Lender concern over unhelpful European report
Published: 10 August 2011 | Author: Bernard Clarke
Lenders in the UK and Europe are concerned about an unexpected attempt this summer to widen significantly the scope of the proposed European directive on mortgages. Measures in a report drafted by Spanish MEP Antolin Sanchez Presedo could have serious implications for mortgage and housing markets in many European countries.
Proposals for a directive on mortgages first emerged several years ago and, in the aftermath of the financial crisis, the European Commission said it wanted to introduce measures that would reinforce responsible lending and borrowing in Europe.
From the outset, however, the European initiative pursued wider objectives. Alongside the goal of reinforcing responsible lending and borrowing, the Commission saw the proposed directive as a means of promoting another key aspiration: its planned drive towards a more integrated European mortgage market, with increased cross-border lending and borrowing activity.
Lending across Europe
The Commission has remained keen to promote a pan-European market, even though the financial crisis has left both firms and consumers with a strong aversion to risk, a clear preference for familiar markets, products and institutions – and little appetite for cross-border mortgage activity.
Despite consulting extensively on proposals for responsible lending and borrowing, there was a change of emphasis earlier this year when the directive was finally introduced in March. References to responsible lending and borrowing were dropped from its title; instead, the Commission unveiled a document focusing on the core issue of "credit agreements relating to residential property."
The next stage in the process was for two separate committees of the European parliament – one with responsibility for economic and monetary affairs (ECON) and the other overseeing internal markets and consumer protection (IMCO) – to report their reactions to the proposals. Each committee nominated a rapporteur to draft the report expressing its views.
A change of direction
The IMCO report is not expected until September, but the report from ECON – with Mr Sanchez Presedo as the rapporteur – appeared at the end of last month. It seeks to take plans for the directive in another – entirely unexpected – direction. If it is accepted by the European Parliament, the ECON rapporteur’s proposals would constitute a radical re-working of the directive, with a significant widening of its scope.
The ECON report potentially represents a significant move away from the balanced approach to responsibilities for both lenders and borrowers envisaged in earlier plans for the directive. Instead, it proposes a range of measures, many of which, taken at face value, seek to offer total protection for consumers. But there is little apparent acknowledgement of the potentially damaging impact the proposals could have on lenders – and ultimately the wider mortgage market and therefore on consumers, too.
As well as a series of measures seeking to reinforce consumer protection, the report also contains wide-ranging proposals, encompassing prudential reform, credit underwriting, financial rewards for mortgage sales staff and rules on the registration of loans. There is even a proposal that the directive should extend to the financing of property construction, as well as mortgages.
Among measures seeking to reinforce consumer protection the report proposes:
- the introduction of a 'cooling-off' period for borrowers of at least 14 working days after a mortgage offer has been made;
- compensation for consumers if credit is rejected because a reference agency supplies an inaccurate report;
- the right for borrowers to make overpayments without penalty, and for them to be able to draw down in the future any overpayments they have made; and
- a ban on arrears charges if payment problems arise that are beyond the control of the borrower.
We believe that many of these proposals would have widespread unintended consequences, and that their effects have not been properly assessed. Our concerns include:
- Proposals to make over- and under-payments a standard feature of mortgages. While some UK loans allow this option, many do not, and introducing it across the board imposes on firms costs and uncertainty associated with the prepayment of loans and future options for borrowers to draw down overpayments. That could make all mortgages more expensive for borrowers.
- Measures that would restrict arrears charges in the way proposed or reinforce mandatory 'cooling-off' periods. These would also impose cost and uncertainty on firms, and may make it more difficult for higher-risk customers to obtain mortgage finance. As with some of the proposals for regulatory reform proposed by the Financial Services Authority (FSA) in the UK, measures seeking to protect consumers may not be in their wider interests if they result in exclusion from the market for large numbers of customers. Additionally, all customers could face higher costs to cover the provision of measures that are used only by a few.
Other measures in the report
The ECON report contains a range of other proposals that would significantly widen the scope of the directive and have major consequences for firms, consumers, the availability of credit and even for the supply of housing. But the wider impact of these proposals has not been properly assessed, which we believe to be essential if they are to be pursued further. Among the report’s proposals are measures to:
- Apply the directive to the commercial funding of property developers, as well as transactions financed by mortgages – even though commercial loans are offered on a completely different basis to residential lending. In our view, it would be crucial to assess the wider implications of such proposals on the supply of property, which is a major concern in many European countries, including the UK.
- Require member states to regulate how lenders and credit intermediaries are paid, with rules to prevent financial rewards linked to sales of individual products or targets. Again, we believe it is essential to analyse fully the effects and implications of any proposed rule changes in this area.
- Prevent both automated underwriting as a substitute for expert risk assessment, and scoring based either solely on credit history or from external sources. Credit quality in the UK remains good, and we believe that generally firms should be free to assess risks using means they believe to be appropriate for their range of products and customer base.
- Publish prudential requirements in each member state, including ratios for loan-to-value, loan-to-income, debt-to-income and loan-to-asset, with prudential requirements for the overall mortgage portfolio in each of these categories. But prudential regulation is already covered under covered by the Basel III rules and is subject to the capital requirements directive, currently under discussion by the European Parliament.
- Introduce requirements for "special credit risk agreements," including foreign currency loans, mortgages where there could be significant variation in interest payments, and credit agreements where the return of the property is sufficient to repay the loan. While we recognise that regulation for special credit agreements may be necessary, we believe that this is more likely to be adequately addressed by regulating on a country-by-country basis – where allowances can be made for differences between national markets – than by seeking to draw up pan-European rules.
We believe the recent ECON report seeks to widen the scope of proposed regulation in Europe in a range of ways that are inappropriate and unhelpful. Many of the proposals would have far-reaching and unforeseen consequences on firms, consumers, the availability of credit and even the supply of housing.
In our view, any proposals for regulation in Europe need to be fully tested by appropriate cost-benefit and impact analysis. European regulators need to be aware that proposals may have different effects in different countries, and need to be tested so that the impact in different markets is properly understood. The European Parliament has already agreed that there should be a full impact analysis before any substantive amendments are introduced.
We believe that the ECON report takes proposals for European regulation in an unexpected direction, which is inappropriate to the needs of consumers and firms that continue to operate essentially in separate markets. As we move into the autumn, we will be working with lenders and other interested parties – in the UK and Europe – to seek to ensure that European regulatory proposals are appropriate to the needs of firms and consumers in different countries. We will also be arguing that any new measures should be proportionate and justified by cost-benefit and impact analysis.