MEPs have passed the final rules of the European mortgage credit directive.
The rules were agreed in September but an official vote was delayed until the Council of Ministers agreed so-called correlation tables, which set out how each member state transposes the new rules into their respective national regulatory system. The vote took place yesterday.
The purpose of the directive is to “harmonise” mortgage regulation throughout EU member states and to provide increased protection to mortgage borrowers.
The UK will have two years to introduce the rules into national laws and regulations once the final text has been ratified by the Council and has been published in the official journal of the EU, which is expected to happen early next year.
MEP Antolin Sanchez Presedo, a rapporteur for one of the committees scrutinising the original proposals, says: “For most families, a mortgage is the biggest and longest commitment they make. 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 relation between lenders and borrowers.”
A lot of the new rules mirror those contained within the Mortgage Market Review, which will be introduced on 26 April, especially around lenders’ obligation to ensure the borrower can afford their mortgage.
However, there are some elements which do not appear in the MMR, such as the new rule requiring lenders have to provide an extra APR outlining worst case scenarios for borrowers.
Under the dual APR rule, mortgages where borrowers are tied in for under five years will need to include an APR for what they are paying during the lock in period and a worst case scenario showing the most they could have been charged on a lender’s SVR over the previous 20 years.
A new European standardised information sheet will replace the key facts illustration used in the UK, although lenders may be able to keep the KFI for five years after the final rules have been agreed upon, if the regulator chooses to do so.
The new rules require lenders to offer borrowers a “cooling off” or “reflection” period of seven days, although the customer can choose to go ahead with the transaction during this period if they wish to do so.
The directive also requires lenders and intermediaries to inform the customer if they are receiving advice or just information. However, in this country the regulator has banned non-advised sales for all but minor contract variations.
Moreover, brokers must ensure they provide borrowers with written disclosure of any commission they receive from a lender and the type of service they provide.
Originally, the directive would have captured buy-to-let mortgages but the UK mortgage industry successfully argued that these mortgages should not be regulated in the same way as residential mortgages.
Buy-to-let experts and lender trade bodies warned that the sector would be stifled if it were covered by the proposals, which say lenders must take into account affordability when they advance a home loan. They argued that buy-to-let loans do not need to be assessed for affordability as borrowers use rental income to meet repayments.
The UK also secured four crucial opt-outs for proposals, decided upon at the committee stage of negotiations, on packaged products, meaning lenders will be able to continue to offer guarantor mortgages, shared equity loans, offset mortgages and endowments.
Association of Mortgage Intermediaries chief executive Robert Sinclair praised the FCA and the Treasury for securing the opt-outs but is disappointed with the new rules surrounding the Esis and disclosure.
He says: “From a UK intermediary perspective, though, we are disappointed that these rules bring us back to having to go through a lot of written disclosure, which the UK regulator has acknowledged doesn’t work best with consumers.
“This information is quite complex. There are also certain disclosures around how you are paid, which is not very different to MMR but it is more formalised. We may have to go back Information Disclosure Documents, which are not compulsory anymore [in the UK].”
Building Societies Association mortgage policy adviser Sharon Chapman says: “During the process the UK achieved some wins but we are still left with unwanted provisions. The second APR for example is likely to cause consumer confusion rather than clarity as a lender’s highest borrowing rate in the last 20 years is no indicator of what might happen to rates in the next 20 years.
“Questions also remain around how, and when, we’ll move from the Key Facts Illustration to the European Standardised Information Sheet and what – if any – consumer benefit this new disclosure document will provide.”