Business

Tighter rules for mortgage lending agreed by EU

Mortgage application form
Image caption Consumers across the EU will be given more standard information about their loan

New rules will mean that borrowers across the European Union (EU) will be refused a mortgage if they fail a standard affordability assessment.

The European Commission said its new mortgages directive would prevent any repeat of reckless home loan lending of the past.

The agreement also includes plans to make it easier for consumers to shop around for their loan.

A lenders' group said the changes would have little impact on the UK system.

The Council of Mortgage Lenders (CML) said that UK rules, which were bolstered recently, already had the greater consumer protection and information in place.

Background checks

The directive, driven by the Irish Republic's presidency of the EU, aims to halt cases of mortgages being handed out without any background checks on borrowers.

The key feature is that any borrower across the 27 EU member states would be refused a home loan if they failed a standard credit worthiness assessment.

Other features of the agreement include:

  • A standard information sheet given to borrowers to explain how to find the mortgage that suits their needs
  • Detailed information on the specifics of a loan, including warnings about future changes to interest rates and costs of borrowing in a foreign currency
  • A crackdown on misleading advertising
  • A cooling-off period for anyone signing up to a mortgage
  • A general right to repay a mortgage early, although this may include a fee
  • Lenders being required to show some forbearance to borrowers who get into difficulty with repayments, rather than repossessing a home immediately

"The financial crisis started with the subprime debacle in the United States where mortgages were being handed out with no background checks carried out on whether consumers could afford them, and ill-informed and often vulnerable consumers were encouraged to take excessive risk," said EU Internal Market Commissioner Michel Barnier.

"We have seen similar excesses in Europe, for example with the housing booms and the inevitable busts which followed in Spain and Ireland."

He said the consequences had been enormous, with many people losing their homes to repossession.

"This directive will help put an end to these excesses and foster responsible lending practices," he added.

"Consumers will finally get the protection they deserve. They will be better informed so they can choose the mortgage product which best meets their needs, at the best price, and fully aware of the risks they are taking."

Paperwork

In the UK, lenders have recently gone through a mortgage market review that tightened rules on applications. This has led to new rules, including affordability checks, which will come into force in April 2014.

Paul Smee, director general of the CML, said that the changes would create more paperwork for lenders and regulators in the UK.

But he said that little would change for mortgage applicants above the April rules.

"For consumers, the requirements of the directive add little to the consumer protection and information that UK customers already receive, since our regulatory regime is already the most advanced among European member states," he said.

"For customers in some other member states, the changes will result in increased protection and greater consistency."

The European rules must be approved by the EU Parliament as a whole and endorsed by member states. A vote will be held in the EU Parliament on 11 June.

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