MADRID (Reuters) - Europe’s top court sent a dispute over Spanish mortgages back to local courts on Tuesday, shielding Spain’s banks from a worst-case scenario that could have seen them on the hook for billions of euros in upfront losses.
Caixabank, Bankia, Santander and BBVA are among the major lenders that used Spain’s mortgage price index (IRPH) as an alternative to the interbank rate Euribor to set mortgage rates.
Hundreds of thousands of these mortgages were sold, particularly in 2007 and 2008, at rates that tended to be higher than Euribor and did not fall as much when the European Central Bank cut borrowing costs..
The European Court of Justice ruled on Tuesday that it will be up to local judges in Spain to decide on a case by case basis if mortgages priced off so called IRPH clauses were fair or not, based on whether they were understandable and transparent.
Shares in Spanish banks jumped, with Caixabank (CABK.MC) and Bankia (BKIA.MC) up around 7% and 5% respectively by 1025 GMT on initial relief that the court did not decide on a blanket rejection of the clause.
“While this leaves the door open to domestic claims going forward, it seems to remove the tail-risk scenario of multi-billion upfront losses,” broker Jefferies said in a note to clients.
However, any domestic claims could still hit banks’ bottom lines as they grapple with the effects of a long-term low interest rate environment.
Spain’s Supreme Court ruled in 2017 that use of the IRPH index did not constitute an abuse of the market and Spanish banks considered that its use did not imply a lack of transparency as it was published by the Bank of Spain.
However, customers and lower courts challenged this decision, bringing it to the ECJ. The Spanish government had scrapped the IRPH in 2013, saying it was unfair.
The ECJ said it would also be up to local judges to decide whether to apply a different interest rate in cases where the sale of IRPH-linked mortgages was considered an abuse of the market.
The court said that in order 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, it added.
Spanish consumer association Asufin welcomed the ruling.
“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, told Reuters.
Reporting By Jesús Aguado; Editing by Ingrid Melander, Kirsten Donovan