The Mortgage Credit Directive (2014/17/EU) (the “Directive”) came into force on 21 March 2014. The Directive’s purpose is the creation of a single residential mortgage credit market in the EU with a high level of consumer protection.
The Directive applies to credit agreements entered into with consumers that are secured by a mortgage (or equivalent security) on residential immovable property and to credit agreements the purpose of which is to acquire or retain property rights in buildings or land. A ‘consumer’ is defined as a natural person acting outside their trade, business or profession.
The Directive will have to be transposed into national law by March 2016.
The following are the main provisions of the Directive:
- Pre-contractual information:- Specific information will need to be provided to consumers at the pre-contractual stage including the identity, status, capacity and remuneration of any credit intermediary involved in the application. Lenders will be obliged to provide information to consumers in a prescribed form, the European Standardised Information Sheet (ESIS) to assist consumers in comparing lenders and products.
- Creditworthiness assessments:- Lenders will be required to carry out a rigorous assessment of the proposed borrower’s income, expenses, financial and economic circumstances before granting credit. The remuneration of staff involved in such assessments cannot be made contingent on the number of applications approved.
- Conduct of Business rules:- Lenders and their intermediaries must act honestly, fairly, transparently and professionally, taking account of the rights and interest of consumers. Member States are required to ensure that lenders and their intermediaries possess and maintain an appropriate level of knowledge and competence concerning the manufacturing, offering or granting of credit agreements.
- Passporting of credit intermediaries:- Once authorised in their home Member State, a credit intermediary will have the right to operate in any Member State.
- Arrears and foreclosure:- Member States will have to adopt measures to encourage creditors to exercise reasonable forbearance before foreclosure proceedings are initiated.
The Directive provides that Member States retain a discretion as to whether and how to apply certain of its provisions and the Department of Financial held a public consultation in that regard late last year. While the outcome of that consultation remains to be seen, the following discretionary provisions are likely to attract considerable attention:
- Buy-to-let Loans – Member states have the option of declining to apply the Directive to ‘buy-to-let’ loans. If a member state elects to exempt ‘buy-to-let’ loans, they must instead apply an alternative appropriate national framework to such transactions.
- Banning commission – To further militate against the prospect of a lender’s remuneration structure potentially disrupting staff from acting in the best interests of consumers, member states can elect to ban commissions paid by the creditor to the credit intermediary.
- Early Repayment: While the Directive permits consumers to repay their loan before the term expires, Members States may impose restrictions on that right. In addition, Member States have a discretion to allow creditors to charge for early repayment to cover any losses directly arising from the early repayment.
- Reflection Period: The Directive provides for a minimum period of 7 days to allow consumers to compare offers, assess their implications and make an informed decision. However, Member States must decide whether this will be either a reflection period before the conclusion of the credit agreement or a period for exercising a right of withdrawal after the conclusion of the credit agreement or a combination of the two.