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 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 ass
