New Rules on Mortgage Credit

After long negotiations on new rules on mortgage credit in the EU, political agreement was reached in trialogue between representatives of the European Parliament, the Commission and the Irish Presidency. The agreement now has to be formally approved by the European Parliament and the European Council. CEPI welcomes the fact that this important issue is close to resolution and the better information and protection which will be offered to consumers by a new Directive.

The Directive will also ensure that mortgage credit providers meet new professional standards and create the framework for a European mortgage market. It will also introduce standards for the conduct of credit worthiness assessment in the mortgage credit area. If the result of such an assessment is negative, the creditors will no longer be able to issue credit. This is designed to eliminate some of the excesses of the past. Properly authorised credit intermediaries will also benefit from a European passport which will enable to work in different EU Member States.

Other important elements included in the new Directive include:
• A requirement for consumers to be given by creditors a standardised information sheet.
• Measures against misleading advertising will be introduced.
• Mortgage credit providers will need to respect high-level principles in their contact with clients, taking account of the consumer’s interests, ensuring that remuneration structures do not encourage excessive risk taking, and disclosing any links between the credit intermediary and the creditor.
• Performance quality standards for staff will be introduced.
• There will be a general ban on tying practices, although tied mortgage products that have proven to be beneficial to consumers in the past (such as some insurance or savings products) will still be allowed.
• Consumers will have a general right to repay their loans early. Member States will have the right to choose to impose a requirement to impose that in such cases creditors should receive fair compensation.
• There will be a mandatory 7-day cooling-off period for consumers before signing a loan, or a right of withdrawal for up to 7 days.
• Property valuations will need to respect principles set out by the Financial Stability Board.
• Creditors will also be required to apply reasonable forbearance in dealing with consumers in serious payment difficulties. There will be a new rule that the return of collateral such as the property itself will suffice to repay the loan, provided that the lender and borrower expressly agree to this in the contract.
• Proposed rules for loans denominated in a foreign currency will allow the borrower, under certain conditions and at the exchange rate defined in the loan contract, to change the currency. If there is no possibility to convert such a loan, then either the borrower should be warned, before signing the contract, that the instalments payable could increase, or the exchange rate risk should be capped.

The legislation will cover mortgages on residential property, property including an office space and building land. Some requirements of the legislation will be adapted to reflect differences in EU Member States’ national mortgage and property markets, but the basic rules will apply EU wide.