European Commission publishes proposals for the mortgage market

31 March 2011 | By Natalie Thomas

The estimated expected total one-off and ongoing costs for lenders, intermediaries and Member States are in the range of EUR 383–621m (£336m - £554m) and of EUR 268–330m (£236m - £290m) respectively.

But according to Commission calculations based on current evidence, expected benefits to society in terms of the potential reduction in the number of consumer defaults are estimated at EUR 1,272–1,931m (£1.12bn-£1.69bn) per annum.

The Directive proposes to introduce certain requirements for the advertising of mortgage credit, for example wording that may create false expectations for a consumer regarding the availability or the cost of a credit will be prohibited.

It also wants to ensure that all institutions involved in the origination and distribution of mortgage credit to consumers are adequately regulated and supervised.

And establish principles for the authorisation and registration of credit intermediaries and for the establishment of a passport regime for those intermediaries.

This means that once authorised in one Member State, the intermediary would be allowed to provide its services throughout the Internal Market.

Lenders and credit intermediaries will be required to make general information available at all times on the range of credit products they offer, provide personalised information to the consumer through a European Standardised Information Sheet or so called “ESIS”, which will replace the KFI.

This will allow consumers to compare mortgage conditions from different providers, give explanations and meet certain standards for the provision of advice, and assess the consumer’s ability to repay, based on information provided by the borrower.

Finally, credit intermediaries will be required to disclose certain information concerning for example, their identity, status and relationship with the creditor, to render transparent any potential conflicts of interest.

It says borrowers will benefit from extra information at all stages in the process of taking out a mortgage allowing them to make the right decisions for them and benefit from a harmonised annual percentage rate of charge in line with that set out in the Consumer Credit Directive which will facilitate the comparability of advertising and the pre-contractual information.

Borrowers will also have an obligation to provide the necessary information to enable an assessment of their ability to repay and have an entitlement to repay their credit before the expiry of the credit agreement, subject to certain conditions to be determined by Member States.

Michael Coogan, director general of the CML, says:”We will need to scrutinise the Directive thoroughly, as well as the indicative impact analysis published alongside it, before drawing detailed conclusions. Even then, it may be difficult to work out the real impacts given that so many areas of the detailed policy will be delegated to the Commission to finalise and are not even included in the Directive itself at present.

“But what we can already conclude is that, for the UK at least, there is likely to be an unholy confusion of competing draft rules at a national and European level that will keep legal advisers gainfully employed for some time to come. Whether or not the end result will help UK consumers remains to be seen, but seems unlikely given that the FSA is at the more robust end of the European regulatory spectrum already.

“As we seek to work towards a UK response, we will be seeking evidence of the Commission taking a realistic view about how far its objectives will be, or can be, met through the Directive. As the largest mortgage market in Europe, the UK stands to bear significant financial and implementation costs, which means that a convincing case for EU level intervention is needed if the UK is to support it. That case does not appear self-evident at present.”

Stay tuned to Mortgage Strategy for a breakdown of the Directive.

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