Creating a fair single market for mortgage credit – FAQ
European Commission - MEMO/11/205 31/03/2011
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Brussels, 31 mars 2011
Creating a fair single market for mortgage credit – FAQ
1. What does this proposal cover?
The focus of this proposal is to ensure that all consumers purchasing a property or taking out a loan secured by their home are adequately protected against the risks. Consequently, the proposal covers all loans to consumers to buy a home as well as certain loans to consumers to renovate a home. It also covers all loans to consumers that are guaranteed by a mortgage or another comparable security.
2. Why act at the European level?
The financial crisis has had a substantial impact on EU citizens. Many have lost confidence in the financial sector and irresponsible lending is now having an impact. As borrowers have found their loans increasingly unaffordable, defaults and foreclosures have risen. These problems are not just cyclical or limited to one or two Member States but can be found throughout the EU. As the recent financial crisis also illustrated, the effects of irresponsible lending in one country can quickly spread beyond national borders.
But this focus on mortgage markets is not new. For several years, the Commission has reviewed EU residential mortgages markets to ensure the efficient functioning of the Single Market. A single market for residential mortgages is far from completion as several obstacles exist to the free provision of services. These obstacles restrict the level of cross-border activity on the supply and demand sides, reducing competition. Creditors may be less efficient than they could be and borrowers may face the risk of consumer detriment.
Against this background, it is clear that solutions can not only be found at the domestic level. Common standards across the EU are necessary to promote an efficient and competitive single market with a high level of consumer protection. These standards are essential not only as a step towards creating a more efficient and competitive single market but in order to ensure that the appropriate lessons are learnt from the sub-prime crisis and to ensure that such a financial crisis does not reoccur in the future.
3. How did the Commission reach the decision to regulate European mortgage markets?
In the context of efforts to create a genuine single market for financial services in the 1990s, self-regulatory initiatives were developed to improve the quality and comparability of information provided to consumers on mortgages. In 2001, these efforts resulted in the European Voluntary Code of Conduct on pre-contractual information for home loans. A Recommendation by the Commission endorsed this Code and committed to monitoring compliance with the Code and to assessing its effectiveness.
Two years after the adoption of the Code, the Commission began a broad review of EU mortgage markets to assess the implementation of the Code and whether further steps were necessary to promote the integration of EU mortgage markets. This process culminated in the White Paper on the Integration of EU Mortgage Markets.i
Against this background and in the wake of the financial crisis, the Commission launched a further consultation to strengthen and deepen its understanding of the issues surrounding responsible lending and borrowing. Additional research was also undertaken on specific topics such as the role and regulation of credit intermediaries in the internal market, the role and regulation of non-credit institutions providing mortgage credit, consumer testing of the standardised information provided to consumers, and a cost-benefit analysis of different policy options.
Taking into account the results of the extensive consultative process and research undertaken to date, the decision was reached to come forward with a targeted proposal regulating specific aspects of the mortgage sale and distribution process.
4. Has an impact assessment been undertaken and what were the main conclusions?
In line with the Commission's better regulation approach a comprehensive impact assessment has been undertaken for this proposal. It builds on the impact assessment accompanying the White Paper on the Integration of EU Mortgage Markets and incorporates the results of studies and consultations undertaken since the publication of the White Paper.
The impact assessment concludes that a package of measures is necessary to ensure responsible lending and borrowing throughout the EU. This will minimise consumer detriment, in particular for consumers with low levels of financial literacy or on low incomes, improve customer mobility both at national and, albeit to a lesser extent, cross-border level, facilitate cross-border activity by businesses and create a level playing field throughout the EU. The entry of foreign lenders and credit intermediaries (generally, companies who provide information and assistance to consumers looking for a mortgage credit and sometimes conclude mortgage agreements on behalf of the lender) should also strengthen competition. 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 1 272–1 931 million per annum. Estimated expected total one-off and ongoing costs for lenders, intermediaries and Member States are in the range of EUR 383–621 million and of EUR 268–330 million respectively. These figures exclude the costs and benefits of early repayment which are subject to a separate cost-benefit analysis in the Study on the Costs and Benefits of the different policy options for mortgage credit. The strong positive effect on consumer confidence of the proposed Directive is also expected to underpin the demand for credit products and encourage consumer mobility both at national and, albeit to a lesser extent, cross-border level. These last effects could however not be quantified due to the difficulty in modelling consumer behaviour.
5. What are the Commission's objectives in the field of mortgage credit?
The objectives are to create an efficient and competitive single market for consumers, creditors and credit intermediaries with a high level of consumer protection and to promote financial stability by ensuring that mortgage credit markets operate in a responsible manner. The proposal seeks to do this in several ways, including by fostering consumer confidence and customer mobility, creating a level playing field for operators and promoting cross-border activity by creditors and credit intermediaries.
6. What problems will this proposal address?
Irresponsible lending and borrowing can be found throughout the EU. For consumers, the consequences have been difficulties in paying bills, defaults on their debts or even the loss of their home through foreclosure. This is, at least in part, caused by different levels of knowledge and differing interests between the lender/intermediary and the consumer, which can result in the consumer buying an unsuitable product. For example, unclear or difficult to understand adverts or information can make it difficult for the consumer to choose the best product for their needs as can inadequate assessments of the consumer's ability to repay the loan or inappropriate advice. Regulatory gaps or inconsistencies can make the situation worse.
Barriers also exist which prevent or inhibit consumers and lenders from making the most of the single market. Consequently, levels of cross-border lending remain low. Lenders and intermediaries face obstacles that prevent them from doing business in another Member State (e.g. inability to access consumer credit histories and different registration, authorisation and supervision requirements for intermediaries) or disproportionately increase their costs (e.g. different advertising or disclosure requirements). Citizens also face obstacles (e.g. lack of comparable information, different standards of care) when seeking a mortgage in another Member State, or even from a lender in the same Member State for a property situated elsewhere in the EU.
Other problems such as low levels of financial literacy, the tying of mortgage credit products to other products, and issues relating to mortgage funding, which may also impact on the decision to grant a particular credit and the borrower’s choice of mortgage product, are out of scope of this initiative.
7. Why does the Commission want to integrate mortgage markets, if the average consumer will not be shopping cross-border?
The Commission acknowledges that today only a small fraction of the European population is active cross-border. Indications are that this will remain relatively small in the short to medium term. Integration will therefore be predominately driven through cross-border activity by mortgage lenders for the near future. Consequently, the Commission aims at facilitating the cross-border supply of mortgage credit by removing the barriers to and reducing the costs of engaging in cross-border lending. In this way, consumers should be able to choose not only from the products and services which are currently available on their home market, but also from products and services which have been designed elsewhere in the EU and are offered to the consumer by locally established firms, local agents or brokers of EU lenders, or even on a purely cross-border basis.
Key facts & figures
8. How will the announced package benefit consumers?
Consumers will benefit directly and indirectly. In direct terms, the measures announced should improve consumer confidence in the lenders and intermediaries that provide mortgage loans as well as in the products themselves. This would reduce the likelihood that they purchase an inappropriate product, which could potentially lead to overindebtedness, default or even foreclosure. In particular, consumer confidence should be boosted by clearer and more understandable information on mortgage loans by means of an improved European Standard Information Sheet (Annex I), better assessments of consumers' ability to repay the loans and more reliable advice. However, indirectly, consumers could also benefit from increased competition both domestically and cross-border.
9. Will the Commission's proposals make it more difficult for consumers to obtain a mortgage?
Responsible lending practices, in particular the obligation to assess the borrower's creditworthiness and to reject the credit application if the outcome of the assessment is negative, may indeed result in reduced access to credit for certain groups of borrowers, such as those with a low income or an impaired credit history. The extent of this possible impact would however largely depend on exactly how Member States would translate this proposal into national law.
At the same time, this proposal plays an important role in ensuring that the most vulnerable consumers, such as those groups mentioned above, are protected by reducing the risk of overindebtedness and default, thus enhancing the social sustainability of lending practices and social cohesion.
10. Will this proposal increase the price of a mortgage credit for consumers?
The price of a mortgage credit depends on a range of factors including the general economic climate, the costs of refinancing for the lender, the level of competition in the mortgage market, and the risks the lender would be exposed to and the costs it may incur. While some of the policies will increase the fixed costs for the lender, at least in the short run, some of the policies being proposed, such as the ability to access consumer credit histories cross-border, should make it easier for lenders to assess the risks of with providing the loan and offer more accurate risk-based pricing, thus potentially reducing the price for some consumers. Other policies, such as those to promote the development of the credit intermediation market, should promote further competition in mortgage markets and offer new business opportunities to lenders and intermediaries alike, therefore potentially leading to a reduction in the price of mortgage credit.
11. European mortgage markets have not experienced the excesses that we saw across the Atlantic. Why therefore introduce EU legislation to solve US problems?
This proposal is a European solution to a European problem. Irresponsible mortgage lending and borrowing in the EU is nowhere near the levels in the US. But this does not mean that irresponsible mortgage lending and borrowing does not occur in the EU or that it does not have consequences for consumers and the wider economy. Similar weaknesses in the regulation of EU markets have been identified, including, inadequate regulation of intermediaries and non-banks and insufficient or inadequate assessment of a consumers' repayment capacity. As the recent financial crisis illustrated, the effects of irresponsible lending in one country can quickly spread beyond national borders. In an integrated financial market such as the EU, these effects can occur rapidly and through multiple channels. The proposal for a Directive will create standards to ensure that mortgage lending in the EU takes place in a responsible manner and contribute to promoting financial, economic and social stability in all EU Member States. This proposal also responds to the G20 recommendationsxiii to ensure that all markets, products and participants are subject to adequate regulation and supervision.
However, this proposal does not focus exclusively on enhancing responsible lending. It also seeks to create a genuine single market for mortgage credit. For several years, the Commission has engaged in a comprehensive review of EU residential mortgages markets to ensure the efficient functioning of the single market. In this respect, this proposal also brings forward measures that should enhance the efficiency of the single market, including for example, measures to facilitate cross-border access to credit databases and a passport for credit intermediaries.
12. Why legislate on early repayment at the European level?
This proposal requires Member States to guarantee the right of borrowers to prepay their mortgages before the end of the contract. This would enable a borrower to prepay the loan in order to, for example, consolidate debts through a new mortgage or sell their home because of a change in personal and/or financial circumstances.
Early repayment has previously been identified in the White Paper on the Integration of EU Mortgage Markets and its accompanying impact assessment as one of the main obstacles to the creation of a single market for mortgages. The existence of different national early repayment regimes impact negatively on consumer confidence and restrict customer mobility. They also inhibit cross-border activity and create an unlevel playing field for lenders. The issue of early repayment therefore cannot be ignored when attempting to design a credible policy on the integration of mortgage markets.
Giving consumers the right to repay their loan in advance is also an essential element of consumer protection. Studies have shown that consumers are not always aware when taking out a mortgage that they could benefit from such a right. A right of early repayment is also in the interest of the market: consumers having the opportunity to escape their current loan will be more inclined to seek better offers, and take full advantage of opportunities for mobility in employment or training.
Member States will be free to determine the eligibility criteria, the conditions for exercising the right and the existence, level and method of calculating any compensation payable to the lender in order to invoke the right. However, Member States must ensure that these conditions are not so restrictive that they would gut the law of substance.
13. Why are you just regulating residential mortgage lending and not commercial loans?
The Directive covers credit agreements secured by a mortgage or by another comparable security, loans to purchase a property and certain credit agreements aimed at financing the renovation of a residential immovable property. As such, the main focus of the Directive is on loans to consumers rather than to companies.
Consequently, commercial mortgage transactions, namely, the provision of a mortgage loan from a bank to a company to build or develop property would not be covered by this proposal. However, the proposal does not preclude the possibility that some Member States may wish to extend the scope to other beneficiaries such as small or medium-sized enterprises or indeed to some commercial property transactions.
Commercial property developers who offer mortgages to purchase their properties would be covered by this proposal. Such developers would be acting as intermediaries as defined in the proposal and would therefore be subject to the conduct of business rules as well as the requirements for registration and supervision.
14. Many of the areas being regulated by this proposal are already covered by a wealth of consumer protection legislation. Why is more regulation necessary?
The proposal is not only consistent with but also complementary to other existing EU legislation in the areas of consumer protection.
The Unfair Commercial Practices Directive (UCPD) (Directive 2005/29/EC) already provides protection for consumers, but it does not take into account the specificities of mortgage credit. In order to ensure that consumers can compare different offers and make informed choices, this proposal sets out, amongst other things, specific provisions for the advertising of mortgage credit and standardised pre-contractual information. The UCPD complements these specific requirements in the areas not covered by the proposal. For instance, it will come into play if the creditor or the credit intermediary uses aggressive commercial practices or when the practice in question is regarded as unfair per se under the Black List of the UCPD.
The Distance Marketing of Financial Services Directive (Directive 2002/65/EC) applies to consumer distance contracts for financial services and provides a number of fundamental legal rights for consumers. The areas where this Directive and the proposal overlap are limited and specifically identified in the proposal. For instance, the proposal addresses the issue of provision of information before the conclusion of the contract in case of distance selling and therefore takes precedence over the Distance Marketing of Financial Services Directive in this field.
The Consumer Credit Directive (Directive 2008/48/EC) was adopted with the aim of enhancing the level of consumer protection and facilitating the integration of the consumer credit market. The proposal largely draws on the conduct of business provisions in the Consumer Credit Directive, while taking account the specific features of mortgage credit, for example by introducing risk warnings in the pre-contractual information provisions and by strengthening creditworthiness assessment provisions.
In conclusion, this proposal complements existing EU consumer protection legislation, in particular by focusing on ensuring responsible conduct of business. Together, the EU legislation should each contribute to a higher level of consumer protection.
15. Changes made to the Capital Requirements Directive force banks to operate responsibly. Why are additional measures necessary?
Forthcoming changes to the Capital Requirements Directive should not alter the flow of credit to consumers directly but instead focus on ensuring that appropriate collateral (e.g. property) exists to cover the risks taken in order to ensure the institutional stability of the lender.
In contrast, this proposal focuses on the consumer's ability to repay the loan and not the value of the collateral. In essence, the Capital Requirements Directive focuses on risks to the lender, whereas this proposal focuses on the avoiding risks to the consumer.
16. Markets have self-corrected and no longer engage in many of the practices that have been identified as irresponsible. As such, there is no need for EU legislation.
It is true that lending conditions have tightened considerably since the onset of the financial crisis. But policies also need to be forward-looking. When markets and the economy pick up further, and lending volumes increase, it is essential that a robust regulatory framework is in place to ensure that the mistakes of the past are not repeated.
17. What are the main findings of the Staff Working Paper on pre-foreclosures accompanying the proposal?
Over the last two years, the Commission services collected information on the evolution of defaults and foreclosures in the Member States and measures taken or about to be taken at national level to avoid foreclosure procedures where possible and reasonable. Several broad trends can be identified.
All Member States that provided information for the years 2008 and 2009 have experienced an increase in default rates over that period. However, when looking at the various default rates more closely, Member States appear to have experienced the impact of the financial crisis differently, with some having higher absolute default rates than others.
In a similar way, data relating to the number of foreclosure procedures reveals a mixed picture. However, the increase in the number of foreclosures opened in 2008–2009 is generally significantly lower than over the period 2007–2008, during which Member States experienced overall an increase in the opening of foreclosure procedures.
The report shows that various steps can be undertaken before lenders need to resort to foreclosure. Creditors in some Member States have voluntarily adopted internal practices in order to avoid foreclosures. Certain measures have also been imposed however on creditors in some Member States to help reduce the number of foreclosures. The report provides illustrations of these practices at national level, ranging from reconciliation procedures, mediation, modification of loan terms, to minimum length of time before starting foreclosure procedures, public rescue schemes and provision of independent debt and legal advice, as well as the collection of data and internal reporting.
18. What are foreclosure procedures?
For the purposes of its research, Commission services have defined a 'foreclosure procedure' as a legal action taken by the lender with the view to recovering the money lent, in cases where the borrower has defaulted in paying his instalments. In the same context, 'repossession' refers to the lender actually taking possession of the mortgaged property.
19. What does the proposal do to reduce the risks associated with foreign currency loans?
In some Member States (e.g. Poland, Hungary), a significant part of mortgage credit agreements taken out by households and individuals for their private residences are denominated in foreign currencies, like the Swiss franc. More than 90 % of mortgages in Latvia, Romania and Estonia are issued in a foreign currency. However, foreign exchange lending is not limited to the newer EU Member States; in Austria, more than 38 % of outstanding mortgage credit is denominated in a foreign currency. Foreign currency lending allowed consumers to benefit from mortgage interest rates which were lower than in their own countries, but at the same time exposed them to currency risks, which could increase the cost of their loan expressed in domestic currency significantly, potentially leading to an increasing number of defaults and foreclosures.
This proposal will ensure that when a lender or intermediary offers a mortgage credit contract denominated in foreign currency that the borrower is made aware through information and personalised explanations of the related currency risks and the effects thereof on the cost of their loan. In particular, the information provided to the consumer should include information on the exchange rate used for calculating and adjusting the exchange rate spreads and the rate used for converting repayments as well as clear risk warnings about the risks of foreign currency loans. The information provided to the borrower should also provide clear examples of the impacts of exchange rate changes both in an upward and downward direction. Finally, the proposal should also ensure that creditors do not overestimate the repayment capacity of borrowers by ensuring that they carefully consider the consumer's ability to repay the loan now and in the future.
20. Granting a loan is a commercial decision. Why is the Commission interfering in the contractual freedom of mortgage lenders?
Although estimates are that 90 % of creditors currently assess a borrower’s creditworthiness, this does not necessarily mean that they decide against granting a loan if the assessment is negative. Creditors can rely on the value of the underlying collateral (the property) in the event of default, transfer the risk of default to a third party by issuing mortgage backed securities or even sell the loan (and risk) to someone else entirely. Consequently, there is a risk that, at least in some instances, the creditors will grant the loan to a consumer who is unable to repay the loan. This proposal seeks to avoid those risks by preventing lenders from being able to grant a loan to a consumer who is unable to repay that particular loan (a negative assessment of creditworthiness). A negative credit assessment is not necessarily the result of a negative credit score or consultation of a credit database but should take into account a wide range of information, including for example, other guarantees offered by the consumer. A positive creditworthiness assessment does not however constitute an obligation for the creditor to provide credit.
Pre-Contractual Information for Home Loans
EUROPEAN STANDARDISED INFORMATION SHEET (ESIS Model)
COM(2007) 807, 18.12.2007.
Hypostat 2008: A review of Europe’s Mortgage and Housing Markets, European Mortgage Federation, November 2009.
Monthly Bulletin, European Central Bank, August 2009.
The European Union Today and Tomorrow, Eurobarometer 69, November 2008.
Towards a Common Operational European Definition of Over-indebtedness, Observatoire de l'Epargne Européenne in cooperation with CEPS and the University of Bristol, February 2008.
Consumers’ views on switching service providers, Annex tables, Flash Eurobarometer 243, January 2009, p. 40.
Public Opinion in Europe on Financial Services, Special Eurobarometer 230, August 2005, pp. 67‑69.
Response to the Financial Services Authority Mortgage Market Review Discussion Paper, Experian, December 2009, p. 10.
CP10/16: Mortgage Market Review, Financial Services Authority, 13.7.2010
See Impact Assessment, Section 6.8, Table 29
Treasury Blueprint for a modernised financial regulatory structure, 31.3.2008, p. 6.
See Annex 4 of the Impact Assessment, Section 4.9.1, Table 27.
G20 Declaration, summit on financial markets and the world economy, 15.11.2008.