Rome 1 regulation on applicable law: implications for mortgage lenders

The EU Rome 1 regulation intended to embody the Rome 1 convention on applicable law in cross-border contracts had initially attracted little attention from mortgage lenders. Various concerns then surfaced in connection with the draft regulation, however, and the CML took action to formulate these and press for their alleviation. It appears that the position has been successfully resolved.

Note: the UK chose to opt out of the regulation on tactical grounds and is, therefore, not currently bound by it. Having secured concessions in the final draft of the regulation the UK Government  consulted on a proposal to opt in to the regulation to avoid unnecessary legal complexity in relations with other member states. The CML indicated its support for a UK opt in. The Government has now announced that the UK will opt into the regulation from 17 December 2009.

The particular concerns focused around the requirement that professional-consumer contracts be undertaken under the law of the consumer's habitual residence. There was an exemption for loan security but, arguably, not for the loan contract itself. This could have created problems for mortgage lenders lending across borders with the possibility of loan documentation under one jurisdiction and loan security under another.

These problems appeared to have been resolved in the final version of the regulation approved in December 2007, though this has of course not yet been tested in the UK courts.

It appears that the position for mortgages will be essentially the same as under the Convention with the parties able to choose the applicable law for contract and security (Article 4.1(c), Article 6.2.), but with the obligation to ensure that the consumer is not disadvantaged in terms of the rights they would have enjoyed within their own jurisdiction.