MADRID, Feb 15 (Reuters) - Spain's Supreme Court said on Wednesday it would follow a recent ruling by Europe's top court that forces banks to pay customers around 4 billion euros ($4.2 bln) in compensation related to disputed mortgage clauses.
Spanish banks had been awaiting guidance from the Supreme Court to proceed with paybacks on affected home loans, in a case that has already hit many lenders' fourth quarter earnings as they set aside funds to pay back clients.
The mortgages were sold with an interest rate that could not fall below a certain level, which meant customers missed out when rates dropped below that floor.
The dispute arose when some clients complained the clauses were not clearly explained.
In December, the European Court of Justice (ECJ) overturned a prior decision by Spain's Supreme Court that had capped liabilities for mortgages declared invalid, because the terms had not been presented clearly, to only those going back to May 2013.
Under the ECJ ruling, banks have to compensate clients for the savings they lost out on since the beginning of a mortgage loan if the clauses were not considered transparent.
The Bank of Spain has estimated the cost to the banks at 4 billion euros.
BBVA, Spain's second-largest lender, is among those affected and had asked for clarity from the Spanish court, prompting Wednesday's ruling.
A spokesman for the lender said it would respect the decision by the Spanish court and would proceed "as soon we receive the sentence".
BBVA, whose 2016 results were hit by a one-off charge of 404 million euros linked to the mortgage problems, had said that in the worst case scenario potential paybacks could cost it up to 1.2 billion euros.
In January, the Spanish government approved a royal decree that would give banks three months to reach settlements with customers who were sold those mortgages.
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. ($1 = 0.9496 euros) (Reporting By Jesús Aguado; Editing by Susan Fenton)