The right example

Spain’s second-biggest lender announced a decision on Wednesday that should be followed by the rest of the financial institutions in Spain. BBVA said that with effect of May 9 this year, it would cease to impose so-called interest-rate floor clauses in mortgage contracts. Floor clauses establish that the interest rates paid by people who have taken out a mortgage can never fall below a certain level (the average floor in the case of home loans granted by BBVA was 2.8 percent) regardless of how much the reference one-year Euribor rate drops below the established floor rate. The social consequences of this development are far-reaching, given that in the case of BBVA it affects 425,000 mortgages. Other banks, such as Cajamar, have already decided to follow suit.

The decision taken by BBVA is no shot in the dark. The social clamor against evictions of people from their family home is partly based on abusive clauses included in mortgage contracts, which discriminate against those who take out a home loan and benefit the banks. The European authorities have consistently come out against such clauses when they are unfairly hidden in the fine print of mortgage contracts. Judges have also taken on the task of defending mortgage debtors, who often end up unable to service their loans, by ruling against opaque or poorly explained contracts. That is the reason why the Supreme Court declared null and void the interest-rate floor clauses included in the mortgage contracts of a number of lenders due to a lack of transparency.

BBVA and Cajamar have opted for prudence by accepting the inevitable and sending out a message in favor of transparency. It is better for a bank to calculate the potential costs, even if these are not onerous, and bow to the common sense of the courts and the public rather than allow itself to get caught up in socially undesirable legal battles. The potential saving in terms of legal costs — both for the banks and their customers — is considerable. The loss of earnings, which BBVA has estimated at 35 million euros in the first full month after its decision to eliminate interest-rate floor clauses, is manageable, and in any case will be offset in part by profits previously reaped from unjustifiable conditions imposed in mortgage contracts.

Transparency and efficiency

The financial system needs to acknowledge that providing customers with transparent information is another factor in efficiency. Fine-print clauses in all contracts must be eliminated, as for the example in the case of preferred share issues, which brought with them harmful political and economic consequences. All contractual restrictions not in keeping with what is dictated by the rationale of the market should be eliminated, and in this respect interest-rate floor clauses in mortgage contracts are not the only ones.