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| Reading the small print |
SPAIN The two words have been much in the media recently, not least because the clauses in a mortgage contract have largely been qualified as abusive banking practice by the Supreme Court. Cláusula, of course, means clause; suelo means floor - floor rate clauses, in other words. There is also something called cláusula techo, which means a roof clause, though better understood as ceiling. That's the top and bottom of the definition. But what do they mean, and are there similar clauses in mortgage contracts in other countries? It is sometimes known in English-speaking countries as the base rate clause, but that could be confusing as the translation is used for other unrelated things too. Another possible translation is 'minimum interest rate' - you get the idea. Let's make it simple: When a mortgage contract is signed, a series of conditions are established that will last until the end of the contract - which is of course why we are always told to read the small print, so as to avoid later surprises.>>>
Since so few people do read the fine print surprises abound, most often of the unpleasant kind.
Cláusula suelo: how low can you go?
To the point: a cláusula suelo defines the lowest percentage of interest to be applied to the payments the borrower is to pay.
In Spain that percentage is most usually measured according to the Euribor, or European borrowing rate. This is similar to the Libor inter-bank lending rate, of infamous manipulation by Barclays, and equally subject to the addition of the differential that allows a bank to make money on the loan.
The problem with the cláusula suelo scandal in Spain is that if it is too high it could mean that the Euribor rate is below it - but the clause means that the that the indexed percentage can't be paid. In other words, the mortgage payments do not go down at the same rate as Euribor+, if at all. The bank makes a lot of money, and the mortgage could easily lead to negative equity. This is exactly what happened.
Cláusula techo: up, up and away
The cláusula techo, on the other hand, limits the maximum percentage to be applied to the liquidation of the mortgage, or pay-off. This, too, should be scrutinised before signing a mortgage contract because if it is too high it will not serve its purpose, which is to protect against impossibly high payments. To predict the Euribor rate is not only difficult, not to say impossible, but if interest rates go too high, the client (who is always right?) will end up making sky-high payments, but if the rates go down the payments will not decrease to that percentage - because of the cláusula suelo, below which the applicable percentage will not go.
And that, too, is exactly what has happened: inter-bank borrowing rates have been at historical lows, ranging from 0.025% to a couple of points above that over the last three years. But almost no mortgage rates have been at historical lows.
Banking abuse
Without going too far into the legal details we have checked into deeply, earlier this month Spain's High Court made clearer a previous decision that said that these rates are not valid if they were made in anything other than very transparent at the time, or before, signature of the mortgage documents.
(Another blow to the already staggering banking industry. Or not: reports are coming in as we write that many of the banks involved are increasing their fees.)
The Spanish Supreme Court ordered the regional authorities to open sanction procedures against banks making (much more than) mischief with the cláusula suelo.
Only Andalucía and Catalonia have so far complied. Scandalous.
In March and April FACUA, the consumer organization sent a battery of denuncias to the corresponding authorities in the seventeen autonomous regions. The denuncias were against Bankia, BBVA, Caja España-Duero, Unicaja, Caja Rural del Sur, Banco Popular, Cajasol Caixabank, Novagalicia Banco (previously Caixa Galicia), Cajasur (of the Kutxabank Group), Banco Pastor (of the Banco Popular Group), Banco Gallego, Cajamar Caja Rural, Banco Etchevarría, Caja Granada (of the Banco Mare Nostrum group), Arquia, SabadellAtlántico and Caixa Penedès (both of the Banco Sabadell stable) and to Banco Castilla-La Mancha CCM, Caja de Extremadura y Cajastur (of the Liberbank group). They are still waiting for replies, at the beginning of July.
What to do about it and getting your money back
Given the legal nature of this problem, we are preparing an article about what you, the mortgagee, can do about it, and how to get your money back. But we want to make sure we're right, and are at this moment consulting our battery of lawyers, including the largest firm in Europe, based in Madrid. Please be patient, we must be absolutely sure, so we know you will understand.
Also, there is no date limit on when you begin proceedings - yet. Our sources say there is little chance that any date can be set, at least by Congress.
Apparently getting money back is possible, but it is likely to be convoluted and may involve going to court - but the good news is that costs are low, and new papers may not be necessary.
In any case, we are preparing a step-by-step guide that will be available very soon.
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