Home Loans Without Borders
EU Cross Border Residential Mortgages - Are they nearer a reality?
Retail financial services, from bank accounts, payment cards, consumer and mortgage credit, insurance and long term savings products, are an integral part of people’s daily lives. Based on statistics from July 2016, quoted by the Commission, only 7% of consumers had purchased a financial service from another EU Member State.
In its March 2017 Action Plan, the EU Commission set out the remaining obstacles and work to be undertaken to bring about a single market for retail financial services, so that the distinction between domestic and cross border providers of financial services will no longer matter.
What has been adopted so far
As of February 2018, amongst other legislation, the SEPA Migration Regulation1, and Directives on Payment Accounts 2, Payment Services 2 3, Consumer Credit 4, and the Mortgage Credit Directive 5 have been adopted.
The Mortgage Credit Directive
From a consumer’s perspective, the Mortgage Credit Directive (MCD) is the most significant, as not only is taking out a Mortgage to buy a home (residential immovable property 6 ), the most significant borrowing a consumer will undertake in his or her lifetime, it also is a product where significant differences in pricing exist between Member States.
Development of a single market for Mortgages has been slow to take off, even though the MCD was required to be implemented in all Member States by the 21st of March 2016.
The MCD Overview
In drafting the MCD, the EU adopted regulatory approaches common to many EU directives in the financial services sector. As regards creditors and credit intermediaries, these requirements include:
- Conduct of business obligations such as – (i) requirements to act honestly, fairly, transparently and professionally taking account of the rights and interests of the consumers and (ii) regulation of the manner in which creditors remunerate their staff and credit intermediaries. Note the MCD allows Member States to prohibit or impose restrictions on payments from a consumer to a credit or credit intermediary prior to the conclusion of a credit agreement (article 7). In addition, the European Banking Authority (EBA) have published Guidelines on remuneration policies and practices related to the provision and sale of retail banking products and services. The Guidelines apply from 13 January 2018.
- Information – The MCD sets out information required to be provided to consumers at both pre-contract and contract stages. This information must be provided free of charge (articles 8,10,11,13 and 14 to 16).
- Knowledge and competence requirements for staff (article 9).
- Tying and bundling practices Member states shall allow bundling practices but must generally prohibit tying practices. However, the article sets out circumstances where tying may be allowed (article 12).
Creditworthiness and suitability assessments 7
Creditworthiness assessments in both the Consumer Credit Directive and the Mortgage Credit Directive 8 aim to prevent irresponsible lending and borrowing.
In addition to the detailed requirements in articles 18 to 21, the EBA have published Guidelines on Creditworthiness Assessment. Under Article 16(3) of the EBA Regulation (Regulation (EU) no 1093/2010) competent authorities and financial institutions must make every effort to comply with these guidelines.
Valuations: Article 19 of the MCD requires that Member States must ensure that reliable valuation standards are in place and are used by creditors. Such standards should take into account of internationally recognised valuation standards.
Foreign currency loans and variable rate loans: Where a credit agreement relates to a foreign currency loan, Member States must have an appropriate regulatory framework in place at the time the credit agreement is concluded to at least ensure that (a) the consumer has a right to convert the credit agreement into an alternative currency under specified conditions or (b) there are other arrangements in place to limit the exchange risk to which the consumer is exposed. Article 23.2. specifies what the alternative currency must be.
Variable rate credit agreements: Where the credit agreement is a variable rate credit, article 24 requires member states to ensure that: (i) any indexes or reference rates used to calculate the borrowing rate are clear, accessible, objective and verifiable by the parties to the credit agreement and the competent authorities and (ii) historical records of indexes for calculating the borrowing rates are maintained either by the providers of these indexes or the creditors
Early repayment: Under article 25, member states must ensure that consumers have the right to repay their credit before the expiry of the credit agreement. The consumer is entitled to a reduction, in that event, to the total cost of the credit, such reduction consisting of the interest and the costs for the remaining duration of the contract. Member states may set conditions on the exercise of that right. Examples are given and they are important.
Flexible and reliable markets: Member states must have appropriate mechanisms in place to ensure that the claim against security is enforceable by or on behalf of creditors. In addition, creditors must keep appropriate records concerning the types of immovable property accepted as security as well as the related mortgage underwriting policy that is used (article 26).
Information concerning changes in the borrowing rate is regulated by article 27.
Arrears and foreclosure: Article 28 of the MCD requires that member states adopt measures to encourage creditors to exercise reasonable forbearance before foreclosure proceedings are initiated. Default charges must be no greater than is necessary to compensate the creditor for costs incurred as a result of the default. In addition to article 28 which is extensive, the EBA have published Guidelines on Arrears and Foreclosure.
Issues for Cross Border Lenders: Development of a Cross Border market for Mortgage Credit Intermediaries
For the first time, the MCD established a cross border harmonised regime for the authorisation and supervision of brokers and for the passporting of their services (for which they are authorised) into other Member States. However, credit intermediaries are not allowed to offer their services in relation to mortgages offered by non credit institutions to consumers in a member state where such non credit institutions are not allowed to operate. The MCD also permits member states to allow a broker to appoint an appointed representative for which it will be responsible. There are specific requirements for tied intermediaries.
Maximum harmonisation in two instances
The MCD is largely a minimum harmonisation measure (thus enabling member states to introduce more stringent measures). This is constrained in two instances where member states must not diverge from the MCD;
(i) article 14(2) and Annex II, the requirement to provide standard pre-contractual information for borrowers through a European Standardised Information Sheet (ESIS) which is contained in Annex II; and
(ii) parts of article 17 and Annex I, the requirement to apply a consistent EU standard for the calculation of the annual percentage rate of charge (APRC). Essentially the APRC is to be calculated in accordance with the mathematical formula set out in Annex I based on the assumption that the credit agreement is to remain valid for the period agreed.
The Commission has published a mortgage credit webpage with materials relating to calculating the APRC and published an Excel simulator tool to help users calculate the APRC of a given credit.
Where the MCD does not or may not apply
The MCD does not apply to:
- certain equity release credit agreements;
- credit agreements where the credit is granted by an employer to his employees as a secondary activity where such a credit agreement is offered free of interest or at an APRC lower than those prevailing on the market and not offered to the public generally;
- credit agreements where the credit is granted free of interest and without any other charges except those that recover costs directly related to the securing of the credit;
- credit agreements in the form of an overdraft facility and where the credit has to be repaid within one month;
- credit agreements which are the outcome of a settlement reached in court or before another statutory authority; and
- certain credit agreements which relate to the deferred payment, free of charge, of an existing debt.
Member States may decide not to apply (amongst others):
- Articles 11 and 14 and Annex II to credit agreements for consumers, secured by a mortgage or by another comparable security commonly used in a Member State on residential immovable property or secured by a right related to residential immovable property, the purpose of which is not to acquire or retain the right to residential immovable property, provided that the Member States apply to such credit agreements (Articles 4 and 5 of and Annexes II and III to Directive 2008/48/EC);
- the MCD to credit agreements which relate to an immovable property where the credit agreement provides that the immovable property cannot at any time be occupied as a house, apartment or another place of residence by the consumer or a family member of the consumer and is to be occupied as a house, apartment or another place of residence on the basis of a rental agreement;
- the MCD to credit agreements which relate to credits granted to a restricted public under a statutory provision with a general interest purpose, free of interest or at lower borrowing rates than those prevailing on the market or on other terms which are more favourable to the consumer than those prevailing on the market and at borrowing rates not higher than those prevailing on the market;
- the MCD to bridging loans.
Member State Discretions
Member State discretions under the MCD are extensive and need to be checked by an incoming creditor against those granted by his home state. Generally, one would expect National Regulatory Authorities to publish the discretions where exercised and how they have exercised the discretions on their websites.
An example of a member state discretion is contained in article 22 (which regulates the standards for advisory services). Amongst other requirements, the creditor, credit intermediary or appointed representative must explicitly the consumer, in the context of a given transaction, whether advisory services are being or can be provided to the consumer.
Member States may prohibit the use of the term ‘advice’ and ‘advisor’ or similar terms when the advisory services are being provided to consumers by creditors, tied credit intermediaries or appointed representatives of tied credit intermediaries.
Non Credit Institution Lenders
The MCD in article 35 requires member states to ensure that non-credit institutions are subject to adequate admission, registration and supervision arrangements.
The requirements in Article 28 are also extensive and a Member State implementation of this article would need to be carefully considered. In addition, the EBA Guidelines will have to be complied with.
The two areas of maximum harmonisation (ESIS and the APRC) and referred to above must be complied with.
Extension to non consumers
It would be important for an incoming creditor to check whether the Member State had extended the MCD regulation to non residential properties.
Changes needed to make a cross border market happen
The Payment Accounts Directive already requires in article 16.2 that Member States ensure that consumers legally resident in the Union have the right to open and use a payment account with basic features with credit institutions located in their territory. Such a right shall apply irrespective of the consumer’s place of residence. However, there are some limitations on this right.
Access to good Credit Data
For Credit institutions or authorised lenders in other members states access to good credit data is essential.
Article 21 of the MCD requires each Member State to ensure non discriminatory access for all creditors from all Member States to databases (whether public or in private ownership) used in that Member State for assessing the creditworthiness of consumers and for the sole purpose of monitoring consumers’ compliance with the credit obligations over the life of the agreement.
However, even with these access rights, the Commission pointed out that in some Member States, credit registers only report on missed payments (i.e. negative reporting); in others, they also report on the regularity of payments (i.e. positive reporting). Moreover, credit data is usually shared only reciprocally. As a result, credit registers are not interoperable, the relevance of the available data for creditworthiness assessments is unclear, and information is not widely used across borders. Some work to address these issues is already under way. There are market-led reciprocal information exchange agreements between credit registers in different Member States where national reporting traditions are similar. However, this still leaves many gaps.
In 2011 the European Central Bank initiated a project called AnaCredit (analytical credit datasets) to set up a dataset containing detailed information on individual bank loans in the euro area, harmonised across all Member States. This work should lead to further data standardisation on loans.
Under the CMU Action Plan, the Commission is exploring ways of improving the availability of financial and credit information about small and medium sized enterprises for (alternative) lenders and investors.
Electronic Identification of Customers
Cross-border provision of financial services will not take off as long as consumers have to appear at providers’ offices to be identified, receive disclosure documents on paper, and give handwritten signatures on contracts.
A major step in this context is the Regulation on Electronic Identification (eIDAS) 9 which (on a cross border basis allows for public services and trust services) (i) sets conditions under which member states recognise means of eID of natural and legal persons falling under another member state’s eID scheme which has been notified to the European Commission (ii) lays down rules for trust services, in particular for electronic transactions and (iii) establishes a legal framework for electronic signatures, electronic seals, electronic time stamps, electronic documents, electronic registered delivery services and certificate services for website authentication.
In the draft Fifth Money Laundering Directive 10 amending the Fourth Money Laundering Directive (AMLD IV) 11 two of the proposed changes to AMLD IV are significant. They apply eIDAS to the Fourth Money Laundering Directive in requiring of Member States:
that obliged entities take adequate steps to ensure that the third party provides immediately, upon request, relevant copies of identification and verification data, including, where available, electronic identification means, relevant trust services as set out in Regulation (EU) No 910/2014 or any other secure, remote or electronic, identification process regulated, recognised, approved or accepted by the relevant national authorities; and that customer due diligence measures shall comprise in part identifying the customer and verifying the customer’s identity on the basis of documents, data or information obtained from a reliable and independent source, including, where available, electronic identification means, relevant trust services as set out in Regulation (EU) No 910/2014 or any other secure, remote or electronic, identification process regulated, recognised, approved or accepted by the relevant national authorities;
Cross Border Payments in Euro 12
The Regulation on cross-border payments equalised fees for cross-border and national payments in euro within the EU. Non euro EU payments are not covered by it. In July 2017 the Commission announced a public consultation on amending this Regulation. The objectives are to reduce charges on cross border transactions in all member states, review good and bad practice in dynamic currency conversion and consider the most appropriate way to allow consumers choose the best rate.
Separately on the 8th of March 2018, the Commission published its FinTech Action Plan 13 (COM 109 final). Of particular interest is the Commission’s comment that supervisors may take different approaches to identifying the applicable EU legislative framework and applying proportionality when licensing innovative business models, such as with online platforms acting as brokers/intermediaries, p2p insurance, virtual currencies and automated investment advice, Initial Coin Offering, etc.
Additionally, the European Banking Authority identified differences in authorisation and registration regimes 14 as an area requiring further attention
It is to be noted that the European Central Bank (ECB) also recently launched a consultation on a ‘Guide to assessments of FinTech credit institution license applications’ 15 in September 2017. The Guide explains the application process, the licensing requirements for credit institutions in general and specific considerations for those with fintech business models.
All of these developments, together with the proposals in the FinTech Action Plan (which are outside the scope of this article) will result in cross border Mortgage lending through electronic platforms being developed and available sooner rather than later.
© Copyright McKeever Solicitors 2018 – All rights Reserved. As published by Devlin Media in the Irish Public Sector Magazine
This article is a general review of the law on the subject and is not intended to be a complete statement of the law. Specific legal advice must be sought on a case by case basis.
1 Regulation 248/2014 (OJ L 84, 20.3.2014, p. 1–3) – Applied from the 1st February 2014.
2 Directive 2014/92/EU (OJ L 257, 28.8.2014, p. 214–246 ) – implemented into Irish law on 18th September 2016.
3 Directive 2015/2366/EU (OJ L 337, 23.12.2015, p. 35–127 ) – implementation deadline – 13th January 2018.
4 Directive 2008/48/EC (OJ L 133, 22.5.2008, p. 66–92 ) – implemented in Ireland on 11th June 2010.
5 Directive 2014/17/EU (OJ L 60, 28.2.2014, p. 34–85) – implemented in Ireland on the 21st March 2016.
6 The MCD applies to credit agreements (i) that are secured either by a mortgage or by another comparable security commonly used in a member state on residential immovable property or secured by a right relating to residential immovable property; and (ii) the purpose of which is to acquire or retain property rights in land or in an existing or projected building.
7 Articles 18 to 20 of the MCD.
8 Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010 (OJ L 60, 28.2.2014, p. 34–85).
9 Regulation 910/2014 (OJ L 257, 28.8.2014, p. 73–114). It came into force on the 1st July 2016.
11 Directive (EU) 2015/849 (OJ L 141, 5.6.2015, p. 73–117) of the 20th of May 2015.
12 Regulation (EC) No 924/2009 (OJ L 266, 9.10.2009, p. 11–18) of the European Parliament and of the Council of 16 September 2009 on cross-border payments in the Community.