* Transparency of mortgage selling under scrutiny
* Initial opinion from European court due next week
* Banks’ profits could be hit by negative ruling
MADRID, Sept 6 (Reuters) – Spanish banks are bracing for a preliminary ruling from the European Court of Justice on whether they charged some customers too much for mortgages, a decision which could eventually lead to them paying out billions of euros in compensation.
Caixabank, Bankia, Santander and BBVA are among the major lenders that used Spain’s mortgage price index (IRPH) as an alternative to the interbank rate Euribor to set mortgage rates.
Hundreds of thousands of mortgages set using this rate were sold, particularly in 2007 and 2008, but it tended to be higher than Euribor and did not fall as much when the European Central Bank cut borrowing costs. The Spanish government scrapped it in 2013 saying it was unfair, leading customers to take banks to court demanding compensation.
Spanish courts have rejected these appeals, but a question focusing on the lack of transparency when selling mortgages with this clause has now been lodged at the European Court of Justice, which is due to give an initial opinion next week.
An adverse impact on the Spanish banks could pave the way for lenders to pay out compensation, hitting their bottom lines just as they grapple with low interest rates.
“If the opinion from the advocate is adverse, it will have an impact on the banking sector, right at a moment when negative interest rates are penalising the banks’ profitability levels,” said a Spanish banker on condition of anonymity.
The banker said if the advocate’s opinion was not negative, it would just provide relief pending the final decision.
The ECJ’s general advocate is expected to issue a non-binding statement on Sept. 10 with the final decision expected towards the end 2019 or early 2020.
The Bank of Spain recently warned of a potential impact on Spanish banks’ profits related to the IRPH.
Though there are no official figures for how many mortgages were sold under the IRPH, Spanish consumer association Asufin expects around 1 million clients to be affected.
Spain’s Supreme Court ruled in 2017 the index did not constitute an abuse of the market and Spanish banks considered that its use did not imply a lack of transparency.
However, customers and lower courts have challenged this decision at the ECJ.
“We expect the European court to rule against the IRPH as this index was detrimental to the consumers,” said Juan Ignacio Navas, partner-director at Spanish law firm Navas & Cusi, who has been working on the case.
The IRPH is one of a number of mortgage-related problems Spanish banks have had to face in the past. In December 2016, the ECJ overturned a Spanish court ruling that had capped banks’ liabilities for mortgage floor clauses.
“We expect a similar full retroactivity ruling as with floor clauses,” said Patricia Suarez, chairman of Asufin, which estimates on average a loss of 25,000 euros per customer with a potential adverse impact of 25 billion euros ($27.9 billion) for the entire banking sector.
If the ECJ does rule against the banks, it would likely then fall to the Spanish authorities to determine how consumers should be compensated, according to a judicial source.
Goldman Sachs estimates a potential cost to the banking sector of between 7 billion and 44 billion euros.
Goldman also said it was unclear to what stock of IRPH mortgages the potential ruling would apply. “The possible range, in our view, is from full retroactivity on all originated loans to only currently outstanding mortgages,” it said.
Among banks, Caixabank has an outstanding value of 6.5 billion euros in IRPH mortgage contracts, Santander around 4.3 bilion euros, BBVA 3.1 billion euros, Bankia, 1.6 billion euros, and Sabadell, 830 million euros.
Smaller regional lenders Unicaja and Liberbank have an outstanding exposure of 200 million euros and 100 million euros, respectively.