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Mortgage provision to be tightened under EU rules

A draft European law on mortgages took one step closer to becoming law last week, when a European Parliamentary Committee struck a deal with the Council of Ministers. The proposals have still to be approved by the full Parliament and the EU Commission.

The Mortgage Credit Directive

Plans to tighten up the EU rules on home loans date back to 2011, when the Commission announced that it wanted to make sure that there would be no repeat of the irresponsible lending and borrowing practices that caused the financial crisis.

It proposed a Directive that would create a responsible, efficient, healthy and competitive pan-European market, which worked to the benefit of consumers. It would also promote customer mobility, cross-border activity of creditors and intermediaries, and create a level playing field for all those involved.

But most of all, said the Commission, the new rules would ensure that all consumers purchasing a property or taking out a loan secured by their home were adequately informed about the possible risks and that all institutions engaging in these activities conducted their business in a responsible manner. 

Pushed forward

Work on the proposed Directive has been pushed along during the Irish presidency of the EU, and last week Economic and Monetary Affairs Committee MEPs and EU member state representatives reached agreement on most of the outstanding points.

According to Michael Barnier, European Commissioner for Internal Market and Services, the proposals will make sure that consumers get the protection they deserve.

Directive on credit agreements relating to residential immovable property

The proposed Directive, known formally as the Directive on credit agreements relating to residential immovable property, will introduce European-wide standards to the credit-worthiness tests used when someone applies for a mortgage. In very general terms, if the tests reveal that the person involved is not credit-worthy, then the new rules will prevent creditors from making the loan.

From a consumer point of view, the new rules will also ensure that:

  • Creditors are required to give consumers a standardised information sheet (ESIS) that will allow them to shop around to identify the best and cheapest credit offer for their needs.
  • This ESIS will be user-friendly and will include detailed information on the characteristics of the loan on offer.
  • Measures against misleading advertising are introduced.
  • Mortgage credit providers are required to respect high-level principles in their direct contacts with their clients, such as taking account of the consumer’s real interests.
  • Concrete performance quality standards for staff are introduced.
  • There is a general ban on tying practices (where certain other financial products are tied into the credit offer) unless these are shown to be beneficial to consumers.
  • Consumers have a general right to repay their loans early, although in some member states a fee may be charged for this.
  • A cooling-off period is always included.
  • Creditors must act with forbearance when consumers initially display difficulties in repaying their loan.

Biggest financial commitment

Welcoming the agreement, Antolín Sánchez Presedo, the European Parliament’s rapporteur and chief negotiator, highlighted the fact that mortgages are the biggest financial commitment made by most European families.

“The new legislation on mortgages will become a reference in terms of consumer protection, financial inclusion and economic stability,” he said. “It will help to avoid the irresponsible lending and borrowing that were at the roots of the current crisis.”

The UK position

The development has been welcomed in the UK, although questions remain over whether the proposals will actually have much impact here.

According to Paul Smee, the Director General of the Council of Mortgage Lenders, the proposed rules will sit alongside consumer protection measures due to be introduced in the UK by the Financial Conduct Authority. 

“UK customers already receive significant consumer protection and information as our regulatory regime is already the most advanced among European member states, but for customers in some other member states the changes will result in increased protection and greater consistency,” he said.