Spanish banks are awaiting a key legal opinion on whether they should be forced to pay billions of euros in compensation for the way they sold a certain type of mortgage.
Advocate General Maciej Szpunar of the EU Court of Justice is set to publish a non-binding opinion on whether the lenders misled customers by failing to provide sufficient information when selling loans tied to the Bank of Spain’s Mortgage Loan Reference Index, or IRPH. The court’s rulings usually come four to six months later and follow such advice in a majority of cases.
The case has drawn parallels with the U.K.’s payment protection insurance scandal, which resulted in tens of billions of euros of compensation to customers. The Spanish banks could be ordered to pay clients as much as € 44 billion, Goldman Sachs Group Inc. estimated.
«In a worst-case scenario, this is a very serious problem,» said Pablo Manzano, vice president of the global financial institutions group at credit-rating agency DBRS. «The intensity could be less than PPI or it could be more.»
A Million Loans
About € 108 billion of home loans linked to IRPH, marketed as an alternative to the Euribor benchmark, were sold since 1999, according to DBRS. Some 1 million customers in Spain bought them, paying an average of 25,000 euros more than those who took Euribor-linked loans, according to an estimate by the Association of Financial Users (Asufin).
Several banks have said they’re optimistic that the EU’s top court will uphold a 2017 ruling by Spain’s Supreme Court, which concluded the methods used to sell IRPH weren’t abusive. Still, Spanish banks bore the burnt of a ruling from the European court as recently as 2016, when it ordered them to pay back billions of euros for imposing so-called mortgage floors — clauses in loan contracts that prevented borrowing costs from falling in line with benchmark rates.
In DBRS’s Manzano opinion, the European court is likely to side with banks this time, especially since a ruling against them could open up claims over other types of mortgages across the EU where the rate calculation wasn’t sufficiently explained.
Europe’s highest court is reviewing a case referred to it by a Barcelona tribunal. The waters have been muddied somewhat by a report issued by the European Commission’s legal team in September 2018 that said Spanish judges should be allowed to nullify contracts and offer customers the opportunity to switch to obtain better rates.
Banks haven’t reported the full extent of their exposure to potential claims, only publishing their outstanding IRPH-linked mortgages. CaixaBank SA has the most with € 6.4 billion as of June 30. That’s followed by Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA with € 4.3 billion and € 3.1 billion respectively.
Original Story: Bloomberg | Author: Charlie Devereux
Photo: Photo by Philipp K from Free Images
Edition: Prime Yield