This article comments on the European Union Court of Justice ruling of March the 3rd 2020 on the eventual abusive mis selling of the IRPH variable interest rate in Spanish mortgages.
After all the expectation we finally have the IRPH ruling which you can find here. It is a very important ruling indeed as it affect to thousands of mortgage payers. The economic consequences for the bank industry could be very important.
The questions that the ruling answers
A judge form Barcelona (Spain) asked the EUCJ if the use the IRPH use infringe the EU consumer’s regulations. The Spanish judge asked basically three things to the EUCJ:
- Taking into account that the rate of a loan (mortgage) is an essential part of the contract, is it possible to assess its abusiveness? Otherwise it could be like a price control which is forbidden.
- If the answer to (i) is yes, then is the IRPH rate abusive due to its way to calculate it.
- If the IRPH is abusive then which are the consequences?
Answers to the questions
Preliminarly we have to highlight that the assessment of the validity of the IRPH it is made by the EUCJ from the consumer’s point of view. This is, if the IRPH stipulation respects the consumer’s regulation. So it is assumed that we are always talking about relationships between a professional lender and a consumer subject to conditions (not negotiated stipulations).
Having said that the EUCJ answers were as follows:
- The general rule is that the stipulations about the balance between the price and products and services cannot be assessed as abusive or not in order to avoid a price control. The general rule unless the stipulation are not clear and understandeable. So it is enough that the stipulation can be read and understood from a formal and grammatical point of view. The consumer has to understand the legal and economic consequences of the stipulation for themselves. So, we can always assess the transparency of a stipulation in a consumers’ contract.
- With regards to the IRPH it can be abusive if it is not transparent. The transparency assessment ought to be made by the local judge taking into account all the facts and findings of the case. It is essential the information provided by the lender. With this regards there are a few points to take into consideration:
- The IRPH calculation is funny. It is an simple average and not a weighted one. It takes into account not only bare rates but with commissions and expenses added to it. The data to calculate the IRPH was provided by some particulars lenders which manage the minority of the mortgage market. By regulations a negative rate to compensate the commissions and expenses added had to be applied to the IRPH. But this was barely made by any of the lenders which used the IRPH. And yes, as the EUCJ says, the way to calculate the IRPH was published in the official journal so an average consumer could access to this information. I think this is a relevant point coming from the EUCJ.
- Lenders had to provide by law information of the IRPH rate during the last 2 years and the last value of it. This was barely made also. No need to compare with other interest rates in principle. But I think that the way to calculate the IRPH was difficult enough and require detailed information. If the consumer had this information then they will be able to compare with other interest rates as the IRPH was always higher than the EURIBOR for instance.
- The lenders which used the IRPH always sell it as good because it was more stable. This is a funny way to say it was controllable and manipulable.
- So if we conclude in a specific case that the IRPH stipulation is not transparent and therefore abusive, what happens? The typcical lawyer’s answer is that it depends. There are several options:
- The general rule is that if a stipulation is abusive is void and null as if it did not exist. And then we have a loan without interest. As simple as that. Obviously this would lead to a cancellation of the contract from the bank as a loan without interest is no business for them at all. It would be unnatural. And the cancellation means that the consumer ought to pay all the money So in the cases when the cancellation of the contract is worst for the borrowed money at once in a lump sum. And this could be impossible some times,
- If that is case and the consumers’ situations are worst if the loan is cancelled, then the law allows the judge to amend the contract and maintain it changing the variable interest rate for another one. But which one? In the first place, if the loan foresaw a substitute for the IPRH that would be the one (as long as it is legal and transparent), and secondly, the current IRPH which is in force. And this other IRPH was not very different than the one examined by the EUCJ. So, the final outcome would be similar to the original situation and the banks will not have to pay back much money at all to consumers.
In my opinion this ruling is not a turmoil for the bank industry for two main reasons:
- As each individual case has to be assessed by a judge there will be another avalanche of court claims. Consumers will have to go to court always as a general rule. Sorry, I do not imagine the lenders calling the clients and offering to pay back all the money surcharge.d I still do not have John Lennon’s imagination. This will saturate the system even more. The procedures will last in the first instance as average a few years. And the lenders will be happy because if they have to pay they will pay late.
- If the court outcome is that the old IRPH is substituted by the current IRPH the money difference is so little that consumers will have to consider very carefully if they wish to claim in court or go all the way which has a cost in time, money and psychological.
If your loan is subject to the IRPH and it is completely paid off or about to it would be advisable to claim in court and ask for all the money paid on interest. This could be very worthy. Subsidiary, you can ask to substitute the od IRPH for the current one. At the end of the day you will win one thing or another and there will not be negative consequences for you provided the judge understands that the IRPH stipulation is not transparent.
Neverteless the Spanish Supreme Court will rule some IRPH cases applying the EUCJ ruling and we will see what is the outcome. We will have to stick to the Spanish Supreme Court interpretation. So it might be still a little bit soon to know what will happen. As the situation is I would recommend patience unless a consumer is in a desperate position to pay the mortgage and wish to claim the bank immediately to compensate debts if possible, I would rather wait and see and go slowly.
However, I would recommend starting making the out of court claims to the bank as soon as possible asking for all the monies surcharged so far as the EUCJ advocates as a general rule. This step is necessary, and it will be already done when consumers decide to go to court. And who knows. Some lenders might pay the money back at this early stage saving time and money to the consumer.
Besides, as soon as the out of court claim to the bank is made this step will be already done and we might avoid any other specific measures or steps that the government could approve before allowing the consumers going to court and making more lengthy and difficult the court access at the end of the day as the bank policies are to do not pay anything until the court rulings are definitive. And this is the general rule unfortunately.
I always say the same and I repeat now. It seems funny to me the concern about the bank industry risk if it has to be return a lot of money. At the end of the day this industry has taken that money wrongfully from thousands of consumers mis selling and cheating on them. So it is just a justice issue. If the bank industry took money wrongfully, they have to pay it back plus interest (and they are experts about the interest thing so they understand it perfectly). As simple as that I am afraid.
The bank industry strategy is to figth until the end. Why? Because the courts in Spain are overloaded and saturated and they will pay, if so, many years later. And this is something that make many consumers desist to claim. And the bank industry knows that. Fuerthermore, the bank lawyers work almost for free because they deal with thousands of procedures the fees they offer their lawyers are ridiculous. And I konw that from colleagues that work for the banks. Ridiculous fees. So for the bank industry, the litigation is almost free wich is another incentive to go to court until the end.
This is the current situation I am afraid. So it will be if there are no profound changes in the system.
The changes should start for the transparency in the financial industry in general, strengthen the consumers’ industry and start thinking seriously about punitive damages. The latter would probably be the strongest reasons for the bank industry to be definitely transparent because the risk for the industry would be then for real.
Transperency should be a human right in my opinion. Basically, a little bit of honesty.
Thank you for your time and attention and I hope this information is of use. You are very welcome to share if you liked it.
You might be interested in this other post on the IRPH as well.
Please, note that this is general information. This is not specific legal advice. It is advisable to seek legal advice for any specific legal issue.