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The financial crisis started with the subprime debacle in the United States where mortgages were being handed out with no background checks carried out on whether consumers could afford them, and ill-informed and often vulnerable consumers were encouraged to take excessive risk. We have seen similar excesses in Europe, for example with the housing booms and the inevitable busts which followed in Spain and Ireland. The consequences for the financial sector and the economy as a whole have been enormous. And there have been too many very real tragedies for those who have lost their homes because they could no longer meet their mortgage repayments.
This Directive will help put an end to these excesses and foster responsible lending practices. Consumers will finally get the protection they deserve. They will be better informed so they can choose the mortgage product which best meets their needs, at the best price, and fully aware of the risks they are taking.
This Directive will also benefit mortgage credit providers. They play a key role in the economy. Two-thirds of the loans in portfolios are mortgages. The Directive will ensure that the mortgage credit providers meet new professional standards, and will encourage competition. It will create the framework for a European-wide mortgage market enabling operators to finally be able to take full advantage of the Single Market and its 500 million consumers thanks to a European passport.
Background
The Mortgage Credit Directive (Directive on credit agreements relating to residential immovable property – see IP/11/383 and MEMO/11/205) will introduce for the first time European-wide standards for the conduct of the credit worthiness assessment in the mortgage credit area. Where the result of such assessment is negative, the creditors will no longer be allowed to hand out mortgage credits.
The Directive will not only put a brake on the excesses of the past, but will also offer the mortgage credit providers new opportunities to take full advantage of the Single Market with its 500 million consumers. Provided that credit intermediaries are properly authorised, registered and supervised at national level, they will receive a European passport and can look for new business opportunities in any of the 27 Member States.
But above all, the new Directive will include a number of important elements that go beyond a mere crisis response, for the benefit of consumers:
Creditors will be obliged to hand out to consumers a standardised information sheet (ESIS) that will allow them to shop around to identify the best and cheapest credit offer for their needs.
The ESIS will be user-friendly and will also include detailed information on the characteristics of the loan on offer. Consumers will, for instance, be alerted to the risks associated with the offer, e.g. in relation to variable rate loans and foreign currency loans.
Measures against misleading advertising will also introduced.
Mortgage credit providers will also need to respect high-level principles in their direct contacts with their clients, such as taking account of the consumer’s real interests, ensuring that the remuneration structures do not incite excessive risk taking, and disclosing any links between the credit intermediary and the creditor.
Concrete performance quality standards for staff will also be introduced (e.g. obligation for staff to possess the appropriate knowledge and competences in fields identified, obligation to provide adequate explanations at pre-contractual stage, standards for advisory services).
Consumers will also profit from more competition through a general ban on tying practices. Tied mortgage products that have proven to be beneficial to consumers in the past (e.g. some insurance or savings products) or future products that will be assessed positively will still be allowed.
The Directive will grant consumers a general right to repay their loans early. Member States will have the choice to impose that in such cases creditors should receive a fair compensation.
Consumers will benefit from a guaranteed period of time before being bound by an agreement for a mortgage (through a period of reflection, a right of withdrawal, or both).
Property valuations, if conducted, will need to respect principles in line with the Financial Stability Board.
The Directive will also require creditors to apply reasonable forbearance when being confronted with consumers in serious payment difficulties.