Treasury supports CML views on Euro mortgage directive
Published: 1 June 2011 | Author: Bernard Clarke
We welcome the Treasury’s decision to support our lobbying on controversial proposals for a European directive on lending and borrowing. In the last week, the Treasury has shared its proposed amendments to the directive, which support our work on behalf of members to persuade the European Parliament to address concerns about the impact of the proposed directive.
A key area of concern for lenders is that the proposed directive, as drafted, would capture buy-to-let mortgages as well as lending on properties that are used for both residential and commercial purposes. Neither are regulated in the UK, and we believe it to be unnecessary because it is commercial, rather than residential, lending.
Unlike residential mortgages, which are assessed on the income of the borrower, the affordability of buy-to-let loans is based on rental income. However, calculating affordability on the basis of rental income is outside the scope of the directive and does not recognise the commercial nature of buy-to-let mortgages.
The Treasury supports our view that buy-to-let lending should be excluded from the directive.
We oppose the requirement to provide borrowers with a European standardised information sheet on mortgage credit, as set out by article nine of the proposed directive. We support pre-contractual disclosure of information to consumers, and it has been a requirement for UK lenders to provide a ‘key facts’ illustration to customers since 2004. Introducing the European information sheet in this country would cost borrowers and lenders tens of millions of pounds, yet deliver no obvious benefits to UK consumers.
The Treasury proposes that European countries should be able to use their own disclosure formats as long as they provide the right information for borrowers.
Article 14(2) of the proposed directive creates a legal obligation on lenders to refuse credit in the event of a negative assessment of creditworthiness. In our view, however, this could result in the unjustified refusal of a mortgage in circumstances in which a UK lender may be prepared to consider one. Examples could include young professionals with highly predictable rising incomes, or first-time buyers with a third party guarantee. We are also concerned that it could conversely create a right to a mortgage where there is a positive assessment of creditworthiness, which could lead to litigation from consumers and uncertainty.
The Treasury is suggesting that article 14(2) should be deleted from the directive.
We are also concerned about the requirement in the proposed directive for lenders to give detailed reasons for refusing to offer a mortgage to a prospective customer. Again, this could lead to litigation and create legal uncertainty, and would certainly add disproportionately to administrative requirements and costs. And, in cases where fraud is suspected, giving reasons to an applicant for refusing a mortgage could provide useful information to apply to another provider. A potential fraudster would know exactly why his original application had been declined.
We are particularly concerned about proposed requirements for the lender to explain the logic in automated decision-making processes. This could be difficult to communicate in ways that customers would readily understand. For commercial reasons, lenders are also keen to protect information about automated systems.
The Treasury accepts that lenders should provide information to applicants but favours removing requirements to provide a detailed explanation.
The proposed directive could effectively prevent lenders providing advice on their own products. Article 17 requires someone giving advice to a customer to "consider a sufficiently large number of credit agreements available on the market". We believe this would require consideration of products outside of the lender’s own range which would be unrealistic. Since 2005, lenders have been increasingly providing advice to borrowers in the UK. In 2010, 49% of all mortgages sold direct by lenders were sold with advice, some 26% of the overall market.
The Treasury supports retaining consumer choice of advice from a lender or from an intermediary as long as it is clear what range of products is being advised on.
We are concerned about the range of delegated acts in the directive. This would allow the European Commission to change the directive without consultation with stakeholders or drawing up an impact analysis or cost benefit analysis. There would be very limited opportunity for the European Parliament or Council to consider any proposals, even though some of these measures could have significant consequences. Among these is how the affordability of the customer is assessed, which is central to the decision of offer a loan and changes to the information given to customers.
The Treasury supports our view that future changes to the mortgage directive should be subject to full scrutiny.
On behalf of lenders, we support:
- A principles-based approach to European regulation, recognising there are significant differences between national mortgage markets. Introducing reforms without seeking to align detailed rules across Europe is most likely to produce a better result for consumers.
- A proportionate approach to regulation, where the benefits for consumers are weighed against the costs of introducing new rules. Lenders already face new capital and liquidity requirements, and the need – and impact – of additional new conduct of business rules should be carefully assessed against this backdrop.
- Measures that reinforce the responsibilities of customers, as well as lenders. There should be proper recognition that the decision to borrow is made by the customer.
The timetable for the European directive remains unclear but we could be nearing a final version towards the end of 2011. At that stage we will need to consider how the proposals differ from the FSA’s proposals which should also be clearer later this year and the extent to which UK regulation will need to be changed to align with the directive. It is important for the mortgage market to have a coherent set of regulatory proposals that do not require expensive piecemeal changes which will not benefit consumers.
Finally, we are not convinced by EU aspirations to use regulatory reform to try to create a single European market for mortgages. Many systemic and cultural differences in national markets exist that the directive cannot address. In our view, neither lenders and intermediaries nor consumers have any significant appetite for lending or borrowing across national boundaries.