The recent regulations transposing the Mortgage Credit Directive 2014/17 into Irish law are raising a host of issues for creditors, including, in particular, banks and credit unions. Some of these issues are familiar from other legislation relevant to property lending while others are specific to the new framework. Given that the new regulations are already in force, creditors will have to decide how to deal with these issues sooner rather than later.
Consumer credit has long been regulated in the EU, in particular by the Consumer Credit Directive 87/102/EEC, and more recently by its successor, the Consumer Credit Directive 2008/48 ("CCD"). Among other things, the CCD contains specific provisions on advertising concerning credit agreements for consumers as well as a list of standard information that must be included in an advert whenever certain conditions are met. However, the CCD only applies to consumer credit and does not cover other forms of credit such as mortgage products and services. It also generally only applies to credit agreements involving a total amount of credit from EUR 200 up to EUR 75 000. The European Communities (Consumer Credit Agreements) Regulations 2010 transpose the CCD into Irish law.
Prior to the MCD, at EU level, consumer protection in the area of mortgage credit was by way of Commission Recommendation 2001/193 on precontractual information to be given to consumers by lenders offering home loans. That Recommendation, which remains in force, endorses a pan-European Voluntary Code of Conduct on Pre-contractual Information for Home Loans. Among other things, it entitles consumers to receive a personalised European Standard Information Sheet prior to the conclusion of the loan contract.
Nevertheless, the exclusion of mortgage credit and high-value credit agreements from the CCD's scope means that there was a significant gap in EU consumer protection law applicable to property loans. The MCD seeks to remedy this. It was transposed into Irish law by the European Union (Consumer Mortgage Credit Agreements) Regulations 2016 (the "MCD Regulations”) (here)
Overview of the MCD Regulations
The MCD Regulations contain provisions impacting on, among other things, conduct of business requirements, the advertising and marketing of credit products, the precontractual information provided, ways to assess product suitability and borrower creditworthiness, advice standards, responsible borrowing, and issues relating to the framework for credit intermediaries, including disclosures, registration, authorisation and supervision.
The MCD Regulations apply to certain types of credit agreement where the person to whom the credit is provided is a consumer. The definitions of both the terms "credit" and "consumer" are the same as those set out in the CCD regulations. Specifically, "credit" means a deferred payment, loan or other similar financial accommodation. For its part "consumer" means a natural person who is acting for purposes outside his or her trade, business or profession. Again reflecting the position under the CCD Regulations, it appears that contracts concluded partially for non-consumer purposes will still fall within scope, as long as the consumer purpose is predominant.
Once an agreement is a consumer credit agreement, the MCD Regulations have a very broad scope and apply to any agreement:
- that is secured by a mortgage or by another comparable security on residential immovable property or secured by a right related to residential immovable property there is no need for the agreement itself to relate to residential immovable property; or
- that has as its purpose to acquire or retain property rights in land or in an existing or projected building there is no need for the building to be a residential building.
Buy-to-let loans and bridging loans are both in-scope. However, the MCD Regulations do not apply to: certain equity release credit agreements or other equivalent specialised products; home reversions which have comparable functions to reverse mortgages; lifetime mortgages, which do not involve the provision of credit; and certain niche credit agreements.
Advertisements and Unfair Commercial Practices
In addition to setting out, as a general principle, that advertising and marketing communications concerning credit agreements must be fair, clear and not misleading, the MCD Regulations set down requirements regarding the standard information to be included in advertising. These requirements resemble those set out in the CCD Regulations, but are generally more detailed.
Subject to some exceptions, the MCD Regulations prohibit tying practices but allow bundling practices. While both tying and bundling practices involve offering or selling the credit agreement in a package with other distinct financial products or services, in a bundling practice the credit agreement is also made available to the consumer separately, whereas in a tying practice it is not.
Creditors must provide clear and comprehensible general information about a credit agreement either on paper or electronically, including information on the types of credit available, its characteristics, the conditions of the credit and its costs. The general information must include a representative example of the total amount of credit, the total cost of the credit to the consumer and the total amount payable by the consumer. It must also include the Annual Percentage Rate of Charge ("APRC"), namely the total cost of the credit to the consumer, expressed as an annual percentage of the total amount of credit. Further general information requirements relate to the rights and obligations arising under the credit agreement, including a warning on the possible consequences of non-compliance and information on the right of early repayment.
Creditors must provide standard precontractual information for borrowers through the European Standard Information Sheet ("ESIS") which is contained in Schedule 2 of the MCD Regulations. The purpose of this information is to permit the consumer to compare the credits available on the market, assess their implications and make an informed decision on whether or not to conclude a credit agreement.
The MCD Regulations set out when the ESIS must be provided to the consumer. In particular, it must be provided when a binding offer is made to the consumer and the consumer then has a 30 day reflection period during which he or she may accept the offer at any time. During this period, the offer is binding on the creditor.
Credit Worthiness Assessment
A creditor must carry out a thorough assessment of a consumer's creditworthiness before concluding a credit agreement for the purpose of verifying the likelihood that the consumer will meet his or her obligations under the credit agreement. The consumer must provide much of the relevant information and the credit must specify clearly and simply the information that the consumer needs to provide and the applicable time frames.
The MCD Regulations contain particular requirements about the valuation of residential property and a creditor must use reliable standards, such as those developed by the International Valuation Standards Council, the European Group of Valuers' Associations or the Royal Institution of Chartered Surveyors, when carrying out a valuation.
The EBA has published Guidelines on creditworthiness assessment which provide greater detail regarding creditworthiness assessments, (here).
Once the creditor is ready to propose a credit agreement to the consumer, it must provide the consumer with adequate explanations on the proposed agreement and ancillary services so as to allow the consumer to assess whether these are adapted to his or her needs and financial situation.
The explanation must include: the required pre-contractual information; the proposed products' essential characteristics; the specific effects of the proposed product on the consumer, including the consequences of default; and whether each component of any ancillary bundled component can be terminated separately and the implications of doing so.
Sound Execution of Credit Agreements and Related Rights
A consumer has the right to repay his or her credit agreement early and where he or she seeks to do so the creditor must provide the consumer with the information necessary to consider this option.
This information must at least quantify the implications for the consumer of early repayment.
In certain circumstances a creditor may be entitled to fair and objective compensation for possible costs directly linked to the early repayment, however the amount of compensation must not exceed the creditor's financial loss.
A creditor must give the consumer advance notice of any change in the borrowing rate, stating at least the amount of the payments to be made after the new borrowing rate takes effect and, in cases where the number or frequency of the payments changes, particulars of those changes.
Interaction with other Legislation
Several issues covered in the MCD Regulations are already addressed in other measures, including the Consumer Credit Act 1995, the Central Bank of Ireland's Consumer Protection Code and its Code of Conduct on Mortgage Arrears. The MCD Regulations contain a number of specific provisions dealing with the interaction between its requirements and those contained in overlapping legislation.
One of the most notable things about the MCD Regulations is their scope. In particular, as long as the person receiving the credit is a consumer, the Regulations apply to an extensive range of agreements including but not limited to those secured by a mortgage on residential property. In particular, second charge mortgage lending, loans to fund deposits, buy-to let loans, and some home renovation loans may fall within scope.
The MCD Regulations resemble the CCD Regulations in a number of ways and creditors are likely to come across a number of familiar difficulties, including in particular, determining whether or not a person is acting as a consumer in certain borderline situations and the extent to which the MCD Regulations cover guarantees.
Other difficulties arise out of the specific requirements of the MCD Regulations. In particular, Irish creditors may well struggle with the requirement to inform the consumer of a change in the borrowing rate under a credit agreement, before the change takes effect. In this context it is worth noting that it is an offence to fail to comply with this (and several other) requirement(s) contained in the MCD Regulations.