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Abusive clauses

In order to protect borrowers more balance and transparency are required in mortgages

The Supreme Court has ruled that interest-rate floor clauses in mortgages granted by three banks in Spain are "abusive." The ruling is a blow to a practice that is both controversial and widespread. It entails setting a minimum interest rate that a borrower must pay on a mortgage even though the reference rate set in the contract — normally the one-year euribor rate — is below that amount.

According to the Supreme Court, such clauses are abusive because they are "neither reasonable nor transparent" and transform what in theory is a "floating-rate" loan into a "fixed-rate one that can only vary on the upside." The ruling also criticizes the way in which banks insert such clauses "amid an overwhelming mass of data," assigning them "secondary treatment" — that is, within the fine print — when they in fact constitute a key condition of the loan.

These and other recent legal rulings on different aspects of mortgages, such as the amount of late payment interest rates, reveal to what extent Spanish consumers have been on the wrong end of certain banking practices and contract models that are biased in favor of the lender. The strong growth in the financial sector as a result of the property bubble has resulted in such abuses — now that that crisis has left hundreds of thousands of borrowers trapped — acquiring an unacceptable social dimension.

The imbalance is particularly outrageous in those cases involving eviction — a situation that the new law on foreclosures mitigates in the case of future mortgages, but does not address in the case of the some 200,000 home loans currently subject to foreclosure proceedings.

Aware of the state of defenseless of borrowers, judges have got together at a summit meeting held to unify the criteria that have been agreed on in what amounts to an admirable initiative under which they will annul, ex officio, contracts where abusive clauses have been detected even in the absence of a specific request to do so by those affected. Judges also agreed weeks prior to that to suspend out-of-court foreclosures of abusive mortgages.

It is a healthy situation that these professionals have decided to go beyond the blind application of the law. These decisions show a social commitment benefitting the current circumstances. A certain commitment on the part of the banking sector should also be forthcoming by urgently mending their ways. Although some lenders do apply codes of good practice, the financial system as a whole is a long way off reaching the levels of social responsibility and transparency that are to be desired.

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