5 billion euros ($17.21 billion) of these mortgages, with Caixabank and Bankia among the lenders that used them most.

The European Court of Justice said it would be up to local judges in Spain to decide on a case by case basis if mortgages priced in this way were fair or not, based on whether they were understandable and transparent.

Shares in Spanish banks jumped after the court ruling. Caixabank and Bankia were up around 6.6% and 3.8% respectively by 1254 GMT on initial relief that the European court did not decide on a blanket rejection of this type of mortgage pricing.

“Today’s ruling should lead to some litigation but reduces the tail risk from massive litigation,” Exane BNP Paribas analysts said in a note, adding that they considered this removed “one of the largest uncertainties” for the sector.

But any domestic claims could still hit banks’ bottom lines which are already under pressure from a long-term low interest rate environment.

The exact impact of Tuesday’s ruling will depend on how many cases are brought to the Spanish courts, how many mortgages are declared invalid, what rate the IRPH would be replaced with, and whether that would be retroactive.

The mortgage case is one of a number of litigation risks Spanish banks are facing, including an upcoming Supreme Court ruling that will decide at what point the interest charged on credit cards could be classed as “usury”.


Among Spain’s listed banks, Caixabank has an outstanding value of 6.06 billion euros in these mortgage contracts; Santander around 4.3 billion euros; BBVA, 2.8 billion euros; Bankia, 1.3 billion euros; and Sabadell 751 million euros, official data from the banks showed.

Smaller regional lenders Unicaja and Liberbank have an outstanding exposure of 182 million euros and 100 million euros respectively.

The European Court of Justice said it would be up to local judges to decide whether to apply a different interest rate in cases where the sale of IRPH-linked mortgages were considered abusive.

The European court said that to comply with transparency requirements an average consumer has to be in a “position to understand the specific functioning of the method used for calculating that rate and thus evaluate, on the basis of clear, intelligible criteria.”

The consumer must also understand the potentially significant economic consequences of such a term on his or her financial obligations, the court said.

Spanish consumer association Asufin, which welcomed the ruling, estimates that one million people could be affected, though there are no official figures available.

“The judges will be able to check whether the IRPH was explained in a clear and transparent manner so that the average consumer could understand the economic cost that it would entail,” Patricia Suarez, the head of Asufin, said.

On Tuesday, the Spanish banking association AEB said in a statement that they considered that the IRPH clause was implemented in a transparent manner.

Spain’s Supreme Court had ruled in 2017 that use of the IRPH index did not constitute an abuse of the market. However, customers and lower courts challenged this decision, bringing it to the ECJ.

The government had scrapped the IRPH in 2013, saying it was unfair. ($1 = 0.9008 euros) (Reporting By Jesús Aguado Editing by Ingrid Melander, Kirsten Donovan and Jane Merriman)

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