Mortgage lenders will have to inform potential borrowers of
the real cost and risks of a mortgage, eliminate early repayment penalties, and
better screen the credit-worthiness of mortgage applicants, under new mortgage
regulations approved by European Parliament this week.
The Mortgage Credit Directive was approved overwhelmingly during parliament's 10 Dec. plenary
session, in a vote of 596 to 31 with 65 abstentions. The package already has
been approved by member states.
Members of parliament only endorsed the deal after receiving
assurances that the European Banking Authority (EBA) would be able to
investigate alleged violations of the rules or failures to implement the rules,
according to information provided by parliament following the vote. MEPs also
wanted to ensure the EBA would be able to enlist the aid of national
authorities in getting information on any such lapses.
“For most families, a mortgage is the biggest and longest
financial commitment they make,” lead MEP Antolin Sanchez Presedo of Spain said
in a statement. “So we need these rules to drive progress towards an EU-wide
mortgage market that is stable, integrated, and above all sustainable, with a
high level of consumer protection, good information, and balanced relations
between lenders and borrowers.”
The regulations apply to mortgages on residential property,
residential property with office space, and building land.
Commissioner for internal markets and services Michel Barnier said the new rules will
help restore consumer confidence in the financial sector. He said in the past
too many consumers were unaware of the extent of their risks, and when the financial
crisis hit, many were unable to meet their obligations and lost homes as a
result.
“The aim of the Mortgage Credit Directive is to make
responsible mortgage lending the norm across Europe,” Barnier said in a
statement. “It ensures that vulnerable consumers are protected by reducing the
risk of over-indebtedness and default. Creditors will be encouraged to apply
reasonable forbearance when confronted with consumers in serious payment
difficulties.”
Lenders will be required to provide consumers with a
standardized information sheet, which will allow consumers to compare products
and shop around for the best product for their needs at the best price. The
information sheet, known as ESIS, will include information on worst-case
scenarios for variable interest and foreign currency loans. Lenders must give
borrowers either a 7-day “reflection period” before signing a contract for a
loan, or a 7-day window to cancel after the contract is signed. Lenders also
must apply new EU-wide standards to determine an applicant's credit-worthiness.
The rules lay out a new code of business conduct, including
the stipulation that a lender's salary policies should not be a deterrent from
disclosing links between the credit intermediary and creditor, or from working
in the client's best interests. Staff must be shown to have appropriate
knowledge and competency, and provide clients with “adequate explanation”
before any contract is signed. Advisory services will face similar standards.
The directive gives borrowers more flexibility for early
repayment of loans. While the new rules prohibit penalties for early repayment,
the regulation does give member states the ability to decide what compensation
a lender would be entitled to for costs directly associated with the early repayment.
Similarly, borrowers with loans in a foreign currency would be able to change
the currency in certain cases, subject to an exchange rate specified in the
contract.
Lenders also are being pushed to cooperate more closely with
borrowers who run into financial difficulty. A new rule allows for the return
of the property itself to satisfy the loan as long as both parties agreed to
the provision in the contract. Lenders also are instructed to secure the best
price possible for properties in default, and work with the borrower on a
repayment plan for any remaining debt.
Also new in the law is the creation of a passport regime for
credit intermediaries. Once a credit intermediary meets certain criteria in a
member state, the intermediary would be able to provide services anywhere in
the EU. Criteria include holding professional indemnity insurance and being of
“good repute.”
Barnier said in his statement that this passport regime will
open new business opportunities to the lenders complying with the regime
through a Single European Mortgage Market. “This will result in more EU-wide
competition and is expected to drive down prices in the long run,” Barnier
said.
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