Spain approves fast-track law to settle mortgage crisis

Spain approves fast-track law to settle mortgage crisis New law gives banks 3 mths to reach deal with customers. Cost to banks estimated at 4 bln euros. Banks may offer alternative to cash . compensation . MADRID, Jan 20 The Spanish government said on Friday it had approved a royal decree that will give banks three months to reach settlements with customers who were sold

mortgages with interest rate floors that were not clearly explained.

The royal decree - a law fast-tracked through Parliament - aims to allow customers that were sold these mortgages to agree some form of compensation with their banks free of charge. It also aims to prevent a wave of lawsuits against the banks.

These home loans were sold with an interest rate that could not fall below a certain level, which meant customers missed out when rates dropped below that minimum.

In December, the European Court of Justice said Spanish banks must compensate customers who took out these mortgages, overturning a Spanish court ruling that had put a cap on what banks should pay.

The Bank of Spain has estimated the cost to the banks at 4 billion euros ($4 billion).

The banks must now contact customers to offer them a settlement and have one month to set the process in motion. If they come up with a compensation offer, customers have 15 days to accept.

If after three months no deal has been reached, customers would then still be able to file a legal complaint.

LEGAL HEADACHE

About 1.5 million customers who were sold those mortgages will still have the right to seek to get their money back in the courts, potentially creating a new legal headache for Spanish banks and hitting their bottom line. BBVA, Spain's second largest bank, said in December the ECJ ruling would knock its full-year earnings for 2016 by 404 million euros.

BBVA executive chairman Francisco Gonzalez said in Davos on Thursday that the bank would proceed according to the new law but also said: "It is important to look at the big picture and preserve legal security."

A spokesman for BBVA said on Friday the bank would wait for the Spain's Supreme Court interpretation of the ECJ ruling, expected in the following weeks or months, before deciding how to proceed.

Banco Sabadell has said its mortgages were still valid as they had been presented clearly. Deutsche Bank analysts have estimated the bank could be liable for charges worth as much as 490 million euros following the ECJ ruling.

While most banks are expected to compensate customers for what they lost, many will aim to avoid making a cash payment upfront.

"The consumer and the entity can agree on compensatory measures other than cash," Economy Minister Luis de Guindos said on Friday. He said, for example, a bank could compensate the home owner with a reduction in future mortgage payments. ($1 = 0.9407 euros) (Reporting by Jesus Aguado; Editing by Paul Day and Jane Merriman)