The Mortgage Credit Directive (“MCD”) came into force on 21 March 2014 with the overall aim to create an EU-wide single residential mortgage credit market with a high level of consumer protection. Such legislative intervention is to be considered as a response to the financial crisis that showed that irresponsible behavior by market participants can undermine the foundations of the financial system, leading to a lack of confidence in particular on the part of consumers.
The MCD is thus very oriented towards the protection of consumers against excessive indebtness by developing 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 inclusion2.
According to article 3, the MCD applies to:
- credit agreements secured either by a mortgage or by another comparable security commonly used in a Member State on residential immovable property or secured by a right related to residential immovable property; and
- credit agreements the purpose of which is to acquire or retain property rights in land or in an existing or projected building.
Regarding the negative scope of the MCD, there are on the one hand a range of agreements that are explicitly excluded and on the other hand, Member States may decide on a discretionary basis not to apply the MCD to certain other products, including credit agreements related to a purchase for rental use, credits granted to a restricted public free of interest or at lower than market rates as well as bridging loans3.
The scope ratione personae of the MCD includes creditors, credit intermediaries and appointed representatives4 (hereinafter collectively referred to as the “Creditors”).
With the objective of an efficient protection of the consumer when concluding a credit agreement falling under the scope of the MCD, the latter addresses a series of obligations comparable to those provided for by directive 2008/48 EC on credit agreement for consumers5, which may be presented as follows:
Pre-contractual requirements: The consumer must be given personalized information without undue delay (after having supplied information on his needs, financial situation and preferences) and in good time before he is bound by any credit agreement or offer. Such information must in addition be given in a prescribed form, the European Standardized Information Sheet (ESIS).
Moreover, consumers will be allowed a reflection period (at least 7 days) in order to compare offers available on the markets, assess their implications and make an informed decision. In this regard, it can be noted that Member States are given flexibility to provide such time to the consumer either in the form of a reflection period beforehand, or in the form of a withdrawal period after its commitment, or as a combination of the two.
Creditworthiness assessments: Before granting credits, Creditors will have to assess the proposed borrower’s income and expenses as well as its financial and economic circumstances in order to ensure that it will properly honor its obligations at the end of the credit agreement terms.
Conduct of business rules: Creditors, when conducting business toward consumers, are required to act in an honest, fair, equitable and professional way while taking account of the rights and interests of consumers.
In addition, the MCD requires Member States to ensure that an adequate competence and knowledge in relation to manufacturing, offering or granting of credit agreements are maintained among Creditors.
Lastly, Member States will have to adopt measures encouraging Creditors to exercise reasonable forbearance before foreclosure proceedings are initiated
Property valuation: According to the MCD, Member States shall ensure that reliable standards for the valuation of residential immovable property for mortgage lending purposes are developed within their territory, and that such valuations are sufficiently independent from the credit underwriting process.
Variable rate credits: For credit agreements with a variable rate, indexes or reference rates used to calculate the borrowing rate will henceforth have to be clear, accessible, objective and verifiable by the parties to the credit agreement and the competent authorities. Thus, general references to “market rates” will no more be sufficient.
Early repayment: Member States should ensure that consumers have a right to early repayment of their loan, i.e. before the end of its term, without facing sanctions. Member States may however impose restrictions on that right including time limitations on the exercise of the right, different treatment according to the type of borrowing rate (fixed or variable) or restrictions with regard to the circumstances under which the right may be exercised.
Moreover, Creditors may be entitled to fair and objectively justified compensation for potential costs directly linked to early repayment of the loan. Subject to those conditions, Member States may provide that the compensation may not exceed a certain level or be allowed only for a certain period of time.
Impact of the MCD and transposition into Luxembourg law
It can firstly be noted that although the Luxembourg Consumer Code regulates credit agreement involving a consumer, it explicitly excludes credit agreements for consumers secured by mortgage6. Thus, in the absence of a proper legislation, mortgage credits are for the time being governed by general contract law as well as by specific provisions on credit agreements. In this regard, Creditors will, through the implementation of the MCD, face a set of new legally binding provisions that might animate them to reconsider their internal practices.Considering the number of discretionary matters contained in the MCD according to which Member States retain discretion as to whether and how to apply certain of its provisions, it will be difficult to predict the consistence of its transposition into Luxembourg law, but also interesting to see how the Grand-Duchy will design its draft bill of transposition, notably with regard to property valuation and early repayment conditions.The MCD shall be transposed by 21 March 2016, and shall not apply to credit agreements existing before such date. From a Luxembourg point of view, no draft bill is yet available. It was initially announced to be submitted to the Luxembourg Parliament during March 20157.