Stephen Adams, Head of Compliance at Mortgage Intelligence, explores some of the potential ways the Mortgage Credit Directive could impact your clients.
After the Mortgage Market Review (MMR) in 2014, few expected such a similar piece of legislation to be hot on its heels, let alone affecting the whole European region. But on 21st March 2016 the Mortgage Credit Directive (MCD) will come into effect, in an effort to further protect consumers and create a sole mortgage market in Europe.
Although there is some debate as to whether this further legislation will actually add additional benefits to consumers, it will impact both residential mortgage lending and lending for buy to let. The UK’s regulatory body, the Financial Conduct Authority, with implement the changes here, but what specific areas will be affected?
Buy to Let and Foreign Currency
More specifically consumer buy to let (CBTL), the MCD will cover the minority of buy to lets where the borrower has not taken out the mortgage for business or investment purposes, or as an Investment Property Loan (IPL). From March, certain consumers, or “accidental landlords”, that have had to take out a BTL as a solution to circumstances, such as an inherited home or Let to Buy transaction, will find they fall under the new regulation.
Foreign currency loans will now be subject to further regulation, in some cases restricting the loan size and requiring a warning around possible rate changes. The MCD defines a foreign currency loan as “a mortgage denominated in a currency other than that in which the consumer receives the income”, or if they hold the asset from which the credit is to be repaid”. Because of these changes, there are some lenders that are already withdrawing their lending on foreign currencies.
The Sales Process and the “ESIS“
The European Standardised Information Sheet (ESIS) has been one of the more contentious announcements as part of the MCD. Having to abandon our own Key Facts Illustration (KFI), the UK must now adhere to the new ESIS sheet, or in some cases a KFI Plus prior to application. Many lenders are already adjusting to the new rules, choosing whether to move to the ESIS immediately in March or temporarily to the KFI Plus.
Although the UK’s MMR in 2014 put us in good stead ahead of MCD, the changes are nevertheless conflicting with some of our own regulation that has been tailored towards the UK market. The general sales process, which in each country can vary markedly due to certain differences in mortgage systems and languages, will now be restricted to a standardised, continent-wide law that requires certain steps to be taken before a mortgage is completed.
Protecting the Consumer?
Some experts have criticised the MCD as potentially confusing for consumers, rather than protecting against financial detriment as was the goal of the changes. But either way the MCD is tightening further the rules around financial promotions to be clear and not misleading, which can only help further protect consumers.
The MCD also ensures that lenders are required to now issue binding offers to consumers as well as a seven day reflection period which will start on the issue of the binding mortgage offer. This is designed to deliver peace of mind and further security to consumers.
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