European Commission mortgage proposals gets negative reaction

The European Commission has published its ‘Proposal for a Directive on Credit Agreements Relating to Residential Property’.

The directive on mortgage lending sets out proposals aimed at creating an efficient and competitive single market and has taken eight years of investigation by DG Internal Market & Services into EU mortgage markets.

But it has not gone down well with European and UK trade bodies.

The Building Societies Association does not believe that the case for EU intervention has been convincingly made. A single rulebook for mortgage lending is inappropriate given the diverse markets, cultures and regulatory frameworks in place across the EU. There is a risk that with these proposals the Commission is seeking to design a European solution to a US problem.

The scope of the proposal includes pre-contractual disclosure, advice, creditworthiness assessments and early repayment provisions. This includes a proposal for a European Standardised Information Sheet (ESIS) that could replace the Key Facts Illustration provided to mortgage customers in the UK currently.

Since UK mortgage lenders are subject to parallel regulatory intervention at both national and European level there is a risk that this draft Directive could conflict with the FSA proposals expected to be published in the summer.

Paul Broadhead, head of mortgage policy at the BSA said: "The requirement for a European Standardised Information Sheet, with prescribed content and layout could burden the industry with costs running into tens of millions of pounds.

“This is unlikely to deliver any benefit to UK consumers as they will receive less information than they currently receive through the KFI.

"Now that the draft Directive is published it is vital that the FSA pays close attention to its effect on the mortgage market review. The summer consultation will need to incorporate the European dimension if it is to include a full and robust impact assessment."

The Council of Mortgage Lenders is concerned that the UK, as the largest mortgage market in Europe, will incur cost but gain little benefit from the Directive.

Michael Coogan, director general of the Council of Mortgage Lenders, commented: "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."

Annik Lambert, secretary general of the European Mortgage Federation, said the industry remains to be convinced that there is a business case for such an initiative.

She said: “In the current environment of flat economic growth, we have reservations about whether the regulation of consumer protection in the field of mortgage credit will ensure a more efficient functioning of the Single Market, as appears to be the Commission’s intention.

“For consumers, mortgage markets are purely domestic – they do not shop around on a cross-border basis. Therefore, any cross-border mortgage lending is supply-driven, i.e. it is lenders who cross borders to offer their products. The reason for this is the intrinsic link between immovable property and national territory and legislation.”

“The Commission’s Impact Assessment does not make a convincing case that regulation will bring about any change to this. If the Commission’s aim is a more integrated mortgage market, then its focus should be on removing obstacles to lenders lending across borders, obstacles which have been clearly identified in the course of this reflection process.”

The EMF also has serious concerns about a number of the provisions proposed, such as the requirement that lenders must tell customers why they have been refused a mortgage if they fail the credit score.

Lambert said: “We strongly believe that such provisions will lead to an unbalanced shift of liability to the lender and to even more legal uncertainty and litigation, which in turn will result in a restriction of access to credit for an increased range of prospective borrowers, notably first-time buyers, the self-employed, those with a lower income etc.”

“The prospect we are facing therefore is less credit to fewer borrowers.”