Creating a fair single market for mortgage credit

The EU has been long expected to legislate on responsible lending following the financial crisis. It has now published a proposal for a directive on credit agreements related to residential property. The proposal aims both to create an efficient single market in mortgages with a high level of consumer protection and to promote financial stability by making sure that mortgage credit markets operate in a responsible manner.

 It covers all loans to consumers to buy a home and certain loans to consumers to renovate a home. It also covers all loans to consumers that are guaranteed by a mortgage or other comparable security.

One of the consequences of the proposed legislation which may be of concern to property professionals is that it will make it more difficult for certain consumers to get a mortgage, particularly those with a low income or a weak credit history. The Commission’s answer to this concern is that the extent to which this will affect borrowers will depend on how the proposal is transposed into national law. It does not affect commercial mortgage transactions (such as a loan from a bank to a company to build or develop property) although a Member State may choose to extend its scope, particularly to SMEs. Also commercial property developers who offer mortgages to purchase their properties would be covered by the proposal.

In particular the creditor will be under an obligation to assess the creditworthiness of the consumer and to refuse credit when that assessment is negative. Authorised credit intermediaries must be registered and meet professional requirements. A standard information sheet must be used giving pre-contractual information for home loans. In outline the Directive will:

• Introduce requirements for the advertising of mortgage credit;
• Ensure that all institutions involved in mortgage credit are regulated;
• Establish principles for the authorisation and registration of credit intermediaries;
• Ensure that lenders benefit from being able to access information in credit databases on a non-discriminatory basis;
• Require lenders and credit intermediaries to:
- make general information available on the range of credit products they offer;
- provide personalised information to the consumer through a European standardised information sheet;
- give explanations and meet standards for advice;
- assess the consumer’s ability to repay;
- disclose certain information (identity, status, relationship with creditor etc.) to make conflicts transparent.
• Benefit borrowers (who will have an obligation to provide the necessary information to enable an assessment of their ability to repay):
- with extra information;
- a harmonised annual percentage rate of charge in line with that set out in the Consumer Credit Directive;
- an entitlement to repay credit before expiry of the credit agreement (subject to conditions).

At the same time the Commission has published a working paper on national measures and practices to avoid foreclosure procedures for residential mortgage loans. This shows ways in which different countries are trying to impose rules on how properties can be repossessed.

The draft directive (in all official languages) and the working paper (in English) are both available here.