Mortgage credit directive and the UK market

Mortgage credit directive

Mortgage credit directive effects

  • Why borrowers over 50 are ‘housebound’
  • The Bulgarian mortgage broker
  • How to find out why you got a ‘no’
  • The death of the mortgage bogof
  • Your Euro mortgage
  • Why your Spanish mortgage is a problem
  • Why you should not pay a tied mortgage broker
  • Why we all need to go to mortgage school
  • Bye Bye to the proc fee

The mortgage credit directive 2014/17/EU was released in February 2014 as part of the ongoing drive for the European Parliament to standardise as much legislation as possible across the EU.

The agreements under the directive are scheduled to go into place in the UK in March 2016.

What affect will the Mortgage Credit Directive have on the UK market?

There is no doubt there will be a number of affects, some will be minor, some may be major in terms of cross-border trading.

One issue that has been picked up by the UK press relates to mortgage affordability and its effect on current mortgage holders looking to make changes. We are already aware of couple of smaller building societies who were trying to use UK rules to accommodate borrowers who have affordability or interest only issue. We understand that these building societies have been put off of such accommodations by the provisions within the MCD.

Having read the MCD document in one of its 22 official published languages (we chose English), here is our overview view of the main points.

Overview of the Mortgage Credit Directive – the Bulgarian Broker

The bulk of the MCD document consists of paragraphs which state the obvious. There are a few areas that are interesting to the UK mortgage borrower, and we outline these below.

The standardisation of the provision of mortgage advice and the way mortgage lending is handled across the European Union may make it easier for mortgage lenders to work cross-border. We do wonder however how much difference this will make in practice when the bulk of our lenders are already multi-national companies.

One aspect of the MCD which is interesting is that it allows advisers who are qualified and authorised in one member country to operate in another member country. Does this mean that UK mortgage brokers will shortly be in competition with French brokers, Italian brokers, or Bulgarian brokers?

MCD and mortgage affordability – over 50s trapped?

Perhaps the section of the MCD which has gathered the most press in the UK.

Section 55 states that it is essential that the consumer’s ability to repay credit is assessed and verified. Further it states that allowance should be made for future events during the term of the agreement such as a reduction in income. It further states that the value of the property should not be a factor in determining credit worthiness for affordability.

This section gives member states the option to set limits on loan to value or loan to income ratios.

The text in section 55 in our view is directly contrary to the transitional arrangements set out in the UK mortgage market review last year. This allowed lenders to take a practical approach on issues such as affordability where an existing borrow was already being seen to manage a mortgage contract in a satisfactory fashion.

The transitional arrangements allowed a mortgage lender to advance funds to a borrower who was for instance downsizing on the basis that they could evidence management of their existing lending.

If section 55 means that that lender would have to do treat the borrower as a new risk based on the current situation alone, this could cause issues for mobility of UK mortgage holders particularly those nearing retirement.

Those concerned by the text in section 55 may wish to refer to the Financial Stability Board’s Principles for Sound Residential Mortgage Underwriting Practices.

MCD and credit scoring – now you know about your ‘no’

Perhaps the best result for the borrower to come out of the MCD is section 61 relating to rejections of an application for credit.

The MCD states that where a decision to reject an application for credit is based on data obtained through a database, the consumer has the right to access the information and personal data concerning him.

This means that where a lender fails the case on credit score we would now expect them to have to advise the borrower where they got the information for the credit score and why the case has been failed. Currently lenders do not discuss specific reasons for failure with either borrowers or brokers.

This new requirement around credit rejection is most clearly outlined in article 18 section 5C of the MCD.

This simply states that the borrower needs to be told by the lender why a credit score has failed and which credit reference agency has been consulted.

MCD and consumer knowledge – get to mortgage school

The MCD suggest that member states should promote measures to support the education of consumers in relation to responsible borrowing and debt management in particular relating to mortgage credit agreements.

This is laudable and we hope in the UK this task is not left to the much derided and ridiculously expensive Money Advice Service.

MCD and bundling or tying of additional products to mortgages – end of the BOGOF

Lenders across the European Union have a habit of trying to sell additional financial services products on the back of mortgage contracts. They do this by ‘tying’ – where one product has to be bought in order to obtain another, or ‘bundling’ – where products are grouped together on a ‘special’ deal. You may know this practice colloquially as BOGOF.

The MCD expects that Member States should monitor their own market to ensure the bundling practices do not distort consumer choice or competition. Further tying practices should not be allowed unless the associated product could not be offered separately.

MCD and foreign currency loans – your Euro mortgage

There is obviously the opportunity for lending emanating from one member state in one currency and being applied to a property in another member state in a different currency.

Such lending obviously carries exposure exposure to exchange rate risk, and the MCD states that the risk could be limited by giving the consumer the right to convert the currency of the credit to limit such exchange rate risk.

Most mortgage brokers would consider foreign currency loans to be too complex an area in which to advise in a regulated market – therefore uneconomical business.

MCD and independent advice – don’t pay your tied broker

In the UK we still have both whole of market (independent) mortgage brokers and other brokers that are offering tied advice (tied meaning that products come from one or a few providers).

The MCD is questioning whether tied intermediaries collecting fees from the consumer is in the interests of that consumer. Section 69 states that member states should be free to maintain or impose restrictions on the possibility to charge fees by mortgage advisers who are tied.

Our view is that borrowers should not be asked to pay for advice that is not independent (whole of market). Indeed the MCD in section 63 states that it’s appropriate to ensure that member states impose safeguards where advice is described as independent ensuring that such arrangements fit with the consumer’s expectations of such advice.

Article 15 states that mortgage advisers who are tied to a small number of borrowers shall provide the names of the borrowers for which the adviser is acting.

Article 8 provides provision for member states to prohibit the use of the terms ‘advice’ and ‘adviser’ where tied intermediaries are operating.

MCD – commission and fees – bye bye proc fee?

The MCD states advisers who receive commission from one or more lenders will be required at the borrower’s request to provide information on the difference in levels of commission payable by different lenders providing products that are being offered to the borrower. The borrower has the right to request such information.

In practice the key features document currently provided by mortgage advisers in the UK does carry details of the commission (procuration fee) to be paid. If the borrower is provided with details of two products from two different mortgage lenders, commissions on both products are therefore disclosed.

What we do not have to do currently is disclose commissions payable on products we are not recommending to the borrower and we hope that continues to be the case. Any other arrangement would be an unnecessary complication in our view. Mortgage brokers are already prevented by existing legislation from disadvantaging a borrower to receive more preferential commission.

Chapter 3 article 7 section 4 further relates to fees and commissions.

In particular it states that member states may prohibit or restrict payments from a consumer to a creditor or credit intermediary prior to completion of a credit agreement.

In the UK is commonplace for both lenders and advisers to levy some charges prior to completion. We expect that this article 7 is directed more at allowing member states which restrict this practice to continue doing so, rather than encourage those that do not, such as the UK, to impose restrictions.

Section 4 states that where advisory services are provided, remuneration of the staff should not prejudice their ability to act in the consumer’s best interest. Particular mention is made of sales targets – the section even goes as far as to suggest that member states may ban commission paid by the Lender to the credit mortgage broker.

We wonder whether this means the eventual end of the procuration fee. If so the mortgage market may go the way of investment market where any advisory fees are clearly at the full cost of the borrower. We suspect lenders will keep any procuration fees in their own pockets rather than benefiting the borrower if this were to come to pass.

MCD and EU wide credit history – danger of the Spanish Mortgage

Article 21 states that each member state should ensure access to all Lenders from all states to databases used in that member state.

This would mean that information on a credit file held in Spain about a Spanish mortgage would now be available to UK lender considering a UK borrower.

This seems to us a particular complication for some borrowers – particularly those who we often deal with that have come into the UK from other member states to make their home here.

This provision and its impacts needs to be considered carefully.

MCD and property valuation

Section 26 of the MCD says that member states should ensure that reliable valuation standards are in place.

This section talks about standardisation of valuation procedures which could, as we often seen before, mean extra work and extra cost for the valuers.

We expect any extra cost to be passed on to the consumer.

MCD and buy to let mortgages

The current position is that provision is made within the MCD for buy to let mortgages to be excluded from the legislation, as indeed such contracts are from UK mortgage regulation.

We believe that the regulation of buy to let mortgages would be extremely complex and it is right that they continue to be excluded.

MCD and advisers operating across Europe

The mortgage credit directive allows for mortgage advisers who are authorised and regulated in one member state to operate in all other member states once notice has been given to their home regulator. Article 32 specifically gives freedom to mortgage advisers to provide services across the entire territory of the European Union.

We wonder whether it will be attractive for a Spanish mortgage broker, for example, to try to break into the UK market. Or indeed easier for UK brokers to handle mortgages for British nationals in Spain.

Brokers who are looking to branch into new territories will need to upgrade their professional indemnity insurance accordingly and this may prove prohibitive for some of the smaller brokerages whilst providing an opportunity for some of the larger networks.

Those brokers that do set up to operate in new territories need to ensure they are doing regular business as article 33 allows for authorisation to operate in another member state to lapse if it is not used over six months.

Mortgage credit directive and second charge lending

Second charge lending, is generally known as a secured loan in the UK. This is a loan secured on your property in addition to the main mortgage you already have in place. The main mortgage is secured on a first charge, additional loan on a second charge which sits behind the first charge in priority in the event of sale will stop

Providers and advisers in the second charge lending market have been regulated under consumer credit legislation. As a result of the mortgage credit directive the FCA has decided these firms should now be brought under the umbrella to become FCA regulated.

What does this mean for secured loans?

FCA regulation is more expensive for providers and advisers so it is unlikely that costs to the borrower will be unaffected.

Since FCA regulation is more comprehensive than CCL regulation second charge lending will be more difficult to obtain from March 2016.

Glossary of terms

There are terms used in the MCD which are different from the terms we tend to use in the UK. Here is our understanding of the equivalent UK terminology.

  • Credit intermediary = mortgage adviser
  • Creditor = mortgage lender
  • Consumer = borrower
  • ESIS = KFI key features document
  • Credit worthiness databases = credit reference agencies (e.g. Experian/Equifax)

For anybody who has found this article fascinating and wants to know more here is a link to official documentation of the Mortgage Credit Directive 2014/17/EU

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