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Multi-currency mortgages: The CJEU again points the way for the Supreme Court

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Benjamín J. Prieto Clar analyses Multi-currency mortgage and how the CJEU points again the way for the Supreme Court


Multi-currency mortgages (MCMs), of which it has been calculated there are some 70,000 in Spain, are mortgages in which the capital and repayments are denominated in a currency other than the euro, with most MCMs denominated in Swiss francs or Japanese yen. Both monthly repayments and the capital are subject to currency fluctuations, with the result that not only does the monthly repayment vary (as is the case with all mortgages) but also the principal borrowed, which is recalculated each month. As a result, there are now many people who have been affected by these MCMs who, having obtained a loan many years ago and having been punctual with their monthly repayments, now owe more on their loans than on the day they obtained their loan due to the appreciation in the currency, which has outstripped the amounts repaid.

MCMs are described in the clause on loans as a loan denominated in a foreign currency. However, in reality they perform like a loan pegged to a foreign currency.

Clients who took out this type of loan were never given sufficient information about this aspect of their loans. At the time, these clients believed that they were preferential clients and paid less interest on their mortgages than if they had taken out a mortgage in euros, when interest rates in the eurozone were high and incurring debt in other currencies was advantageous, until the situation was reversed because of the euro crisis and rising interest rates in Switzerland and Japan.

The Supreme Court pronounced on MCMs in June 2015, declaring the complexity of the same due to the fact that they are “hybrid products” (a combination of a mortgage and financial derivative). However, in December 2015 the Court of Justice of the European Union reserved this classification and put the SC in a situation where it had to defend its position or adopt the perspective of the CJEU.

Just as the SC was about to hand down a second judgement setting out its definitive opinion of MCMs, on September 20 the CJEU handed down a decision ruling that MCMs were null and void due to their abuse of the clause on the lack of transparency. This remains an opinion that is very favourable to consumers, which, as it turns out, is the same as that of the SC in respect of land in mortgages (SCJ 9-5-2013), which could result in a tidal wave of judgements annulling MCMs.

In view of this clear judgement from the CJEU, the SC has postponed its deliberation (it has given the parties 10 days to provide submissions) to digest the reasons received from the Luxembourg Tribunal, so as to take them into account in its anticipated judgement and to follow up on them, except in the event of a major unexpected development.

The doctrine set by the CJEU (which refers to a Romanian citizen who took out a mortgage in Swiss francs) passed on to national courts the duty to examine each case in accordance with this scale, taking into account the publicity that surrounded the product and the "information provided by the borrower when negotiating a loan agreement". Thus, it specifies and demarcates its doctrine on the consequences forecast by Directive 93/13/EEC on contracts entered into with consumers when they contain unreasonable clauses, establishing that procedures in relation to multi-currency mortgages are governed by consumer law and, therefore, their clauses must be declared null and void on the grounds that they are unreasonable, inasmuch as they do not exceed the dual control of transparency. 

The CJEU has thus established a transparency criterion that requires banks to confirm that the clause has been described correctly, both from a formal and a grammatical perspective, and that the client was clearly aware of the financial consequences of the multi-currency mortgage, such as fluctuations in exchange rates and the risks inherent to taking out a loan in a foreign currency.

The CJEU judgement states that it is incumbent on the national judge to confirm whether or not the client has been informed of all the factors that could affect the scope of their commitment, and of the “possible failure of the bank to fulfil the requirement that it act in good faith”.

It also prohibits the bank from imposing conditions that are unbalanced for the parties. With MCMs, financial institutions included in their loan deeds a clause that protected them from any negative movement in the exchange rate: under the terms of this clause, if the outstanding capital were to increase by more than 10% in respect of the initial amount lent, they could demand additional guarantees from the client and had the option to cancel the loan and execute if the client was unable to provide said additional guarantees.

However, there is more: already prior to 2008, one of the years in which most MCMs were extended to borrowers and in which the Euribor, after reaching its peak, began to gradually fall on the initiative of the ECB in an effort to combat the crisis, financial institutions sought to minimise their risk at the expense of their own clients, given that these clients, upon taking out a MCM, were not aware of the fact that the most probable outcome was that the Euribor would continue to fall, meaning that it would be of greater benefit to them to take out a mortgage in euros than one with a multi-currency option.

In short (and not for the first time), the CJEU has pointed out to the SC a path from which it had deviated. We will see if our highest court decides to move away from this path or embarks on it on a definitive basis, to the satisfaction of many persons affected and to the consternation of some financial institutions (fortunately, not all of them) that have been punished in the courts for their bad practices.


For further information, please contact:

Benjamín J. Prieto Clar

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