The European Parliament has provisionally approved the mortgage credit directive, which will require UK lenders to provide “worst case scenarios” when explaining rates to borrowers and which could see existing key facts illustrations replaced with alternative documents.
The purpose of the directive is to “harmonise” mortgage regulation throughout EU member states.
A lot of the new rules mirror those being brought in under the Mortgage Market Review, which will be introduced next 26 April next year, especially around lenders’ obligation to ensure affordability.
However, there are some elements of the directive which do not appear in the MMR. One requirement of the directive is lenders will have to provide borrowers who are locked into their rate for less than five years with an APR for what they are paying during the lock in period and a worst case scenario showing the most they could have been charged on a lender’s standard variable rate over the previous 20 years.
A new European standardised information sheet will replace the key facts illustration used in the UK, although lenders may be able to keep the KFI for five years after the final rules have been agreed upon, if the FCA chooses to do so.
The directive requires lenders to offer borrowers a “cooling off” or “reflection” period, expected to be seven days, although the customer can choose to go ahead with the transaction during this period if they wish to do so.
The directive also proposes lender and brokers must inform the customer if they are receiving advice or just information. In the UK, the FCA has banned non-advised sales for all but minor contract variations. Brokers must also ensure they make borrowers aware of any commission they receive from a lender.
An official vote on the final text of the directive will not take place until the Council of Ministers agreed how each member state transposes the new rules into national laws and how much member states can add to the new rules.
However, the official vote is seen as a formality and it is highly unlikely the text will change from its present format.
It is not yet know when the official vote will take place, although the very earliest this could happen is in October, when the next plenary session takes place.
Building Societies Association head of mortgage policy Paul Broadhead says the next phase for the UK is for the Treasury, the FCA and the industry to come to an interpretation of the laws and implement them, following the vote.
He says: “There will be lots of discussions there about how everyone [the Treasury, FCA and other UK stakeholders] interprets the directive but we have been working together as a group for so long we pretty much all know what we need to do. Now it is making sure we get to a good outcome for UK consumers.”
Originally, the directive would have captured buy-to-let mortgages but the UK mortgage industry successfully argued against this.
The UK also secured four crucial opt-outs to ensure lenders will be able to continue to offer guarantor mortgages, shared equity loans, offset mortgages and endowments.
Conservative MEP Vicky Ford says: “I do not believe we ever needed European law on mortgages. However, we have managed to get rid of the worst bits which could have shut down parts of the UK market with a heavy handed approach to buy-to-let and first-time buyer products. There remains concerns over replacing the key facts illustration, which is unnecessarily handed a one-size fits all.”
The UK will have two years to introduce the rules once the European Parliament has voted through the final text and it has been published in the official journal of the EU.