European Parliamentary Committee calls for greater consumer protection measures in the proposed Mortgage Directive
The Economic and Monetary Affairs Committee of the European Parliament has called for greater consumer protection measures to be built into the proposed Mortgage Directive, which was published in draft form in March of this year.
Specifically, the Committee has called for:
- The introduction of a ’cooling-off’ period for borrowers of at least 14 working days after a mortgage offer has been made
- Compensation for consumers if credit is rejected because a reference agency supplies an inaccurate report
- The right for borrowers to make overpayments without penalty, and for them to be able to draw down in the future any overpayments they have made; and
- A ban on arrears charges if payment problems arise that are beyond the control of the borrower.
The Committee also wants to require Member States to regulate how lenders and intermediaries are paid, with rules to prevent financial rewards linked to sales of individual products, and seeks to reassert the need for expert risk assessment in lending decisions rather than the current over-reliance on automated credit scoring systems.
The draft Directive is also being scrutinized by the Intermal Markets and Consumer Protection committee within the Parliament, although this is not expected to report until next month. For a report of the developments see the MoneyMarketing article here.
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The MEP Rapporteur while attempting to broaden the scope of the Directive nevertheless focused on the current proposal when suggesting amendments but has introduced a clause on "Further initiatives on responsible lending and borrowing". A summary of some of the proposed amendments (see the July 2011 Antolin Sanchez Presedo Draft Report also annexed below) are listed here alongside some text in the “explanatory statement” section:
IV. THE COMMISSION'S PROPOSAL: OUR ASSESSMENT
Your Rapporteur was appointed in October 2010 following a 2009 consultation and 2010 working paper by the Commission on Responsible Lending and Borrowing. He then wrote to Commissioner Barnier stating that "irresponsible lending and borrowing was at the heart of excessive indebtedness, one of the main causes of the financial crisis" and calling for the scope of any proposal to be "broader than retail aspects of mortgage lending". Once the limited scope of the proposal was confirmed, the ECON Committee Chair and your Rapporteur wrote again to the Commissioner explaining that "evidence shows that the main problems are not posed by defaults by consumers on loans related to residential property" and seeking "assurance that this proposal will be only the first step of a coherent EU strategy for addressing the poor lending practices". Given Commissioner Barnier's commitment that the Commission "will not ignore these issues moving forward", your Rapporteur focused on the current proposal and has introduced a clause on "Further initiatives on responsible lending and borrowing". Having met numerous stakeholders your Rapporteur believes the proposal is welcomed though it needs to be fine-tuned and complemented. The proposal relates to conditions applicable to creditors and credit intermediaries, competent authorities and supervisory requirements. These need to be strengthened in a way coherent with the new European supervisory architecture. It also contains provisions on information and practices preliminary to the conclusion of the credit agreement, annual percentage rate of charge, creditworthiness assessment, database access, advice and early repayment. These need to reflect the principles of the Financial Stability Board's review of mortgage underwriting (2011) and take account of the US Dodd-Frank Act (2010) to promote global consistency. The proposal should address other critical issues without delay: a risk based approach, financial education, sound performance and transparency. It is necessary to define a category of special risk agreements to correct excessive uniformity of regulation; to combat financial illiteracy at the root of irresponsible practices; to deal with key problems during the life of a credit agreement by guaranteeing flexibility through an enhanced balance of competition and stability; and to promote transparent, smart and reliable mortgage markets.
V. KEY ISSUES OF THE REPORT
Further initiatives on responsible lending and borrowing: As explained above, the Commission is asked to report on options to tackle excessive leverage, including macroeconomic measures related to credit evolution, its limits and uses, and measures to protect savers and address highly leveraged institutions to determine what other legislative proposals are needed.
Special risk agreements: this kind of agreement needs to be defined and the risks managed through extra measures including warnings for consumers and stricter prudential requirements so that those taking greater risks also bear the potential costs of taking such risks. Creditworthiness assessment: this is key to achieving a sustainable market. The directive itself should reflect minimum standards recommended by the Financial Stability Board, even if these are further developed through technical standards. The assessment must be robust but to avoid financial exclusion, judgement should be used to protect consumers from arbitrary or unjustified decisions to deny credit.
Reflection period: consumers should have a time to compare offers and ask for advice. The report allows flexibility as to whether this is before or after conclusion of the contract, or a combination of the two.
Advice: It is important to define and provide clear standards for advice and to distinguish such advice, which includes a personalised recommendation, from personalised marketing material which does not contain such a recommendation. This includes ensuring remuneration does not inappropriately incentivise those providing advice.
Early repayment: consumers should have the right to repay early, under certain conditions. A common European framework should be based in Member States legal traditions, and take account of different mortgage funding structures. The framework should ensure that consumers are not penalised for exercising their right and, consistent with Dodd Frank, that creditors are indemnified to a level consistent with market efficiency.
Valuation: Both creditors and consumers have an accurate and impartial valuation of the property. Valuation standards are proposed, and in the case of foreclosure coherence is assured with the value determined under the CRD.
Traceability: The crisis has shown the importance of ensuring the traceability of rights in residential immovable property for creditors and for those investing in instruments for which the right in the residential immovable property provides collateral. A European Mortgage Key Identifier should be allocated to new credit agreements ensuring that the link between the loan and the property can be identified in primary and secondary markets.
Local competent authorities: the Member State where the property is located should be able to determine standards applicable to loans related to property in their territory. Such standards should be applied through co-operation among competent authorities. Co-ordination at European level is needed, particularly relating to the identification and management of systemic risk.
ECON proposed amendments:
Recital 4: The word “pre-contractual stage” has been deleted
Recital 7: “Handling defaults” deleted and no longer specified as a non-harmonised area.
Recital 9: Added: “should apply to all actors in the supply chain including property developers”. Also specifies that mortgage can be for the purchase or to finance construction of residential property.
Recital 14: Added: alongside a credit check, “conduct after the credit has been extended should be regulated”, and new detailed provisions 14a-e have been drafted. For example:
(14a): It is also necessary to regulate some additional areas to reflect the specificity of loans relating to residential immovable property. Given the significance of the transaction it is necessary to ensure that consumers have adequate time for reflection before committing themselves to taking out a loan. It is also important to prevent practices which may induce consumers to enter into a credit agreement which is not in their best interests, such as tying of products other than current accounts or a requirement to take out a particular loan to purchase a property. It is also important to ensure that the residential immovable property is appropriately valued both before the conclusion of the credit agreement and in the event of default. Given the often longterm nature of the loans and the risks which can arise during the execution of the contract, it is appropriate to provide for a degree of flexibility during the life of the credit and to regulate the handling of arrears and defaults.
Recital 14 b (new) Text proposed by the Commission Amendment (14b) Furthermore, it is appropriate to distinguish those credit agreements relating to residential immovable property which may pose special risks arising either from the intrinsic features of the product or by being significantly different from market practice and hence unfamiliar to consumers or because of the economic environment. Those special risks should be appropriately disclosed to consumers and managed through additional prudential and supervisory measures, to ensure that those who take the special risks bear the potential costs.
Recital 14 c (new) Text proposed by the Commission Amendment (14c) In order to ensure traceability and allow appropriate supervision of loans related to residential immovable property, information is needed to understand the concentrations of risk across the market. Registers should therefore be designated across the Union to act as repositories of information about such loans and also about the use of such loans as collateral in financial instruments. A system of identifiers for loans secured on residential immovable property, to be known as the European Mortgage Key Identifier (EMKI), should also be established to assist market participants and supervisors in understanding and where necessary enforcing rights in relation to residential immovable property.
Recital 14 e (new) Text proposed by the Commission Amendment (14e) In order to increase the ability of consumers to make informed decisions for themselves about borrowing and managing debt responsibly, Member States should work with stakeholders to facilitate the education of consumers in those areas.
Recital 16a-b: added link to remuneration directive and provisions on the management of conflict of interests: “order to disclose potential conflicts of interest, aspects of the credit agreement and conduct of creditors after the credit agreement has been concluded should be regulated and all actors involved in the origination of credit agreements relating to residential immovable property should be adequately authorised, registered and supervised.”
Recital 22: Added: “explanations and personalised information should not constitute personal recommendation”
Recital 24: reference to “credit score and past credit history” deleted
Recital 31: Provision now stipulates advice as distinct service that needs separate remuneration.. Added that “the act of making a binding offer does not in itself constitute advice”. New 31a mentions “performance of credit agreement not just formation”, and stresses provider flexibility “creditors and consumers must manage and reduce risk during life of loan”. For example:
(31a) In order to achieve the objectives of this Directive it is necessary to ensure that the performance of credit agreements and not just the formation of the agreement is sound. This requires a degree of flexibility, so as to ensure that the financial system serves the needs of consumers while preserving the indemnity of financial institutions. It is therefore appropriate, in line with the recommendations of the FSB, to provide flexibility which enables creditors and consumers to manage and reduce the risks to which they are exposed during the life of the loan, through a right to flexibility in payments, a right to convert a credit agreement back into the national currency and an appropriately calibrated right to repay loans early. It is also appropriate to provide for situations where either the creditor or consumer wishes to transfer the credit agreement, and to allow consumers to retain the credit agreement while providing different collateral provided such collateral is equivalent.
Recital 32: Early repayment provisions have been made vaguer but added: “avoiding penalising the consumer”. (note that title for Chapter 8 was changed from “Early repayment” to “Sound performance of credit agreements”). 32a contains the clause that the creditor must contact the consumer when difficulties noticed but adds reference to “minimum subsistence income and appraisal of collateral value”. 32b gives details on competent appraisers to value property including the EMKI central registration (which is to contain all claims on the property, 1st lien, 2nd charge, etc…).
Recital 34: reference to “home MS” competent authority for supervision deleted.
Recital 44: Added: “Commission should report on options to respond to the wider challenge of overindebtedness….”
New definitions added: (rb) 'Special risk credit agreements' on residential immovable property are those that, due to their intrinsic product features, deviation from standard market practice or the economic environment pose specific risks to creditors or consumers in comparison to other alternative credit agreements; (rc) 'Advice' means the provision of personal recommendations based on the professional expertise of the adviser in respect of one or more transactions relating to credit agreements; (rd) 'Appraiser' means a natural or legal person who, in the course of his trade, business or profession, carries out valuations of residential immovable property or the land on which such residential immovable property is or could be situated.
Chapter 1 a: text about Financial education
Article 4 a Financial education of consumers 1. Member States shall ensure that measures are in place to support the education of consumers in relation to responsible borrowing and debt management, in particular in relation to credit agreements. 2. Member States shall ensure that all stakeholders are adequately involved in the design and development of these measures.
Article 5 paragraph 1: added “implementing the contract”
Article 9 – paragraph 1 – subparagraph 1: Member States shall ensure that general information about credit agreements is made available by creditors or, where applicable, credit intermediaries at all times in a durable medium or in electronic form and, in any case, is accessible in a web page or similar interface of the creditor or credit intermediary in a clearly audible or easily legible and printable manner.
Article 9 – paragraph 2 – subparagraph 2: 2. Member States shall ensure that the credit agreement cannot be concluded until the consumer has been provided in a durable medium with an offer binding on the creditor and has a sufficient period to compare it with other offers, obtain third party advice if necessary and assess its implications and take an informed decision on whether to accept the offer, regardless of the means of conclusion of the contract. The period of reflection after the offer shall be no less than 14 working days and includes the time during which a right of withdrawal is granted where Member States allow the contract to be concluded before expiry of the reflection period.
Article 9 – paragraph 5: a copy of the draft credit agreement free of charge will be provided (and no longer upon request of the consumer).
Article 9b (new): Added clause on tying: “Ancillary services: 1. Member States shall prohibit creditors or credit intermediaries from tying by making the offer of a credit agreement conditional upon the purchase of insurance or other financial products from a given provider specified by the creditor or credit intermediary except for the opening of a current account. 2. Member States shall prohibit creditors or credit intermediaries from tying by making the offer of a credit agreement conditional upon the provision of services by appraisers, notaries, legal advisers or any other provider specified by the creditor or credit intermediary.”
Article 12 – paragraph 2 a (new) Added: 2a. Any potential for negative amortisation shall be included in the total
Article 14 – paragraph 1: Added: Expert risk assessment shall not be replaced by quantitative parameters in automatic underwriting processes nor rely only on externally provided credit scores or on scores based only on credit history.
Article 14 – paragraph 1 a (new): 1a. Member States shall ensure that the assessment of creditworthiness shall be applied without discrimination to loans relating to residential immovable property located within their territory and shall include at least the following criteria: (a) the assessment shall not allow any reliance on an increase in the value of the property as a means of repaying the loan; (b) the assessment shall be made on the basis of the consumer’s current net disposable income, taking account of social benefits, debts and other financial commitments as well as foreseeable changes due to retirement during the term of the loan; where the assessment relates to a credit agreement under which the borrower will not occupy the property and which allows the borrower to rent the property, Member States may allow creditors to take account of reasonable projected rental income in carrying out the creditworthiness assessment; (c) the assessment shall be based on a realistic assessment of the repayment amount which shall be sufficient to repay the debt by final maturity at the fully indexed rate assuming a fully amortising repayment schedule and of the repayment structure which shall include foreseeable changes arising from the structure of the product, an allowance for increases in adjustable rates where such increases are permitted under the credit agreement, and where applicable an allowance for the impact of negative amortization on subsequent payments.
Article 18 – paragraph 2 – subparagraph 1: Member States shall ensure that creditors shall not impose any penalty on a consumer who exercises the right referred to in paragraph 1 and shall maintain the indemnity of the creditor while ensuring efficiency in the markets.
Article 18 – paragraph 2 – subparagraph 2: Member States shall ensure that the following provisions are complied with: (a) where the credit agreement is funded by callable instruments negotiated in regulated markets, the consumer is entitled to repay the credit agreement at a value determined by market conditions for the callable instrument; (b) where the credit agreement relates to a loan with a fixed interest rate for part or all of the term of the agreement and is funded by long-term means, the consumer is be entitled to repay the credit agreement: (i) free of charge after expiry of the fixed interest rate period; or (ii) before expiry of the fixed interest rate period, in cases where the consumer has a special interest, upon payment of compensation to the creditor for potential costs directly linked to early repayment of the credit; (c) in credit agreements not referred to in points (a) or (b), the consumer is entitled to repay the credit agreement within a period which is no longer than three months after giving notice to the creditor of his desire to do so. In the context of point (b)(ii), the existence of a consumer's special interest shall be recognised at least in situations involving involuntary loss of employment, need for mobility, serious illness or death. In the context of point (c), Member States may maintain a statutory or contractual compensation for early repayment may exist but shall not be higher than 1 % of the outstanding debt.
Article 18 a (new): Portability: 1. Member States shall ensure that lenders allow borrowers to keep a credit agreement when moving house provided that the value of the new property is sufficient to serve as the collateral required by the credit agreement and when the conditions required to consider collaterals as equivalents referred to in paragraph 2 have been fulfilled. 2. Member States shall adopt the measures appropriate to ensure that where under national law a credit agreement related to a residential immovable property located in another Member State is considered as equivalent to a credit agreement related to a residential immovable property on its territory for the purposes of being pooled in financial instruments traded in secondary markets, they shall also be considered equivalent for the purpose of paragraph 1. 3. In order to ensure consistent harmonisation of the right of the portability, EBA shall draft regulatory technical standards to further specify the conditions required to consider collateral as equivalent in accordance with the first paragraph of this Article. EBA shall submit those draft regulatory technical standards to the Commission by... 4. Power is delegated to the Commission to adopt the draft regulatory technical standards referred to in the first subparagraph in accordance with articles 10 to 14 of Regulation (EU) No 1093/2010.
Article 18 b (new): Conversion of foreign currency loans: 1. Member States shall ensure that where a credit agreement relates to a loan in a foreign currency, the consumer shall have the right to convert the loan into the currency of the Member State within a reasonable period. 2. Member States shall provide that the creditor should be entitled to obtain fair and objectively justified compensation for potential costs directly linked to the exercise of the right but shall not allow creditors to impose a penalty arising from the exercise of the right.
Article 18c (new): Payment flexibility: Member States shall ensure that creditors allow consumers to make payments which exceed the amount required by the amortisation structure of the loan contained in the credit agreement without penalty and thereby have the right to redeem in the future the payments scheduled according the amortization structure up to the value by which they have previously exceeded the required amount.
Article 18 d (new): Reverse agreements: Member States shall ensure that, in order to cover risks of aging or retirement, the parties to a credit agreement may agree to convert the credit agreement into a reverse mortgage or other credit agreement under which a sum of money is advanced or paid periodically to the consumer to allow access to equity in the residential immovable property and which will eventually be repaid from the sale of the residential immovable property.
Article 18 e (new): Switching of creditor: 1. Member States shall ensure that creditors may transfer credit agreements or portfolios of credit agreement to other financial institutions without the consent of the consumer as long as the loan conditions are not altered to the disadvantage of the consumer. This paragraph shall be without prejudice to Article 122a of Directive 2006/48/EC. Member States shall ensure that mortgages portfolios are transferable to a new lender without registration of a new mortgage deed for each loan in the transferred portfolio. 2. Member States shall ensure that consumers also have the right to transfer a credit agreement to a new creditor which is prepared to accept the transfer and which makes a binding offer to the consumer provided that: (a) the binding offer significantly improves the economic conditions for the consumer either by an improvement of at least 100 basis points in the interest rate or by an extension or reduction of more than a third in the length of the repayment period for the outstanding debt; (b) the creditor refuses to make a binding offer before the expiry of the offer made by the new creditor which at least matches the terms of the binding offer made by the new creditor; and (c) the creditor receives adequate compensation where appropriate according to national law. Member States shall ensure in such cases that the compensation does not constitute a penalisation of the consumer and that once a credit agreement has been in force for five years the compensation shall not be higher than 1 % of the outstanding debt.
Article 18 f (new): Switching of borrower: 1. Member States shall allow the transfer from a borrower to a consumer of a credit agreement which would be within the scope of Article 2(1)if it were transferred to the consumer in parallel to the sale of a property on condition that the creditor has carried out a creditworthiness assessment of the consumer in accordance with Article 14 and has not concluded that there is a negative prospect for his ability to repay and has provided the consumer with a binding offer prior to the transfer of the credit agreement. 2. Member States shall prohibit developers from tying the sale of a projected or existing property by making it conditional upon the transfer to the consumer of a credit agreement which would be within the scope of Article 2(1) if it were transferred to the consumer.
Article 18 g (new): Arrears and foreclosure: 1. Member States shall ensure that creditors exercise reasonable forbearance and make diligent efforts to reach a negotiated solution before initiating foreclosure proceedings in relation to credit agreements. 2. Member States may maintain or introduce requirements in relation to the process to be followed or the options which must be pursued prior to initiating foreclosure proceedings in relation to a property situated in their territory. In cases where the borrower has repaid a substantial part or the majority of the loan over a long period such options should include temporarily changing the contractual agreement between the creditor and the consumer. 3. Member States shall forbid penalties for default which are additional to the repayment of the outstanding portion of the loan where such default is the result of circumstances beyond the control of the borrower or where the penalty is not proportionate or is calculated taking into account the non-defaulted part of the loan. 4. Member States shall allow that the return of the collateral is sufficient to repay the loan at least where such a clause was expressly agreed by the parties to the credit agreement. 5. Member States shall ensure that where foreclosure proceedings are initiated the lender shall credit to the consumer as the value of the collateral a value at least as great as the most recent valuation carried out in conformity with the minimum requirements for the recognition of real estate collateral established in Annex VIII, part 2, point 8 of Directive 2006/48/EC. 6. Where residential mortgage lenders have full recourse to a consumer's assets after foreclosure proceedings are completed and outstanding debt remains, Member States shall ensure that seizure of wages, retirement pensions or equivalent distributions are limited so as to preserve a minimum income sufficient to maintain an adequate standard of living.
Article 18 h (new): European Mortgage Key Identifier: 1. Member States shall ensure that a European Mortgage Key Identifier (EMKI) shall be assigned to every new credit agreement. 2. The EMKI shall be a standard code expressed in alphanumeric characters that contains at least the following information: (a) the Member State where the property that serves as collateral is located; (b) the creditor who granted the credit; (c) the data to identify the property in a Register that offers public information on rights in residential immovable property; 3. The Commission shall be empowered to adopt delegated acts in accordance with Article 26 , to further specify the characteristics of the EMKI and the procedures for the assignment of the EMKI. 4. Member States shall ensure that the EMKI is noted in any designated Register that provides information on credit agreements. Such information shall be accessible for users.
Article -19: General prudential requirements: 1. Member States shall ensure that the local competent authorities formulate and publish standards applicable to loans related to residential immovable property in order to enable the effective identification and management of financial risk taking into account the specific features of their markets. Those standards shall contain at least : (a) a reference level for a prudent ratio of loan to value (LTV); (b) guidelines for the assessment of loan to income (LTI), debt to income (DTI) and loan to assets (LTA) ratios of the borrower; (c) reference levels for a prudent proportion of the loan book of an institution or in a market in relation to the ratios specified in points (a) and (b), taking into account individual, cumulative risks and the evolution of the market. 2. Member States shall ensure that local competent authorities have the necessary powers to monitor creditors' behaviour and require them to take progressive and proportionate measures in cases where the proportions referred to in point (c) are exceeded in order to manage the risks identified. Such binding measures may include specific reporting obligations, use of mortgage insurance or covered products, dynamic provisions, additional contributions to the deposit guarantee scheme, the imposition of firm limits on the loan to value ratio of new loans relating to residential immovable property located within all or a part of their territory made by a single creditor, a group of creditors, or all creditors.
Article -19 a (new): Special prudential requirements: 1. Member States shall ensure that the local competent authorities formulate and publish binding standards for different categories of credit agreements which constitute special risk credit agreements. 2. Those binding standards shall include at least: (a) additional information and risk warnings to be included in precontractual information relating to special risk products; (b) special prudential measures as described in Article -19(2). 3. Member States shall ensure that the following credit agreements are always deemed to be special risk credit agreements: (a) credit agreements where the loan is granted in a foreign currency; (b) credit agreements which allow for significant variation in interest payments during the term of the agreement; (c) credit agreements where it is agreed between the parties that the return of the collateral will be sufficient to repay the loan. 4. Member States shall ensure that local competent authorities have powers to specify additional features which shall be deemed to constitute special risk credit agreements within their territory.
Article -19 e (new): Stress-testing: 1. Member States shall ensure that the creditor carries out stress tests on the impact of increases in interest rates on the risk profile of credit agreements throughout the life adjustable rate credit agreements. Such stress testing shall consider at least a baseline scenario of 1 % increase of interest rate, be compared to historical evolution of interest rates for a period equivalent to the duration of the credit agreement, be coherent with the expectations of monetary authorities and in no case allow for negative expectations on the evolution of interest rates.
Article 31 – paragraph 2 – point a: (a) an assessment of compliance with the ESIS and consumer use, understanding and satisfaction thereof;
Article 31a (new): Further initiatives on responsible lending and borrowing: By ...*, the Commission shall submit a comprehensive report assessing the wider challenges of private over-indebtedness. The report shall identify the related markets, products and actors in the credit supply chain and analyse the different options to tackle these problems including macroeconomic measures related to credit evolution, its limits and uses, structural measures to protect savers in deposit institutions and measures addressed to highly leveraged institutions and the consequent vulnerabilities in the financial system. The report shall be accompanied, where appropriate, by legislative proposals.
(See attachments below)
