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European Commissioner for Health and Consumer Protection
Consumer aspects of mortgage lending
European Mortgage Federation Conference
Brussels, 28 November 2003
Ladies and Gentlemen
First of all, I would like to thank the European Mortgage Federation for inviting me here today to address this conference.
In particular, I appreciate this invitation as implicit recognition of the need to take into account the consumer aspects of mortgage lending.
The Governor of Bank of England recently referred to the past ten years as “the nice decade” a period of low inflation and low interest rates, giving rise to optimal conditions for growth in mortgage credit.
We may now be facing a harsher decade of low inflation, but more expensive credit.
EU policies aim at enhancing the competitive environment by providing the tools for developing cross-border mortgage credit in the European Union.
I believe such development requires a high level of consumer protection to enable consumers to gain confidence in exploring the larger market, either pro-actively by seeking cross-border mortgage credit or re-actively by receiving a broader spectrum of offers.
The Code of Conduct for Home Loans
Between 1998 and 2001, mortgage industry and consumer representatives negotiated a Voluntary Code of Conduct on “home loans”, which was signed in March 2001.
This foresees that the Commission shall monitor the uptake of the Code and within two years review its operation.
Earlier this year the Commission charged an independent research institute with preparing an evaluation of the implementation of the Code.
The evaluation covered exclusively those mortgage lenders who had committed themselves to implementing the Code. The method used was “mystery shopping” by individuals acting as potential customers.
I have to say that the results were clearly disappointing. Only 5% of the creditors surveyed gave information fully in conformity with the Code, and 50% did not give any information at all.
The mortgage industry has suggested that these results may be based on a misunderstanding, because consumers would have received the information at the time of conclusion of a contract.
The Code is indeed silent on the exact time of delivery of information. It covers “pre-contractual information”, which of course in legal terms implies any moment up to the actual conclusion of the contract.
However, there can be no doubt about the spirit of the Code. The information should be given at a time when the consumer is “shopping around”.
In fact it is explicitly stated that the information does not constitute an offer. It makes no sense to pretend that information delivered at the time of conclusion is “pre-contractual information” within the meaning of the Code.
To improve the situation
My objective today is not to name and shame. I am fully aware that, while the negotiations were made at European level by the European federations, implementation had to take place at local level by individual branches of financial institutions. The European federations have had little if any control over this.
I understand that the mortgage industry intends to take steps to improve the situation. I welcome this. The Code and its instruments such as the European Single Information Sheet are available, and mortgage credit institutions are free to use them and develop them further.
But the evaluation does not bode well for the image of self-regulation in the field of financial services. This Code was a test-case, and, as far as I can see, it has been far from successful. I have to say that we made an effort to avoid legislation and achieve a satisfactory and constructive result by means of self-regulation, but my impression is that this effort failed.
The question of consumer information is at the moment being dealt with by the “Forum Group” set up by the Commission.
Any further initiatives in this area from the Commission will be determined on the basis of this group's results.
The Forum Group on mortgage credit
The work of the Forum Group was extensively covered yesterday.
Let me therefore limit my comments to the work of the sub-group dealing with consumer confidence. I should say, however, that the results of its deliberations are far from complete, and that any tentative conclusions we may draw must be strictly provisional.
One conclusion may be that while the demand for cross-border mortgage credit is basically absent for the time being, there are signs that it may grow in the future.
This implies a need for initiatives to underpin any moves in this direction. The pioneers should gain positive experiences that may subsequently encourage others to follow suit.
To increase cross-border mortgage
The analysis of the subgroup identifies the issues that need to be covered by such initiatives:
I am conscious of the fact that industry will claim as a quid pro quo the right to market products across borders even if these are not designed to meet the rules of the country of destination.
The scope for mutual recognition in this area will no doubt be one of the most hotly debated topics, once the Forum Group delivers its report.
The proposal for a Consumer Credit Directive
Let me turn to the question of whether and if so how to cover mortgage credit within the proposal for a directive on consumer credit.
State of play
First though, a few words on the state of play in the negotiations.
As you will know, work in the European Parliament has made little progress up to now. But we are now looking forward to the report by the lead committee. This may be very critical the rapporteur, Mr. Wuermeling has strong views but we shall nevertheless enter into constructive debate with him and his colleagues as soon as his work will allow us.
The Commission has proposed the inclusion of mortgaged credit in the scope of the Directive, with the exception of loans for buying immovable property as these are covered by the “Voluntary Code of Conduct”.
Mortgage in consumer credit
The reason for this is that the surety of a mortgage is increasingly being used in the context of consumer credit.
Yet the view that mortgage credit is quite distinct from consumer credit seems to prevail.
In discussions in the Council only one Member State agreed with to the Commission's approach to include mortgage-backed consumer credit, but to exclude home loans.
On the other side, there is a substantial majority in favour of excluding mortgage credit completely be it mortgage-backed consumer credit or home loans. In other words, the majority prefers the status quo.
Early indications suggest that the Parliament may well share these views.
Should this prove to be the case, the Commission will of course consider carefully how best to proceed. The work of the Forum group would not diminish in importance under these circumstances.
Finally, a few comments about recent research carried out by, or under the auspices of, the Mortgage Federation. We have just received the reports on financial integration of mortgage markets and on the protection of the mortgage borrower.
The EMF report on the financial integration of European mortgage markets is most interesting, as it shows that a Single Market in mortgage credit is indeed possible. It also provides a detailed picture of the functioning of mortgage markets throughout the EU.
Reasons for low cross-border activity
The report cites the low profitability of such transactions and high levels of regulation as the main reasons for low cross-border activity.
I would certainly agree that low profitability does not encourage lenders to seek new borrowers across borders. But I do not agree with the argument that the level of consumer protection across the Member States is a barrier to integration.
It is the differences between national legislations that may constitute obstacles to the Single Market. As I have said many times before, harmonisation at a high level of consumer protection should therefore be the key.
The EMF survey on the protection of the mortgage borrower provides a veritable goldmine of information on the content and nature of national rules and approaches to consumer protection in mortgage credit.
Seen from the consumer perspective, is mortgage credit a special case? Well yes.
Mortgage credit is the single most important economic transaction a consumer may undertake.
But, just like other financial services, mortgage credit would benefit if competition was increased by opening up national markets.
And finally, the cross-border mortgage credit market can only develop if the demand side has the confidence to exploit it. That is the challenge before us.