New EU rules on mortgage lending designed to give better protection to consumers and tighten up lending standards are expected to come into force by 2015, as negotiation on a key piece of legislation enters its final stage in Brussels.
The Irish presidency of the European Council is hoping to secure final sign-off on the mortgage credit directive at a meeting today with representatives from the European Parliament. The directive, which will be applicable to all member states, sets out a new set of rules for all new mortgages taken out after the directive comes into force. This includes rules on advertising and improving pre-contractual information for consumers. A key strand of the regulation is a new European Standardised Information Sheet (ESIS) . This will require lenders to provide standardised information about the terms and conditions of the mortgage, thereby allowing consumers to more easily compare mortgage offers across different lenders both within member states and across the European Union.
Additional rules on advertising, including clearer information on the annual percentage rate, will also be obligatory.
While the new directive will ensure that consumers have a right to repay their mortgage early, it will not prohibit the imposition of penalties by lenders in this situation. Historically, lenders have argued that banks need to be compensated for the loss of the security behind the mortgage.
The new mortgage directive, which was initially proposed by Internal Markets Commissioner Michel Barnier in 2011, was formulated as a response to the financial crisis. Despite the fact that the EU mortgage market equated to about 50 per cent of GDP in 2008, there is no EU legislative framework in place concerning mortgage lending, and the market remains highly fragmented.
While most mortgages are issued by lenders in countries where the applicant resides, the new directive aims to strengthen the cross-border market for mortgages. While levels of cross-border lending generally remain low, Ireland experienced a particularly high level of cross-border mortgage lending during the boom, with a number of British lenders entering the Irish mortgage market.
All EU member states will be required to transpose the directive into national law within two years. While some of the regulations in the directive are already in place in different countries, many of the measures will be additional to those already in place. This will be the case for example in Ireland, where the new directive will contain additional measures to those contained in the Central Bank's Consumer Protection code and Mortgage arrears code.
The new directive will also introduce tougher rules for credit assessment of people applying for mortgages, setting out principles by which a consumer's ability to repay the loans should be assessed.
It will also tackle the issue of remuneration structure for credit-assessment staff to discourage the practice of advisors recommending or sanctioning a mortgage in order to secure remuneration benefits.
In addition, the directive clamps down on mortgage intermediaries or brokers, amid concern that the commission-based model of payments to mortgage intermediaries could incentivise brokers to recommend a mortgage policy on the basis of commission generated, rather than its suitability for the consumer. Under the new legislation, mortgage brokers will be required to have professional indemnity insurance or a similar guarantee of liability, he or she must be included on a register , and credit intermediaries will be subject to supervision by authorities in each member state.
Irish negotiators have been leading discussions with the European Parliament on the issue since January, and are confident of reaching final agreement today.
