Banks may grant fewer home loans after floor clause void

The Supreme Court’s ruling against interest-rate floor clauses in mortgage contracts could have a knock-on effect, with banks granting fewer loans at higher borrowing costs, Vicente Carbonell, a member of the board that oversees the College of Property Registrars, said Thursday.

The Supreme Court on Wednesday clarified a judgment delivered in May declaring floor clauses null and void if they breach the levels of transparency demanded by the law. The clarification stated that any of the six potential areas it identified where transparency demands may have been breached within the context of a mortgage contract as a whole was sufficient grounds for these clauses to be nullified.

A floor clause imposes a limit on the extent to which consumers can benefit, in the form of lower borrowing costs, from a fall in the reference rate used to set mortgage rates, which in the case of Spain is normally the one-year Euribor interbank rate.

BBVA’s profits hit

In response to the Supreme Court’s ruling, BBVA and Cajamar on Wednesday announced they would eliminate such clauses from mortgage contracts effective as of last month. BBVA said the decision would shave 35 million euros off its net profit in June as a result of lower net interest income.

“This measure is going to do a lot more harm to the banks than we think,” Carbonell said at a news conference called by the College of Registrars to present a report it had made on floor clauses.

He said at first sight mortgage contracts that include both ceiling and floor clauses appear fair, but in reality it is the banks that ultimately benefit. “Under the appearance of effectiveness, harmful effects are created for the consumer,” he said.

Carbonell also said in principle that he had a favorable opinion of the recently approved Mortgage Debtors Law, although he added that it contains measures that are “more well-intentioned than useful.” He referred specifically to the requirement of including a clause in mortgage contracts that indicates whether or not the consumer understands what he is signing. “The only difference is that instead of signing just once, the consumer signs twice, but that doesn’t mean that he understands the contract any better,” he said. “It reminds me of the paper you have to sign before a surgical operation.”

In a parallel development, the association that groups together the country’s public notaries said it would set up a system of control to avoid abusive clauses being included in mortgage contracts.