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European Commission

MEMO

Brussels, 10 December 2013

Creating a fair single market for mortgage credit – FAQ

See also MEMO/13/1126

1. What does this Directive cover?

This Directive aims to ensure that all consumers who purchase a property or take out a loan secured against their home are adequately informed and protected against the risks. Consequently, the proposal covers all loans made to consumers for the purpose of buying a home as well as all loans to consumers that are guaranteed by a mortgage or another comparable security.

2. Why act at European level?

The financial crisis has had a substantial impact on EU citizens. Many have lost confidence in the financial sector and the impact of irresponsible lending is now being felt. Borrowers have found their loans increasingly unaffordable, resulting in a rise in defaults and foreclosures. 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 mortgage markets to ensure the efficient functioning of the Single Market. A single market for residential mortgages remains far from complete as several obstacles prevent the free provision of services. These obstacles restrict the level of cross-border activity both on the supply and demand sides, thus reducing competition. The efficiency of creditors is a concern. All of these factors can lead to disadvantages for consumers.

Against this background, it is clear that domestic solutions only will not solve the problems in the market. 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 lessons are learnt from the sub-prime crisis and to prevent reoccurrence.

3. What are the objectives of the Directive?

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 Directive will foster consumer confidence and customer mobility, create a level playing field for operators and promote cross-border activity by creditors and credit intermediaries.

4. What benefits will this Directive bring to consumers?

Consumers will benefit directly and indirectly. In direct terms, the Directive 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 over-indebtedness, paired with the dire consequences of 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 Standardised Information Sheet, 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.

  1. Enhanced transparency: the Directive improves the information given to the consumer at pre-contractual stage by the means of a standardised sheet with user-friendly, detailed information on the characteristics of the loan on offer, including specific warnings in the case of variable rate loans and foreign currency loans; it also provides for a list of standard information at the advertising stage.

  2. Safeguards before entering into the credit agreement: the Directive obliges creditors to conduct a thorough, documented creditworthiness assessment before granting the credit and to only make the credit available to the consumer where the result of the creditworthiness assessment indicates that the consumer’s obligations regarding the credit are likely to be met (see also question 7). In addition the Directive contains a provision to ensure that the consumer has sufficient time before being bound by the credit agreement (via a reflection period or a right of withdrawal or both).

  3. Right to repay the credit early: (see question 10)

  4. Ban on tying practices: (see question 5)

  5. Ensuring proper conduct of business: the Directive sets important principles to guarantee that creditors and credit intermediaries act in the consumer’s interests, imposes high-level standards regarding their remuneration structure and requires specific disclosures to the consumer as regards the nature of the links between creditors and credit intermediaries

  6. Quality standards: the Directive introduces quality standards for the performance of services related to mortgage credits, namely the obligation for staff to possess the appropriate knowledge and skills in fields of relevance for carrying out their activities, the obligation to provide adequate explanations to the consumer at pre-contractual stage, as well as standards for advisory services.

5. What does the Directive foresee in relation to tying practices?

‘Tying practices’ means the offering or the selling of a credit agreement in a package with other distinct financial products or services where the credit agreement is not made available to the consumer separately. While the combination of credit agreements with one or more other financial services or products in packages can benefit consumers, it may also negatively affect consumers' mobility and their ability to make informed choices, unless the components of the package can be bought separately. It is therefore important to prevent practices such as tying of certain products which may induce consumers to enter into credit agreements which are not in their best interest.

In this context and as a general rule, the Directive prohibits tying practices. However it allows tying practices in some justified instances. Mortgage credits, for instance, are often tied together with an insurance product in order to guarantee the repayment of the credit. The Directive will entitle the consumer to choose his/her own insurance provider, provided that the level of protection of the insurance product is considered equivalent to the one offered by the creditor.

6. Under which conditions can credit intermediaries benefit from the passport?

The Directive establishes principles for the authorisation and registration of credit intermediaries (natural or legal person who provides information and assistance to consumers looking for a mortgage credit and sometimes concludes mortgage agreements on behalf of the lender) and establishes a passport regime for those intermediaries. This means that once authorised in one Member State, the credit intermediary would be allowed to provide its services throughout the Single Market, in a similar way to the passport regimes already in place for insurance and investment intermediaries. This process is based on a number of conditions. Credit intermediaries need to possess and to keep up-to-date an appropriate level of knowledge and skills in relation to the manufacture, the offering or granting of credit agreements. In addition they shall hold professional indemnity insurance covering the territories in which they offer services or some other comparable guarantee against liability arising from professional negligence and they have to be of good repute.

7. Will the Directive make it more difficult for consumers to obtain a mortgage? How does the Directive address the issue of consumers in payment difficulties?

The Directive will not make it more difficult for the average consumer to obtain a mortgage credit. On the contrary, through the increased cross-border competition, it is rather expected that the availability of different mortgage products will grow.

Responsible lending practices, however, and in particular the obligation to assess the borrower's creditworthiness, may result in reduced access to credit for certain groups of borrowers, such as those with an impaired credit history. The extent of this impact would depend on how Member States translate this rule into national law.

At the same time, this principle plays an important role in ensuring that the most vulnerable consumers, such as those groups mentioned above, are protected by reducing the risk of over-indebtedness and default, thus enhancing the social sustainability of lending practices and social cohesion.

The Directive also provides that Member States should encourage creditors to apply reasonable forbearance when being confronted with consumers in serious payment difficulties.

8. Will this Directive increase the price of a mortgage credit for consumers?

The additional regulatory compliance costs for the creditors as a result of this Directive are considered to be manageable and are not expected to result in higher administrative fees for consumers. The overall costs of a mortgage credit depend on a range of factors, including the general economic climate, the refinancing costs 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.

The development of the credit intermediation market should promote further competition in mortgage markets and offer new business opportunities to lenders and intermediaries alike, thus leading to potential cost reductions in future.

9. Will this Directive determine how much an individual can take out as part of his/her mortgage loan?

The Directive does not introduce caps in the form of concrete ‘loan to value’ or ‘loan to income’ ratios. The Directive encourages creditors not to include the automatic appreciation of the property when conducting their creditworthiness assessments.

10. Will consumers be able to repay their credits early?

This Directive requires Member States to guarantee the right of borrowers to repay their mortgages before the end of the contract so that they can reap the resulting benefits (e.g. choose a credit with a cheaper interest rate formula). Member States, however, will be free to determine any compensation payable to the lender, provided that such compensation is set at a fair level. The possibility to repay early will also grant borrowers more flexibility to, for example, consolidate debts through a new mortgage or sell their property because of a change in personal and/or financial circumstances.

11. What does the Directive do to reduce the risks associated with foreign currency loans?

The Directive will ensure that, when a lender or intermediary offers a mortgage credit contract denominated in foreign currency, 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 formula used to revise the borrowing rate as well as clear risk warnings about the risks of foreign currency loans. It will also contain a clear example of the possible impacts of an exchange rate change. An appropriate framework to ensure a general right of conversion or alternative arrangements to limit the currency risk will have to be put in place in Member States. The Directive also provides for a warning at the advertising stage and possible warnings during the lifetime of the contract where the value of the total amount payable by the consumer which remains outstanding or the value of the regular instalments varies by more than 20%. Finally, the Directive 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.

12. What does the Directive do to reduce the risks associated with variable rate loans?

Consumers will be clearly informed in the European Standardised Information Sheet (ESIS) of the nature of the borrowing rate and how it is calculated. In order to make the consumer aware of the possible risks linked to variable rate loans, the Directive introduces warnings as well as an illustrative example in the ESIS. The warning will be presented in clear and plain language that is easily understandable to the consumer. To attract the consumer’s attention, the font size used will be bigger.

In addition the Directive requires that any reference rates used to calculate the borrowing rate are clear, accessible, objective and verifiable.

13. Additional provisions to inform and guide consumers

The Directive contains an article on financial education according to which Member States shall promote measures that support the education of consumers in relation to responsible borrowing and debt management, in particular in relation to mortgage credit agreements. Clear and general information on the credit granting process is necessary to guide consumers, especially those who take out a mortgage credit for the first time, as well as information regarding the guidance consumer organisations and national authorities may provide to consumers. The implementation of this article by Member States will help consumers to be more financially literate and to be able to take more responsible and informed decisions.

14. What are the remaining procedural steps before entry into force of the Directive?

The European Parliament adopted the Directive in plenary session today (10 December). The Council now needs to formally adopt the rules.

The Directive will then be published in the Official Journal and the rules will enter into force. Member States will then have 2 years to implement the rules into national law.

Key facts & figures mentioned in the impact assessment accompanying the Commission’s proposal for a Directive

  1. In 2008, outstanding residential mortgage lending in the EU27 represented about 50% of EU GDP and 32% of total euro area monetary financial institutions (MFIs) loans at the end of 2008 were residential mortgages.i Rising household debt levels exist throughout Europe, of which mortgage debt is the largest component, accounting for some 70% of euro area households’ total financial liabilities at the end of 2008.ii

  2. Citizens are having increasing difficulties in meeting their debts: in 2008, 16% of people reported difficulties in paying billsiii and 10% of all households reported arrears.iv The difficulty in meeting repayments has led to an increase in default rates and a rise in foreclosures.

  3. Pre-contractual information is difficult to compare; almost 38% of EU citizens find it very or fairly difficult to compare offers.v Different methodologies and cost bases also make the Annual Percentage Rate of Charge (APRC) incomparable. Consumers also view the information provided as complex and unclear; 59% of EU citizens find it difficult to understand information on the way their mortgages work and the risks involved.vi

  4. While information can be obtained directly from the borrower, information provided by consumers can sometimes be unreliable, especially given potential misaligned incentives. For example, consumers have been found to overestimate their income and/or underestimate their commitments in up to 70% of mortgage applications.vii

  5. More than 90% of mortgages in Latvia, Romania and Estonia are issued in a foreign currency and in Austria, more than 38% of outstanding mortgage credit is denominated in a foreign currency.

  6. In 2006/2007, 45% of UK mortgages were granted without the consumer's income being verified.viii

  7. According to Commission calculations based on current evidence the expected benefits of the package are EUR 1 272–1 931 million. Expected total one-off and on-going costs are estimated at EUR 383–621 million and EUR 268–330 million respectivelyix.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.

  8. In the US, mortgage brokers and lenders with no federal supervision originated a substantial portion of all mortgages and over 50% of subprime mortgagesx.

  9. Irresponsible lending and borrowing impacts on the solvability of mortgage lenders. Notably, some of the high profile collapses in recent years have been mortgage lenders (e.g. Northern Rock, Bradford and Bingley and DSB Bank).

  10. Irresponsible lending and borrowing has had a concrete financial impact through government bail-out programmes or nationalisation.xi In the UK, 20% of GDP has been given directly to the financial and other sectors to cover bad debts and ensure sufficient capital. In Latvia, austerity measures including a 30% cut in public sector employees pay have been introduced to help the country, and in particular the financial sector resolve the bad debts.

i :

Hypostat 2008: A review of Europe’s Mortgage and Housing Markets, European Mortgage Federation, November 2009.

ii :

Monthly Bulletin, European Central Bank, August 2009.

iii :

The European Union Today and Tomorrow, Eurobarometer 69, November 2008.

iv :

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.

v :

Consumers’ views on switching service providers, Annex tables, Flash Eurobarometer 243, January 2009, p. 40.

vi :

Public Opinion in Europe on Financial Services, Special Eurobarometer 230, August 2005, pp. 67‑69.

vii :

Response to the Financial Services Authority Mortgage Market Review Discussion Paper, Experian, December 2009, p. 10.

viii :

CP10/16: Mortgage Market Review, Financial Services Authority, 13.7.2010

ix :

See Impact Assessment, Section 6.8, Table 29

x :

Treasury Blueprint for a modernised financial regulatory structure, 31.3.2008, p. 6.

xi :

See Annex 4 of the Impact Assessment, Section 4.9.1, Table 27.


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