Video Class #26 | presentation and vocabulary

1. ECJ ruling
on IRPH
Important Vocabulary

3. WHAT IS IRPH?
IRPH is the Spanish acronym for Mortgage Loan Reference
Index and it used as a reference rate to calculate the rates for
mortgage loans. The IRPH is calculated with the average monthly
interests applied to new mortgages registered on the mortgage
market by banks and savings banks over 3 years.

4. WHAT IS A REFERENCE RATE?
A reference rate is an interest rate benchmark used
to set other interest rates. Reference rates are at the
core of an adjustable rate mortgage (ARM). With
an ARM, the borrower's interest rate will be the
reference rate, plus an additional fixed amount,
known as the spread.

5. WHAT IS EURIBOR?
Euribor, or the Euro Interbank Offer Rate, is
a reference rate that is constructed from the average
interest rate at which eurozone banks offer
unsecured short-term lending on the inter-bank
market. The maturities on loans used to calculate
Euribor often range from one week to one year.

6. IRPH VS. EURIBOR
WHAT IS THE DIFFERENCE?
The IRPH is calculated according to the average
interest rate at which banks lend to purchase a
property, while the Euribor uses the average interest
rate at which European banks lend money to each
other.

7. HOW DO THE BANKS CALCULATE
IRPH?
The interest rates used in the calculation are
the APR or the Annual Percentage Rate of the
mortgages of those entities. Here is the trick: the
APR includes, the commissions and operating
expenses of a bank product.

8. BACKGROUND OF THE CASE
Mr Marc Gómez del Moral Guasch, a consumer brought a
claim against a Spanish bank; Bankia SA regarding the
potential unfair nature of a IRPH indexed floating interest rate
clause.
He requested that the IRPH clause was declared unfair by
alleging that most mortgage loans in Spain were indexed to
Euribor, which it is more beneficial for the consumer.
In the context of this cliam, the First Instance Court number 38
of Barcelona filed a preliminary ruling request before the ECJ
1.
2.
3.

9. KEY POINTS OF THE ECJ'S
DECISION
The European Court confirmed that the interest clause
falls within the scope of the Directive 93/2013 (and,
therefore, abusive nature can be judged), because the
official index (IRPH) is not mandatorily applicable, being
freely chosen by the parties. Therefore, article 1.2 of
Directive 93/2013 does not apply, and a revision of this
clause cannot be ruled out.
1.

10. WHAT IS THE EU'S UNFAIR
CONTRACT TERMS DIRECTIVE?
The Unfair Contract Terms Directive (93/13/EEC) protects
consumers against unfair standard contract terms imposed by traders.
It applies to all kinds of contracts on the purchase of goods and
services, for instance online or off-line-purchases of consumer goods,
gym subscriptions or contracts on financial services, such as loans

11. Article 1(2)Unfair Contract Terms
Directive?

12. KEY POINTS OF THE ECJ'S
DECISION
2. The analysis of the transparency of the clause must be
carried out on a case-to-case basis.
"The Spanish courts must verify that the contractual
term in mortgage loan agreements providing for the
application of a variable interest rate based on the
index of the Spanish savings banks is plain and intelligible"

13. KEY POINTS OF THE ECJ'S
DECISION
2a. The main elements of the IRPH were accessible to all
consumers because the index is regulated in specific provisions
and is published in the Official State Gazette.
2b. The financial institution is obliged to provide information to
its customers on the recent evolution of the index.

14. KEY POINTS OF THE ECJ'S
DECISION
3. The ECJ leaves the door open for the modification of the
agreement, but leaves the final decision in the hands
of the national judge. The judgment says that the loan
agreement can be modified if the interest clause is found to be
abusive and the agreement cannot survive without it

15. KEY POINTS OF THE ECJ'S
DECISION
"In cases where the invalidity of the unfair term would require the court to annul
the contract in its entirety, thereby exposing the consumer to particularly
unfavourable consequences the judgment indicates the possibility of the
agreement being modified to include an official index, as a replacement index."
In general, the consequence of such an annulment of the contract would be that
the outstanding balance of the loan would become due forthwith, which would
be likely to be in excess of the consumer’s financial capacities and, as a result,
would tend to penalise the consumer rather than the lender who, as a
consequence, might not be dissuaded from inserting such terms in its contracts.

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18. E C J
R U L I N G
O N I R P H
LEGAL VOCABULARY and
presentation
R h e a B a l i w a l a

19. I t i s c a l c u l a t e d w i t h t h e a v e r a g e
m o n t h l y i n t e r e s t s a p p l i e d t o
n e w m o r t g a g e s r e g i s t e r e d o n t h e
m o r t g a g e m a r k e t b y b a n k s a n d
s a v i n g s b a n k s o v e r 3 y e a r s .
MORTGAGE LOAN REFERENCE INDEX
I t i s a R e f e r e n c e r a t e u s e d t o
c a l c u l a t e t h e r a t e s f o r m o r t g a g e
l o a n s .
HOW DOES IT WORK?
REFERENCE RATE
I t i s a n i n t e r e s t r a t e b e n c h m a r k
u s e d t o s e t o t h e r i n t e r e s t r a t e s .
ADJUSTABLE-RATE MORTGAGE (ARM)
A n a d j u s t a b l e - r a t e m o r t g a g e
( A R M ) i s a t y p e o f m o r t g a g e i n
w h i c h t h e i n t e r e s t r a t e a p p l i e d
o n t h e o u t s t a n d i n g b a l a n c e
v a r i e s t h r o u g h o u t t h e l i f e o f
t h e l o a n .

20. T h e a m o u n t o f i n t e r e s t t h a t a
b o r r o w e r m u s t p a y o n a n
a d j u s t a b l e - r a t e m o r t g a g e a b o v e
t h e b e n c h m a r k / r e f e r e n c e r a t e .
T h e E u r o I n t e r b a n k O f f e r R a t e
( E U R I B O R ) , i s a r e f e r e n c e r a t e
t h a t i s c o n s t r u c t e d f r o m t h e
a v e r a g e i n t e r e s t r a t e a t w h i c h
e u r o z o n e b a n k s o f f e r u n s e c u r e d
s h o r t - t e r m l e n d i n g o n t h e i n t e r -
b a n k m a r k e t
U n s e c u r e d l o a n s a r e l o a n s
a p p r o v e d w i t h o u t t h e u s e o f
p r o p e r t y o r o t h e r a s s e t s a s
c o l l a t e r a l .
SPREAD
EURIBOR
UNSECURED LOAN
MATURITIES
Maturities are lending periods,
i.e., how long an amount of
money is lent for.

21. T h e i n t e r e s t r a t e
C o m m i s s i o n s
Operating expenses of a bank product
I t i s t h e a n n u a l r a t e c h a r g e d f o r
b o r r o w i n g o r e a r n e d t h r o u g h a n
i n v e s t m e n t .
T h e A P R i n c l u d e s :
T o s a y s o m e t h i n g w i t h o u t p r o o f
ANNUAL PERCENTAGE RATE (APR) TO BRING A CLAIM
T o i s s u e a c l a i m o r t o f i l e a s u i t
ALLEGING
I n v o l v i n g i n j u s t i c e o r i l l e g a l i t y
ABUSIVE

22. A d e c i s i o n o f t h e E u r o p e a n
C o u r t o f J u s t i c e ( E C J ) o n t h e
i n t e r p r e t a t i o n o f E u r o p e a n
U n i o n l a w , g i v e n i n r e s p o n s e t o
a r e q u e s t f r o m a c o u r t o r
t r i b u n a l o f a E u r o p e a n U n i o n
M e m b e r S t a t e .
A p r e l i m i n a r y r u l i n g i s a f i n a l
d e t e r m i n a t i o n o f E U l a w , w i t h
n o s c o p e f o r a p p e a l .
Used to describe decisions
that are made separately, each
according to the facts of the
particular situation.
PRELIMINARY RULING CASE-TO-CASE BASIS
OFFICIAL STATE GAZETTE
The official gazette of the
Kingdom of Spain and is published
every day except Sunday. The
content of the BOE is authorized
and published by Royal Assent
and with approval from the
Spanish Presidency Office.

23. T o m a k e ( s o m e o n e ) l e g a l l y o r
m o r a l l y b o u n d t o d o s o m e t h i n g
T o d e c l a r e i n v a l i d ( a n o f f i c i a l
a g r e e m e n t , d e c i s i o n , o r r e s u l t ) .
I m m e d i a t e l y .
OBLIGED TO
ANNUL
FORTHWITH
DISSUADED
To discourage

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S O C I A L M E D I A !
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R H E A B A L I W A L A