by Don Quijones, Wolf Street:
Consumer rights v. broke banks: guess who just lost.
After eight years of chronic crisis mismanagement, moral hazard and perverse incentives have infected just about every part of the financial system. Earlier this week, the U.S. Congress published the findings of a three-year investigation into why the Department of Justice chose not to punish HSBC and its executives for their violations of US anti-money laundering laws and related offenses – because doing so would have had “serious adverse consequences” for the financial system – the “Too Big To Jail” phenomenon, a perfect, all-purpose, real-world Get-Out-of-Jail-Free card [read… Congress: “Too Big to Jail: Inside the Obama Justice Department’s Decision Not to Hold Wall Street Accountable”].
But now there’s “Too Broke to Fine.”
Today over a dozen Spanish banks were given a life-line by the EU’s advocate general, Paolo Mengozzi, that could be worth billions of euros in savings for the banks. For millions of Spanish mortgage holders, it could mean billions of euros in lost compensation.
A Legal, Abusive Practice
Just over seven years ago, when conditions were beginning to sour for Spain’s banking system, 40 out of 42 Spanish banks decided to insert “floor clauses” in their mortgage contracts. These effectively set a minimum interest rate — typically between 3% and 4.5% — for all their variable-rate mortgages (which are very common in Spain), even if the Euribor dropped far below that figure.
This, in and of itself, was not illegal. The problem is that most banks failed to properly inform their customers that the mortgage contract included such a clause. Those that did, often told their customers that the clause was an extreme precautionary measure and would almost cerainly never be activated. After all, they argued, what are the chances of the euribor ever dropping below 3.5% for any length of time?
At the time (early 2009), Europe’s benchmark rate was hovering around the 5% mark. Within a year it had crashed below 1% and is now languishing deep below zero. As a result, most Spanish banks were able to enjoy all the benefits of virtually free money while avoiding one of the biggest drawbacks: having to offer customers dirt-cheap interest rates on their variable-rate mortgages. For millions of Spanish homeowners, the banks’ sleight of hand cost them an average of €2,000 per year in additional interest payments, during one of the worst economic crises in living memory. Many ended up losing their homes.
While legal, the bank’s behavior was eventually deemed “abusive” and “non-transparent” by Spain’s Supreme Court. In May, 2013, the court ruled that three financial institutions named in a class-action suit would have to reimburse all their customers the money they’d surreptitiously overcharged them, but only from that moment on. The court argued that the law couldn’t be applied retroactively to 2009, when the banks began introducing the clauses, since it would potentially cripple their finances.
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