A non-binding legal opinion from an European Court of Justice (ECJ) official that Spain’s IRPH mortgage rate could be abusive opens the door to multi-billion Euro compensation claims against Spanish lenders, which would probably get bogged down forever in Spanish courts, if the mortgage floor clause claims are any guide.

In September Maciej Szpunar, Advocate General to the European Court of Justice, made his opinion public that Spain’s Mortgage Loan Reference Index, known locally as the IRPH ( Índice de Referencia de Préstamos Hipotecarios), could fall foul of the EU’s directive on unfair terms in consumer contracts, so can be challenged in court.

In his opinion Spanish courts should decide if IRPH mortgages were sold transparently or not, contradicting a Spanish Supreme Court decision in 2017 finding IRPH mortgages neither untrasparent nor abusive, blocking compensation claims on these grounds.

The ECJ’s ruling will come around six months later, but they have followed such advice in a majority of cases.

What is Spain’s IRPH Mortgage Loan Reference Index?

The IRPH is an official index published by the Bank of Spain calculated using an average interest rate of mortgages loans made by Spanish banks. Variable-rate mortgages using the IRPH rate went from 11.51% of all mortgages in 2004 to almost zero today (red line in chart above). Variable-rate mortgages using Euribor have fallen to 60% of the market, whilst fixed-rate mortgages (blue line) have exploded to 40% in the last three years.

Whilst noting that lenders have alternatives to the IRPH index such as Euribor, Szpunar argued that its “mathematical calculation formula is complex and not very transparent for an average consumer.” Mortgages using IRPH work out more expensive for borrowers, 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, or Asufin. So it’s easy to see why banks might want to sell IRPH mortgages to borrowers who are the least likely to understand them.

In certain periods of interest rate volatility, for instance 2005 – 2009, the IRPH rate can look less volatile, and therefore more attractive to risk-averse borrowers. But when base rates started to tank in 2012, and turned negative in 2016, the IRPH rate stayed stubbornly high

Asufin estimate that some 1 million borrowers in Spain hold IRPH variable-rate mortgages, and Goldman Sachs estimate that Spanish lenders could be on the hook for as much as €44 billion in compensation claims.

Compensation claims that get bogged down forever

On the day the Advocate General’s conclusions were published, shares in Spanish lenders that are particularly exposed, Caixabank and Bankia and Banco Sabadell, went down between 2% and 3%.

But the right to claim compensation from banks in Spain doesn’t always work as it should. Claims can get bogged down forever in the Spanish legal system, which, I suspect, is the way the Government and banks like it.

When it comes to compensation claims for a financial product that has been mis-sold there should be a straightforward, fast procedure in place, as happened with the PPI scandal in the UK. But in Spain, it seems, they set up a torturous procedure that overwhelms the courts and pushes compensation far out into the future, which is obviously in the interest of banks. That seems to be what has happened with the lower courts overwhelmed with mortgage floor clause compensation claims, which I’m told are taking far longer than people expected. Why would IRPH claims be any different?