Juan Carlos Benito Sánchez, PhD Fellow at the University of Louvain (Belgium).
Twitter: @jcbensan

Over recent years, the European Court of Justice has issued several judgments invalidating parts of Spanish mortgage law, both in terms of its content and procedures, and how it’s interpreted by the courts. These rulings were based on the fact that these laws went against EU consumer protection regulations. In particular, the Court based its decisions on Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts. In most cases, it declared that Spanish mortgage law unfairly limited consumers’ ability to challenge and nullify unfair terms in their mortgage agreements.

This piece examines the two most recent rulings by the Court of Justice on this matter: the Gutiérrez Naranjo judgment (Joined Cases C-154/15, C-307/15 and C-308/15, EU:C:2016:980) from December 2016, and the Banco Primus judgment (C-421/14, EU:C:2017:60) from January 2017. The first case involves ‘floor clauses,’ which set a minimum interest rate limit on variable-rate mortgages. The second case deals with ‘accelerated repayment’ clauses, which let lenders demand full repayment of outstanding debt if a borrower falls behind on payments for a short time, often as little as three months. Both rulings bring up important points that have significant implications for EU consumer law and, ultimately, for the fundamental right to housing for individuals and families.

The Gutiérrez Naranjo judgment: limiting the retroactive effect of unfair floor clauses

This case essentially focuses on the time limit that the Spanish Supreme Court’s case law imposed on the retroactive effect of unfair floor clauses in mortgage contracts. In a well-known ruling from May 9, 2013, the Supreme Court declared that floor clauses lacking transparency due to inadequate information provided to borrowers were considered unfair and thus invalid. This had practical implications. Since the variable interest rates in these contracts were usually linked to the Euribor, which fell sharply during the financial crisis, many borrowers found their mortgage interest rates stuck at the minimum limit. They couldn’t benefit from the much lower market rates that would have applied without those floor clauses. Because these clauses’ impact wasn’t adequately offset by clear and sufficient information allowing consumers to understand the risks, the Supreme Court determined that non-transparent floor clauses—the majority of them—were unfair and therefore void.

However, the Supreme Court qualified this declaration by stating that the retroactive nullification of non-transparent floor clauses would have a time limit. Citing the principle of legal certainty, it decided that such nullification wouldn’t apply to situations predating the judgment (May 9, 2013). The Supreme Court believed that full retroactivity would significantly disrupt and harm the economic order. This interpretation effectively barred consumers from seeking refunds for overpayments based on non-transparent floor clauses if those payments were made before May 9, 2013.

The Court of Justice was asked to clarify whether EU consumer protection law, specifically Directive 93/13/EEC, prohibited this time limitation. Building upon previous rulings, the Court determined that a finding of unfairness in a contractual clause “must allow the restoration of the legal and factual situation that the consumer would have been in if that unfair term had not existed, by inter alia, creating a right to restitution of advantages wrongly obtained, to the consumer’s detriment, by the seller or supplier on the basis of that unfair term” (§ 66). It considered that limiting the legal consequences of a nullity declaration was “tantamount to depriving, in general, any consumer having concluded, before [9 May 2013], a mortgage loan contract containing such a clause of the right to obtain repayment in full of the amounts overpaid by the consumer to the bank” (§ 72).

This outcome is not surprising considering the Court of Justice’s established case law on Directive 93/13/EEC. However, the Gutiérrez Naranjo judgment went further. The Court of Justice stated that “it is for the Court alone, in the light of the fundamental requirement of a general and uniform application of EU law, to decide upon the temporal limitations to be placed on the interpretation it lays down in respect of [a rule of EU law]” (§ 70). In essence, the Court clarified that national courts cannot independently impose time restrictions on the effects of EU law. The broad and definitive language used suggests far-reaching implications beyond consumer protection.

The Spanish media widely covered the judgment, which was celebrated by civil society groups advocating for housing rights in Spain, who had made floor clauses a key issue. The Spanish government quickly established a new out-of-court system to handle consumer claims for refunds of overpayments caused by non-transparent floor clauses. This has faced criticism for creating uncertainty for consumers and lacking penalties for non-compliant lenders. Recently, on February 15, 2017, the Spanish Supreme Court issued its first judgment amending its previous stance, confirming the full retroactivity of unfair floor clauses in mortgage agreements.

The Banco Primus judgment: limiting judicial review of unfair accelerated repayment clauses

This case centers around the restrictions imposed by Spanish mortgage law and Supreme Court case law on the ability of courts to invalidate unfair accelerated repayment clauses in mortgage agreements. As previously explained, these clauses enable creditors to demand full repayment of the remaining debt (principal and interest) if a borrower misses a small number of payments. This means that if a borrower falls behind on payments for as little as three months—out of a thirty-, forty-, or fifty-year term—the lender can demand immediate repayment of the entire loan. Because the debtor cannot make such a large payment, the lender typically initiates foreclosure proceedings, sometimes using the streamlined process under Spanish mortgage law, often leading to eviction.

Lenders have routinely included accelerated repayment clauses in loan agreements for years. Their use, particularly after Spain’s housing and financial crises, is considered a major factor in thousands of foreclosures nationwide. These clauses were not only common, but also explicitly allowed under the Spanish Civil Procedure Act, which requires a minimum of three months of arrears before demanding full repayment. Before a 2013 amendment, lenders could even demand full repayment after just one missed payment. Despite this, according to Spanish Supreme Court case law, lower courts couldn’t invalidate accelerated repayment clauses deemed unfair due to significant imbalance favoring lenders, unless those clauses had actually been enforced in a specific case. Since lenders could utilize the Civil Procedure Act to demand accelerated repayment instead of enforcing the—almost always unfair—contractual clause, courts were essentially blocked from invalidating the clause and halting foreclosure proceedings based on its unfairness.

In Banco Primus, the referring court asked whether domestic law and its interpretation could prevent courts from invalidating unfair accelerated repayment clauses if they hadn’t been applied in the specific case. The Court of Justice first reviewed its existing case law regarding unfair terms and outlined the factors national courts should consider when determining if an accelerated repayment clause is unfair under Directive 93/13/EEC. These include the type of goods or services involved and the legal avenues available to consumers to address the loan recall’s consequences (§ 67). The Court then overturned the Spanish Supreme Court’s interpretation, stating that “the prerogatives of the national court ruling on whether a term is unfair, […], cannot be contingent on whether that term was actually applied or not” (§ 73). When a national court determines that a contractual term is unfair, “the fact that that term has not been executed cannot, in itself, prevent the national court drawing the appropriate conclusions from the ‘unfair’ nature of that term” (§ 73).

The practical implications of this judgment in Spain are clear. Thousands of foreclosures based on unfair accelerated repayment clauses, which domestic courts were prevented from nullifying, should have been invalid. This raises concerns about the level of consumer protection offered to borrowers by Spanish authorities and reveals how Spanish mortgage law has repeatedly favored lenders over vulnerable borrowers.

A right to housing perspective

These two cases are revealing but not the first to highlight the shortcomings of Spanish mortgage law in terms of consumer protection and the right to housing. At the EU level, other Court of Justice judgments addressing this matter will resonate with some readers (Aziz, Sánchez Morcillo and Abril García, Finanmadrid EFC). Internationally, the UN Committee on Economic, Social and Cultural Rights recently issued its first decision under the Optional Protocol to the ICESCR, examining the judicial safeguards provided for the right to housing within the context of mortgage enforcement proceedings (I.D.G. v. Spain).

The right to adequate housing is enshrined in Article 7 of the Charter of Fundamental Rights of the European Union, which encompasses the right to respect for private and family life. Viewing mortgage law issues solely through a consumer protection lens doesn’t always reflect the gravity of foreclosures and evictions. This isn’t just about financial institutions taking advantage of consumers with the approval of authorities; it’s also about individuals and families being denied adequate legal protection of their housing rights. Incorporating this perspective into case law, considering human rights, could better illustrate the power imbalance between borrowers and lenders and strengthen the legal protection of borrowers’ security of tenure.

Photo credit: www.thejournal.ie