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Mortgage Credit Directive

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Iain Ramsay

http://www.kent.ac.uk/law/people/academic/Ramsay,_Iain.html

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[Photo credit: http://www.LendingMemo.com]

This post discusses the  EU Mortgage Credit Directive (2014) . This Directive imposes greater ex ante controls on the granting of mortgage credit. Creditors must make a ‘thorough creditworthiness assessment’ of a prospective borrower (art.18) which may include cross-border access to credit databases.  Credit grantors must provide adequate explanations of proposed agreements so that a consumer is enabled to assess whether the agreements meet his needs and financial situation.  A standardised pre-contractual  European information sheet must also be provided ‘in good time’ before entering into the agreement. The Directive also regulates standards for property valuation, arrears and foreclosure procedures,  and foreign currency loans. Member states must promote financial education measures for consumers in relation to responsible borrowing and debt management and the Commission must deliver a report by early 2019 on ‘the wider challenges of private over-indebtedness directly linked to credit activity’ (art 45). ‘Irresponsible behaviour by market participants'(Recital3) as well as the conventional objective of reducing the barriers to the creation of an efficient internal credit market (Recital 2) are the rationales for the Directive with its objectives being to achieve ‘a more transparent, efficient and competitive internal market, through consistent, flexible and fair credit agreements relating to immovable property, while promoting sustainable lending and borrowing and financial inclusion, and hence providing a high level of consumer protection’.

The Directive represents a step change from the earlier 2008 Consumer Credit Directive which applies to unsecured consumer credit.  The Mortgage Credit Directive has a stricter and more specific  creditworthiness assessment process than the Consumer Credit Directive with an obligation on a creditor not to grant credit if a consumer does not meet the test. Greater attention is paid to ensuring that creditors have properly trained staff and supervision of these standards by regulators.

The Mortgage Credit Directive reflects post-crisis politics. The introduction of the Mortgage Credit Directive took place against the background of international post-crisis measures of consumer protection in financial services and the adoption by the G20 of high level principles on financial consumer protection  in  2011, whose content was partly influenced by international consumer groups. These principles are ‘voluntary’ but the document requests that all G 20 members ‘and other interested economies should assess their national frameworks for financial consumer protection in the light of these principles’. The initial Commission draft of  the Mortgage Credit Directive was amended significantly by the European Parliament  Economic and Monetary Affairs Committee (rapporteur Antolin Sanchez Presedo) to include greater specificity in responsible lending obligations and  provisions on arrears and foreclosures.  A high level of consumer protection, preventing another mortgage crisis and addressing the problems of indebted homeowners drove the amendments. References are now made in the Directive to the G-20 principles (e.g. Recital 3).

The  legislative outcome of the Mortgage Credit Directive contrasts with the  Consumer Credit Directive. The original draft of the Consumer Credit Directive was introduced in 2002 as a comprehensive directive on consumer credit including a ‘suitability of credit’ obligation of responsible lending based on Belgian law. Financial interests operating through the European Parliament, and their national governments succeeded in gutting many of the provisions of the original Directive. The Directive’s proposals became associated with a paternalistic image of consumer protection during a period when the ‘democratisation of credit’ was in the ascendancy. Ironically the modest final Draft of the Directive came into force a few months before Lehman brothers crashed and along with it the confidence in the idea of credit as ‘the lubricant of economic life’. These two Directives create different regimes for responsible lending in unsecured and secured credit. Such a distinction is not justified particularly since problems with unsecured credit may be most significant for individuals with lower incomes.

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