Borrowers will enjoy a higher level of protection through robust rules concerning advertising, pre-contractual information, advice, creditworthiness assessment, and early repayment. The requirement to provide personalised information to the consumer through a European Standardised Information Sheet will allow consumers to compare mortgage conditions from different providers. The proposed Directive also aims to create a more efficient and competitive single market for mortgages by creating a level playing field for all actors involved and making cross-border activity easier. It now passes to the European Parliament and the Council of Ministers for consideration.
Internal Market and Services Commissioner Michel Barnier said: "During the boom years, we saw examples of borrowers and lenders acting on the assumption that the good times could not end. Lenders and intermediaries alike engaged in irresponsible practices, and consumers were not warned of the consequences of their decisions. The draft set of rules presented today is designed to ensure a high standard of pre-contractual information and improved lending practices across Europe, while promoting a dynamic, competitive and more integrated Single Market for mortgage credit."
The aim of the Commission proposal is to create a responsible, efficient, healthy and competitive pan-European market that works to the benefit of consumers. It should also promote customer mobility, cross-border activity of creditors and intermediaries, and create a level playing field for all actors involved.
The focus is to ensure that all consumers purchasing a property or taking out a loan secured by their home are adequately informed about the possible risks and that all institutions engaging in these activities conduct their business in a responsible manner. The proposed Directive covers all loans which allow the consumer to borrow money in order 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.
Outline of the initiative
The proposed Directive will:
•introduce certain requirements for the advertising of mortgage credit, for example wording that may create false expectations for a consumer regarding the availability or the cost of a credit will be prohibited;
•ensure that all institutions involved in the origination and distribution of mortgage credit to consumers are adequately regulated and supervised;
•establish principles for the authorisation and registration of credit intermediaries (companies who provide information and assistance to consumers looking for a mortgage credit and sometimes conclude mortgage agreements on behalf of the lender) and for the establishment of a passport regime for those intermediaries. This means that once authorised in one Member State, the intermediary would be allowed to provide its services throughout the Internal Market.
•ensure that lenders benefit from provisions enabling them to access information in credit databases on a non-discriminatory basis.
Lenders and credit intermediaries will be required to:
•make general information available at all times on the range of credit products they offer;
•provide personalised information to the consumer through a European Standardised Information Sheet or so called "ESIS". This will allow consumers to compare mortgage conditions from different providers;
•give explanations and meet certain standards for the provision of advice;
•assess the consumer’s ability to repay, based on information provided by the borrower;
•finally, credit intermediaries will be required to disclose certain information concerning for example, their identity, status and relationship with the creditor, to render transparent any potential conflicts of interest.
•benefit from extra information at all stages in the process of taking out a mortgage allowing them to make the right decisions for them;
•benefit from a harmonised annual percentage rate of charge in line with that set out in the Consumer Credit Directive which will facilitate the comparability of advertising and the pre-contractual information;
•have an obligation to provide the necessary information to enable an assessment of their ability to repay;
•have an entitlement to repay their credit before the expiry of the credit agreement, subject to certain conditions to be determined by Member States.
In parallel the Commission also presented yesterday a working paper on national measures and practices to avoid foreclosure procedures. It also provides examples for national public authorities and creditors on how rising default rates have been addressed across the EU, with a view to avoiding foreclosure procedures where possible and reasonable. These include 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.
Despite the considerable size of the EU mortgage market (equivalent to 50% of European GDP) as well as the importance of a mortgage to consumers, there is no EU legislative framework in place concerning mortgage lending and the market remains highly fragmented.
While many factors drive the decision to grant a particular mortgage credit, it appears that irresponsible behaviour by certain market actors have in recent years contributed to excessive mortgage lending. Consequently, EU citizens are having difficulties in meeting their debts. In 2008, 16 % of people reported difficulties in paying bills and 10 % of all households reported arrears. In line with these difficulties, defaults and foreclosures have risen.
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