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Mortgage Credit Directive

​​​Mortgage Credit Directive: simplify, reduce and clearly define foreign currency loans


​Updated: October 2019

PROPOSED SOLUTIONS AND ACTIONS 

ESBG believes that providing simple and shorter information to consumers will correspond more on the client’s expectations and will have a positive effect on their well informed decision. 

Simplification of information 

MCD, like CCD, requires creditors to give excessively detailed information to the consumer prior to entering a consumer credit agreement. Nonetheless, consumers ignore information which is too complex or difficult to remember and there is evidence that simpler information with fewer figures is much more effective at landing critical messages. That information may refer to information that only reflects the specifics of the product and meets with client’s expectations for short and clear information – for example – the repayment periods, the amount of the repayment instalments and the applicable interest rate. 

Reduction of information 

Regarding the pre-contractual information, it is important to focus on diminishing the number of precontractual documents, which banks are obliged to serve to consumers in any case. This approach has not proved itself to be useful for consumers and for that reason the requirements for serving pre-contractual information and Standard European Consumer Credit Information aren’t helping in achieving the objectives of the Directive. Bearing digitalisation in mind, the required information can barely be presented in a clear and comprehensive way on mobile devices. 

The reduction of information may be also observed through the role of the right of withdrawal. The right of withdrawal is an instrument for the consumer’s protection and when it is granted to the consumer it should diminish some of the requirements for the service providers, especially in the field of the pre-contractual information that needs to be provided to consumers. If the amount of information is not diminished, there is not a substantial meaning of the right of withdrawal. 

Definition of foreign currency loans 

ESBG would like to make a proposal to change the current definition of a foreign currency loan making cumulative and non-alternative the conditions. 

This option: 

  • would be simple to apply and appears fully justified to allow the development of cross-border financing, while maintaining a good level of consumer protection; 
  • limits the scope of the provisions of Article 23 of the MCD to loans more likely to induce currency risk; 
  • would be completely aligned with the wish of consumer protection developed by the European Commission in the MCD. Indeed, Article 23 of the MCD Directive provides, among the modalities for limiting currency risk, the right for the consumer to convert the credit agreement into an alternative currency, which shall be either: 
    • the currency in which the consumer primarily receives income or holds assets from which the credit is to be repaid, 
    • or the currency of the Member State in which the consumer is resident. 

These two currencies (income and of place of residence) are considered by the MCD as sufficiently protective of the consumer to propose them as limiting the foreign exchange risk of a loan in a currency. The notion of foreign currency therefore seems legitimate only to apply to a currency that is different from both the currency of income and the currency of the place of residence, which correspond to the proposal of a "cumulative" definition. 


BACKGROUND

The EU Mortgage Credit Directive aims to integrate the market for mortgage credit, promote common standards across the bloc and protect consumers at an EU level through responsible lending. The 2014 MCD applies to all loans available to consumers when buying residential property. It has the following provisions: 

  • an obligation for lenders to provide clear and detailed information on loan conditions to consumers; 
  • an obligation for lenders to assess the creditworthiness of consumers according to common EU standards; 
  • common quality standards and business conduct principles for all EU lenders; 
  • the right for consumers to repay credit earlier than determined in a contract; 
  • an EU passport scheme that allows credit intermediaries authorised to operate in any EU country to deliver services across the EU. 

Since the MCD came into force, there have been numerous additions in the form of supplementary acts (both implementation and delegated) to help strengthen the original text. 

The Mortgage Credit Directive ‘study’ is due out in 2019 and will focus only on the topics listed in Articles 44 and 45 of the current directive. It will look into the effectiveness and appropriateness of the provisions on consumers and the internal market. The study will also look into digitalisation and sustainable finance (for example, the EC-funded study on green mortgages). Depending on the conclusions of the Study and the Commission’s assessment, legislative changes may be proposed. Some issues have already been identified as being particularly relevant to the review: 

  • Loans in a foreign currency (Article 23) 
  • Digitalisation 
  • Sustainable finance 


WHY POLICYMAKERS SHOULD ACT 

Financial institutions are willing to adapt their mortgage lending process but call for adequate implementation deadlines and help with any additional IT support or other additional costs. A proportionate application of the mortgage credit directive could also be examined in more detail by a cost-benefit analysis. 

In our view it is very important that during the revision the Commission assesses the consumers’ understanding of, and satisfaction with, the ESIS Art. 44a from the Directive. The effectiveness and appropriateness of the Directive should be the core focus of the Commission study. 

The Commission should examine the current definition of foreign currency loans. The market is experiencing difficulties in the application of the rules and we note that due to the current definition there are cases that fall within the scope of foreign currency loans for which the consumer protection measures set out in the Directive should not be addressed or are disproportionate to actual risk for consumers. 

It would be beneficial for consumers to narrow the scope, establishing that the definition will imply cumulative conditions (being residence and receiving the incomes or holding the assets in a currency other than the credit is to be repaid). As a result, the current regime excludes certain consumers from mortgage credit, while creditors would be willing to provide credit in a number of scenarios if the foreign currency loan regime were better aligned with the real risks. 


IDENTIFIED CONCERNS 

The review of the Mortgage Credit Directive is expected soon. In our opinion, there is a need for guidance from the Commission on pre-contractual information and how best to provide ‘barrier-free’ information on, for example, smartphones. 

In our view, there is also a problem with cross-border loans which is not only related to the MCD, but also: 

  • for the fact that those credits are secured with an immovable property and the execution of that property (if the credit is not repaid) may be done in a country different from the country where consumer is domiciled. 
  • because of jurisdiction in court procedures (EU Regulations 1215/2012, 655/2014 and 1896/2006): proceedings may be brought against a consumer by the other party to the contract only in the courts of the Member State in which the consumer is domiciled. The last provision may be departed from only by an agreement which is entered into by the consumer and the creditor, both of whom are at the time of conclusion of the contract domiciled or habitually resident in the same Member State, and which confers jurisdiction on the courts of that Member State, provided that such an agreement is not contrary to the law of that Member State. This means that in order to bring a procedure against the debtor in the country of the creditor, the debtor has to have a domicile within the territory of the country. Having in mind that consumers tend to travel a lot and change domiciles easily these days, bringing a procedure against them is most of the time very difficult or even impossible, because creditors are often in a situation that they do not know where the consumer’s new domicile is. 
  • when it comes to servicing notices for voluntary payment of the debts and judicial papers – it is almost impossible to find the debtor and serve them with such kind of documents and/or understand where their current domicile is. And this puts a lot of obstacles in terms of the debt collection processes and procedures.