14-day cooling-off period for mortgages back on the cards

10 August 2011 | By Natalie Thomas

The idea was originally proposed in the first draft of the European Mortgage Directive but was later scrapped, but it is now back on the cards.

The European Commission announced its proposals for the mortgage market in March this year.

The next stage in the process was for two separate committees of the European parliament – one with responsibility for economic and monetary affairs (ECON) and the other overseeing internal markets and consumer protection (IMCO) – to report their reactions to the proposals.

Each committee nominated a rapporteur to draft the report expressing its views.

The IMCO report is not expected until September, but the report from ECON – with Sanchez Presedo as the rapporteur – appeared at the end of last month and the Council of Mortgage Lenders say the proposals  would constitute a radical re-working of the directive.

The report proposes:

• The introduction of a ’cooling-off’ period for borrowers of at least 14 working days after a mortgage offer has been made.
• Compensation for consumers if credit is rejected because a reference agency supplies an inaccurate report.
• The right for borrowers to make overpayments without penalty, and for them to be able to draw down in the future any overpayments they have made; and a ban on arrears charges if payment problems arise that are beyond the control of the borrower.

In its latest issue of News & Views, the CML says the ECON report potentially represents a significant move away from the balanced approach to responsibilities for both lenders and borrowers envisaged in earlier plans for the directive.

It says: “Instead, it proposes a range of measures, many of which, taken at face value, seek to offer total protection for consumers. But there is little apparent acknowledgement of the potentially damaging impact the proposals could have on lenders – and ultimately the wider mortgage market and therefore on consumers, too.”

The report also proposes to:

• Apply the directive to the commercial funding of property developers, as well as transactions financed by mortgages – even though commercial loans are offered on a completely different basis to residential lending. 
• Require member states to regulate how lenders and credit intermediaries are paid, with rules to prevent financial rewards linked to sales of individual products or targets.
• Prevent both automated underwriting as a substitute for expert risk assessment, and scoring based either solely on credit history or from external sources.
• Publish prudential requirements in each member state, including ratios for loan-to-value, loan-to-income, debt-to-income and loan-to-asset, with prudential requirements for the overall mortgage portfolio in each of these categories.
• Introduce requirements for “special credit risk agreements,” including foreign currency loans, mortgages where there could be significant variation in interest payments, and credit agreements where the return of the property is sufficient to repay the loan.

The CML adds: “We believe that the ECON report takes proposals for European regulation in an unexpected direction, which is inappropriate to the needs of consumers and firms that continue to operate essentially in separate markets. 

“As we move into the autumn, we will be working with lenders and other interested parties – in the UK and Europe – to seek to ensure that European regulatory proposals are appropriate to the needs of firms and consumers in different countries. We will also be arguing that any new measures should be proportionate and justified by cost-benefit and impact analysis.”

 

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