Following the European Banking Association’s (EBA) final report confirming its decision to specify the formula for the benchmark rate under Annex II to the Mortgage Credit Directive (MCD), the EBA has published the formula on the Official Journal of the EU. This will come into force on 24 June 2016, 20 days after its publication.
The MCD specifies the information that mortgage creditors should provide to consumers, including personalised information, in order to enable the consumer to compare and reflect on the characteristics of credit products. The MCD requires mortgage creditors to provide this pre-contractual information to the consumer in the form of the European Standardised Information Sheet (ESIS). The MCD also provides that the creditor should calculate illustrations of the annual percentage rate of charge (APRC) and of a maximum instalment amount in certain circumstances ‘based on the highest value of any external reference rate used in calculating the borrowing rate where applicable or the highest value of a benchmark rate specified by a competent authority or EBA where the creditor does not use an external reference rate’.
Whilst the EBA is not a rate-setting authority, and as such has not previously specified a benchmark rate that can be used by creditors, in order to give effect to the required rate under the MCD, the EBA developed a formula with which mortgage creditors are to calculate the rate. By producing a formula instead of a single rate, the EBA seeks to ensure that its rate is representative of national circumstances. As input, the formula uses an underlying rate that is specific to each Member State, either the European Central Bank (ECB) rate for Eurozone countries or the Member State’s central bank rate for non-Eurozone countries.