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Billions at stake for Spanish banks in EU court mortgage ruling

[MADRID] Spanish banks could face billions of euros in compensation claims if the European Union's highest court delivers an unfavorable verdict on how they've been setting mortgage rates.

The EU's Court of Justice is expected to decide on Tuesday whether banks were sufficiently transparent with customers about why they were sold mortgages with interest rates based on a Spanish central bank index rather than the more widely used Euribor, which often resulted in thousands of euros in extra costs.

CaixaBank SA is the most exposed lender, with 6.1 billion euros (S$9.31 billion) of outstanding mortgages linked to the Spanish central bank's Loan Reference Index, or IRPH, followed by Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA. In an extreme scenario, banks could be forced to repay clients as much as 44 billion euros, according to Goldman Sachs Group Inc.

While the case was brought by a Bankia customer, the decision will influence how such claims will be judged across Spain in the future. Some 1 million customers in the country bought IRPH-linked mortgages, paying an average of 25,000 euros more than those who got loans based on Euribor, according to an estimate by the Association of Financial Users, or Asufin.

A negative ruling for the banks would go against a 2017 verdict by Spain's Supreme Court, which found that selling the IRPH mortgages couldn't be abusive because they were tied to an official index.

IRPH is more difficult to calculate than Euribor because it also includes fees and credit risk. Marketed as a more stable option, the Spanish index has consistently produced higher rates for customers since it was created in the early 1990s. But the gap between the two indexes widened after 2008, when the European Central Bank began to drive down its benchmark rate.

Worst Case

A worst-case scenario for the banks would be a verdict that is retroactive, meaning it would include already-matured mortgages and past interest payments on existing contracts. About 108 billion euros of home loans linked to IRPH have been sold since 1999, according to credit rating company DBRS.

In September, Advocate General Maciej Szpunar of the EU court delivered mixed messages on the IPRH case in a non-binding opinion. He found that Bankia had been sufficiently transparent with the client, but also concluded that the use of the IRPH falls within the remit of the EU's rules on unfair terms and therefore Spanish courts can consider it abusive on a case-by-case basis.

"The opinion increases the likelihood that the ECJ will rule against the use of the IRPH, which would raise the number of consumer claims against banks for a lack of transparency on the sale of IRPH-linked residential mortgages, exposing Spain's lenders to heightened litigation risks," Moodys Investor Services senior analyst Alberto Postigo wrote in September.

Although the EU court follows the findings of its advocates general in most cases, there are notable exceptions. In 2016, it said banks must give back billions of euros to customers who paid too much interest on home loans pre-dating a May 2013 Spanish ruling on so-called mortgage floors. The decision was at odds with the non-binding opinion five months earlier, which had favored the banks.

The case is: C-125/18, Gomez del Moral Guasch.

BLOOMBERG