Explanatory Memorandum to COM(2011)142 - Credit agreements relating to residential property - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2011)142 - Credit agreements relating to residential property. |
|---|---|
| source | COM(2011)142  |
| date | 31-03-2011 |
The present proposal has to be seen in the context of efforts to create an internal market for mortgage credit and against the background of the financial crisis.
The financial crisis has had a substantial impact on EU citizens. Although an important contributing factor was the growth in securitisation, which allowed creditors i to pass the risk of their lending portfolios to investors, consumers have faced the consequences first hand. Many have lost confidence in the financial sector and certain lending practices that used to prevail are now having a direct impact.[2] As borrowers have found their loans increasingly unaffordable, defaults and foreclosures have risen. Addressing irresponsible lending and borrowing is therefore an important element in financial reform efforts.
For several years, the Commission has engaged in a comprehensive review of EU residential mortgages markets to ensure the efficient functioning of the single market. The White Paper on the integration of EU mortgage markets i previously identified areas of direct relevance to responsible lending and borrowing (e.g. pre-contractual information, advice, assessment of creditworthiness, early repayment and credit intermediation) acting as barriers to the efficient functioning of the single market. These barriers prevent the pursuit of business or raise the cost of doing business in another Member State and lead to consumer detriment through low consumer confidence, higher costs and reduced customer mobility, both domestically and cross-border. In view of the problems brought to light in the financial crisis and in the context of efforts to ensure an efficient and competitive single market, the Commission undertook to come forward with measures on responsible lending and borrowing, including a reliable framework on credit intermediation.[4] To this end, the objectives of the proposal are twofold. First, it aims to create an efficient and competitive single market for consumers, creditors and credit intermediaries with a high level of protection by fostering consumer confidence, customer mobility, cross-border activity of creditors and credit intermediaries, and a level playing field while respecting fundamental rights, particularly the right to the protection of personal data, enshrined in the Charter of Fundamental Rights of the European Union . Second, the proposal seeks to promote financial stability by ensuring that mortgage credit markets operate in a responsible manner.
The size of the EU mortgage market is significant: in 2008, outstanding residential mortgage lending in the EU27 amounted to almost EUR 6 trillion, or about 50 % of EU GDP.[5] The EU mortgage market is also of vital importance for the millions of European citizens currently repaying a mortgage and for would-be home owners. Taking out a mortgage is one of the most important financial decisions in a person’s life, entailing a financial commitment potentially lasting decades.
Rising household debt levels exist throughout Europe. However, they are not in themselves a sign of irresponsible lending and borrowing as long as the levels of debt are sustainable and repayments can be met. However, figures show that citizens are having increasing difficulties in meeting their debts. The difficulty in meeting repayments has led to an increase in default rates and a rise in foreclosures. Data can be influenced by factors other than irresponsible lending and borrowing such as the general economic downturn. However, the statistical data combined with qualitative evidence through stakeholders’ contributions and anecdotal evidence from across Europe shows that this is not just a cyclical problem or limited to one or two Member States but can be found throughout the EU.
A range of factors drive the decision to grant a particular mortgage credit, the borrower’s eventual choice of mortgage product and the borrower’s ability to repay the loan. These include the economic climate, information asymmetries and conflicts of interest, regulatory gaps and inconsistencies, as well as other factors such as the borrower’s financial literacy and mortgage financing structures. While these other factors clearly play a role, the fact remains that irresponsible behaviour by certain market actors contributed to a housing bubble and was one of the key features of the financial crisis. It is therefore clear that irresponsible lending and borrowing need to be addressed to avoid a repeat of the conditions that led to the current financial crisis.
Misleading advertising is regulated by Directive 2006/114/EC of the European Parliament and of the Council of 12 December 2006 concerning misleading and comparative advertising i which applies to relations between traders, and Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market i. These rules do not however take into account the specificities of mortgage credit or address the need for consumers to be able to compare adverts.
Unfair terms in consumer contracts are regulated by Directive 93/13/EEC of the Council of 5 April 1993 concerning unfair terms in consumer contracts i and which introduces a notion of good faith in order to prevent significant imbalances in the rights and obligations of consumers on the one hand and sellers and suppliers on the other hand. This general requirement is supplemented by a list of examples of terms that may be regarded as unfair. These rules do not however take into account the specificities of mortgage credit. Pre-contractual information for mortgage loans is the subject of a European Voluntary Code of Conduct on Pre-contractual Information for Home Loans ('the Code') of March 2001 i. The Code was endorsed by the Commission in Recommendation 2001/193/EC of 1 March 2001 on pre-contractual information to be given to consumers by lenders offering home loans i. The objective of the Code was to set out the general information that should be available to the consumer and to agree upon a European Standardised Information Sheet with which consumers could compare home loans both domestically and cross-border. Implementation of the Code is however inconsistent and sub-optimal.
A number of Member States apply selected provisions of Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers (the Consumer Credit Directive) i to mortgage credit. That Directive covers consumer credit loans from EUR 200 to EUR 75 000 and regulates advertising, pre-contractual and contractual information, creditworthiness assessments, adequate explanations, as well as disclosure requirements for credit intermediaries. Credits to purchase a property secured by a mortgage or another comparable security or loans for renovation in excess of EUR 75 000 are outside the scope of that Directive.
Credit institutions are regulated and subject to authorisation, registration and supervision requirements under Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions i. No such requirements exist at EU level for non-credit institutions providing mortgage credit or for credit intermediaries.
Consistency with the EU’s other policies and objectives of the Union
The objectives of the proposal are consistent with the policies and objectives pursued by the Union. The Treaty provides for action to ensure the establishment and functioning of an internal market with a high level of consumer protection as well as the freedom to provide services. Such a market for residential mortgages is far from completion as several obstacles exist to the free provision of services.
The proposal is furthermore consistent with and complementary to other EU legislation and policies, particularly in the areas of consumer protection and prudential supervision. The Consumer Credit Directive i was adopted in 2008 with the aim of enhancing the level of consumer protection and facilitating the integration of the consumer credit market. This proposal complements the Consumer Credit Directive by creating a similar framework for mortgage credit. The proposal largely draws on the conduct of business provisions in the Consumer Credit Directive; however, where appropriate the specific features of mortgage credit have been taken into account, for example by introducing risk warnings in the pre-contractual information provisions and by strengthening creditworthiness assessment provisions. In so doing, the proposal also takes into account the fact that some Member States have already decided to apply certain provisions of the Consumer Credit Directive to mortgage credit. Furthermore, planned or ongoing changes to the prudential and supervisory rules governing the banking sector, for example the changes to capital requirements and rules on securitisation, will have a direct bearing on banks’ lending practices. This proposal complements the work on the supervisory side by focusing on ensuring responsible conduct of business and on ensuring that a regulatory framework is in place for all actors in the lending chain. Together, these initiatives should each contribute to a lower level of credit risk and to greater financial stability.
Consultation of interested parties
Consultation methods, main sectors targeted and general profile of respondents
In recent years, the Commission has undertaken a thorough review of EU mortgage markets, culminating in the White Paper on the integration of EU mortgage markets i. The White Paper and the extensive consultative work leading up to it form an integral part of the preparatory work for the responsible lending and borrowing initiative.
Against this background and in the wake of the financial crisis, the Commission launched a public consultation to strengthen and deepen its understanding of the issues surrounding responsible lending and borrowing. Commission services also held a number of meetings with Member States, creditors and credit intermediary representatives, trade union representatives, and consumer representatives, throughout the process. The European Parliament and the European Economic and Social Committee have adopted several reports on issues relating to responsible lending and borrowing. The Commission consulted the European Data Protection Supervisor with regard to the protection of consumers’ personal data. The Commission also took note of significant research undertaken in other fora such as the OECD and the World Bank.
The extensive consultation process has allowed some key messages to be identified. First, the banking industry argues that irresponsible lending does not exist in the EU to the same extent as in the US, so that there is no need for EU intervention. Although the problems in EU mortgage markets have not been as widespread as in the US, similar weaknesses in the regulation of EU markets have been identified, e.g. a lack of effective regulation of certain actors and weaknesses in the regulation of the mortgage marketing and sales processes. Second, consumer representatives support an initiative that will ensure a high level of consumer protection and that could prevent over-indebtedness. They are also supportive of measures that would allow consumers to compare offers and give consumers confidence in the actors with whom they engage. They favour an EU-level proposal that would introduce only minimum standards, leaving Member States free to enhance consumer protection in line with local conditions and culture. Third, given the current small market for cross-border mortgages, some stakeholders argue that it would be more appropriate for measures to be taken at national rather than EU level. Three of the issues for which there was the most consistent cross-stakeholder support for EU action were the obligation to undertake a creditworthiness assessment, the need for clear, comprehensible and comparable pre-contractual information and the need to ensure that all players in the lending market are subject to appropriate regulation and supervision.
The information collected has confirmed that there is a case for EU intervention in the field of responsible mortgage lending and borrowing and has substantially contributed to the prioritisation and design of the Directive.
The Commission also drew on a series of studies and reports undertaken on issues relating to responsible lending and borrowing, including the study by London Economics on the role and regulation of non-credit institutions in the EU mortgage market (December 2008); the study by Europe Economics on credit intermediaries in the internal market (January 2009); the report of the Expert Group on Credit Histories (June 2009); the report by OPTEM on the consumer testing of a possible new format and content for the European Standardised Information Sheet on home loans (October 2009); and the study by London Economics on the costs and benefits of different policy options for mortgage credit (March 2011).
The Commission carried out an impact assessment.
The impact assessment identifies a series of problems in EU mortgage markets associated with irresponsible lending and borrowing at the pre-contractual stage and the potential scope for irresponsible behaviour by credit intermediaries and non-credit institutions. These problems are driven by market and regulatory failures as well as other factors such as the general economic climate and low levels of financial literacy. At the pre-contractual stage, the following problems were identified: non-comparable, unbalanced, incomplete and unclear advertising materials; insufficient, untimely, complex, non-comparable and unclear pre-contractual information; inappropriate advice; and inadequate suitability and creditworthiness assessments. Other problems highlighted include ineffective, inconsistent, or non-existent registration, authorisation and supervision regimes for credit intermediaries and non-credit institutions providing mortgage credit. The problems identified have potentially significant macroeconomic spill-over effects, can lead to consumer detriment, act as economic or legal barriers to cross-border activity and create an unlevel playing field between actors.
The impact assessment considers a range of policy options for each problem area including no intervention, principles-based rules, and more detailed or specific rules at EU level. It also assesses the most appropriate instrument for measures, considering self-regulation, a Directive, a Regulation, a Communication and a Recommendation.
The impact assessment concludes that a package of preferred policy options is necessary to ensure responsible lending and borrowing throughout the EU and that the preferred instrument is a Directive.
The impact assessment’s preferred options should result in a substantial improvement in terms of a reduction of consumer detriment. They will improve consumer confidence in creditors, credit intermediaries and mortgage products and will reduce the likelihood of consumers purchasing an unaffordable product, which could potentially lead to overindebtedness, default and eventually foreclosure. The strong positive effect on consumer confidence is also expected to underpin the demand for mortgage credit products and encourage consumer mobility at both national and, albeit to a lesser extent, cross-border level. The implementation of some of the selected options will not lead to significant changes in the operation of market actors on the supply side in a number of Member States, where similar obligations already exist. However, the preferred policy options will have an important impact on the cross-border activity of creditors and credit intermediaries. Implementation of the preferred options will encourage cross-border activity by offering new business opportunities as well as economies of scale and scope. This will have a positive impact both on the market players and for consumers. The entry of foreign credit providers and credit intermediaries should strengthen competition and, thus, translate into a wider range of credit products for the consumer and potentially even a marginal decrease in prices. The preferred policy options will also entail costs for creditors and credit intermediaries. However, these costs will be limited by several factors including the fact that a number of the preferred policy options are already implemented in several Member States, that many of the preferred policy options are already common practice amongst large parts of industry and that substantial synergies are expected between the different policy options. The estimated total benefits of the package of measures are in the range of EUR 1 272–1 931 million. The expected total one-off and ongoing costs are in the range of EUR 383-621 million and of EUR 268-330 million respectively.
The different policy options and their impact on stakeholders are discussed at length in the impact assessment.
Contents
- LEGAL ELEMENTS OF THE PROPOSAL
- BUDGETARY IMPLICATION
- Grounds for and objectives of the proposal
- General context
- Existing provisions in the area of the proposal
- 2. CONSULTATION OF INTERESTED PARTIES AND IMPACT ASSESSMENT
- Summary of responses and how they have been taken into account
- Collection and use of expertise
- Impact assessment
- Legal basis
- Subsidiarity principle
- Proportionality principle
- Choice of instruments
- 5. ADDITIONAL INFORMATION
- European Economic Area
- Detailed explanation of the proposal
Article 114 of the Treaty on the functioning of the EU.
The subsidiarity principle applies insofar as the proposal does not fall under the exclusive competence of the Union.
The objectives of the proposed action cannot be sufficiently achieved by Member States and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the Union, for the following reason(s):
The Treaty provides for action to ensure the establishment and functioning of an internal market with a high level of consumer protection as well as the free provision of services. Such a market for residential mortgages is far from completion as several obstacles exist to the free provision of services and the creation of an internal market. These obstacles restrict the level of cross-border activity on the supply and demand sides, reducing competition. Creditors may be less efficient than they could be and borrowers may face the risk of consumer detriment.
Factors that prevent the pursuit of business or raise the cost of doing business in another Member State relative to the costs faced by domestic providers can be addressed by appropriate EU policy initiatives. Some of the problems identified could raise the cost of mortgage lending for domestic providers or prevent them from doing business. However, the costs of entering into business are exacerbated for creditors seeking to engage in cross-border activity and can deter new market entrants thereby restricting competition.
In a competitive and efficiently functioning single market with a high level of consumer protection, consumers would search for the best product offered for their needs, be it in their own country or in another Member State. EU consumers continue to predominantly shop locally though for their mortgage credits. This can be attributed, inter alia, to a lack of consumer awareness of what exists elsewhere and lack of consumer confidence due to insufficient or bad information, fears about whether legal rights will be upheld, or poor legal protection in the event that something goes wrong.
Financial integration and financial stability are mutually reinforcing objectives which operate at national level but crucially depend on certain tasks that can only be achieved at EU level. As the recent financial crisis illustrated, the effects of irresponsible lending in one country can quickly spread beyond national borders due in part to the multinational presence of certain banking groups and also the international nature of securitised risk. This Directive focuses on the interaction between creditors/intermediaries and citizens. Irresponsible lending and borrowing was one of the factors at the origin of the financial crisis: it greatly contributed to the emergence of the financial turmoil. The proposed provisions should ensure that mortgage credit throughout the EU is undertaken in a responsible manner and that it contributes to promoting EU financial, economic and social stability.
Creating an internal market in mortgage credit with a high level of consumer protection as well as facilitating the provision of services throughout the EU would be fully in line with the Treaty. Action by Member States alone is likely to result in different sets of rules, which may undermine or create new obstacles to the functioning of the internal market as well as create unequal levels of consumer protection throughout the EU. Common standards at the EU level, such as the ones proposed, should promote an efficient and competitive internal market with a high level of consumer protection. Such standards are further essential in order to ensure that the appropriate lessons are learnt from the sub-prime crisis and to ensure that such a financial crisis does not reoccur in the future.
The proposal therefore complies with the subsidiarity principle.
The proposal complies with the proportionality principle for the following reason(s):
The proposal does not go beyond what is strictly necessary to achieve its objectives. It does not regulate all aspects of lending and borrowing but focuses on some key aspects of the mortgage credit transaction.
All of the proposed rules have been the subject of a proportionality test and intensive consultation to ensure appropriate and proportionate regulation.
The proposal allows for the later adoption of implementing measures or technical standards, in case specific issues require the development of more detailed technical guidance or clarification.
On 23 September 2009, the Commission adopted proposals for Regulations establishing EBA, EIOPA, and ESMA.[15] In this respect the Commission wishes to recall the Statements in relation to Articles 290 and 291 TFEU it made at the adoption of the Regulations establishing the European Supervisory Authorities according to which: 'As regards the process for the adoption of regulatory standards, the Commission emphasises the unique character of the financial services sector, following from the Lamfalussy structure and explicitly recognised in Declaration 39 to the TFEU. However, the Commission has serious doubts whether the restrictions on its role when adopting delegated acts and implementing measures are in line with Articles 290 and 291 TFEU.'
Proposed instrument: Directive.
Other means would not be adequate for the following reason(s):
Full harmonisation is not always necessary or appropriate: e.g., the structure of housing markets and mortgage markets differs throughout the EU, and the products and remuneration structures also vary. EU intervention needs to be detailed enough to be effective but high level enough to take into account the EU’s diversity. A Directive offers a degree of flexibility in terms of the level of harmonisation. Such targeted provisions can accommodate the diversity that exists in the EU’s mortgage markets.
It is recommended that the legal instrument of a Directive be used for the package of proposed measures.
Leaving aside the normal administrative costs linked to ensuring compliance with EU legislation, there will be no budgetary impact since no new committees are created and no financial commitments are made.
Review/revision/sunset clause
The proposal includes a review clause.
The proposed act concerns an EEA matter and should therefore extend to the European Economic Area.
The following short summary aims to facilitate the decision making process by outlining the main substance of the Directive.
Article 1 (subject matter) states that the Directive focuses on mortgage credit to consumers and on certain prudential and supervisory requirements for creditors and credit intermediaries. As such, the focus of the Directive is on residential rather than commercial property.
Article 2 (scope) sets out the scope of the Directive, which covers credit agreements secured by a mortgage or by another security, loans to purchase a property and certain credit agreements aimed at financing the renovation of a property. The Directive does not preclude the possibility that some Member States may wish to extend the scope to other beneficiaries such as small or medium-sized enterprises or indeed to some commercial property transactions.
Article 3 (definitions) defines the terms used in this Directive. To the greatest extent possible, definitions have been aligned with those in other Union texts in particular Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 which lays down rules at Union level concerning credit agreements for consumers and Directive 2002/92/EC of the European Parliament and of the Council of 9 December 2002 on insurance mediation i. However, given the specificities of this Directive, some have been tailored to the needs of this proposal.
Article 4 (competent authorities) requires Member States to designate specific competent authorities to implement the Directive.
Articles 5 (conduct of business obligations when providing credit to consumers) and 6 (minimum competence requirements) stipulate important conditions for both creditors and credit intermediaries in order to ensure a high degree of professionalism in the provision of mortgage credit, such as an obligation to act in the best interests of the consumer and requirements with regard to having appropriate knowledge and competence.
Articles 7 (general provisions applicable to advertising and marketing) and 8 (standard information to be included in advertising) introduce general principles for marketing and advertising communications and set out the form and content of information to be included in advertising. The standard information concerns key features of the credit and, when the credit is secured by a mortgage, a warning as to the consequences for the consumer in the event of non-observance of his commitments linked to the credit agreement. These provisions complement and expand on the obligations of Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market and amending Council Directive 84/450/EEC, Directives 97/7/EC, 98/27/EC and 2002/65/EC of the European Parliament and of the Council and Regulation (EC) No 2006/2004 of the European Parliament and of the Council ('Unfair Commercial Practices Directive').
Article 9 (pre-contractual information) creates an obligation for creditors and credit intermediaries to make general information available on the range of credit products at all times. It further introduces an obligation for creditors and, where applicable, credit intermediaries to provide personalised information to the consumer on the basis of a European Standardised Information Sheet. These requirements largely mirror the voluntary obligations set out in the European Voluntary Code of Conduct on Home Loans. The content and layout of the European Standardised Information Sheet, as detailed in Annex II, has, however, been updated to take into account the results of consumer testing in 27 Member States.
Article 10 (information requirements concerning credit intermediaries) requires credit intermediaries to disclose information to consumers concerning their identity, status, and relationship with the creditor, prior to the performance of their services in order to increase transparency of possible conflicts of interest.
Article 11 (adequate explanations) introduces an obligation for creditors and credit intermediaries to give explanations on the proposed credit agreement(s) to the consumer at the pre-contractual stage, determined by the level of the consumer’s knowledge and experience with credit.
Article 12 (calculation of the annual percentage rate of charge) concerns the main indicator used for the comparison of mortgage credit products. It requires, for mortgage credit products, the use of the definition of the annual percentage rate of charge (APRC) used in Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 which lays down rules at Union level concerning consumer credit agreements. Details of the APRC calculation method are given in Annex I and provisions for amending the methodology are laid down in order to be able to take market developments into account.
Article 13 (information concerning the borrowing rate) provides for information to be delivered to the consumer in the event of changes to the borrowing rate.
Article 14 (obligation to assess the creditworthiness of the consumer) requires the creditor to assess the consumer’s ability to repay the credit, taking into account the consumer’s personal circumstances and based on sufficient information. It also introduces a duty for the creditor to refuse to grant the credit where the results of the creditworthiness assessment are negative.
Articles 15 (disclosure obligation on the part of the consumer) introduces the requirement for responsible borrowing, namely that the borrower must provide all necessary and correct information to enable the creditworthiness assessment to be carried out.
Article 16 (database access) introduces provisions to ensure that creditors are able to access information from relevant databases on a non-discriminatory basis.
Article 17 (advice standards) establishes standards to ensure that, where advice is given, it is clear to the borrower that advice is being provided, without introducing any obligation to provide advice. It introduces a requirement that a sufficient number of credit agreements on the market be considered and that advice be given in line with the profile of the borrower.
Article 18 (early repayment) requires Member States to ensure that consumers have a right to repay their credit before the expiry of the credit agreement, giving freedom to Member States to set conditions on the exercise of that right, provided that such conditions are not excessively onerous.
Articles 19 to 22 (on the authorisation, registration and supervision of credit intermediaries) establish the principles for a regulatory and supervisory framework for credit intermediaries. This framework provides for the authorisation and registration of credit intermediaries, subject to compliance with certain requirements on entry into the business and on an ongoing basis, and for the establishment of a passport regime. The requirements apply to all credit intermediaries, whether they are tied or not in order to ensure a high degree of professionalism in the industry.
Article 23 (authorisation, registration and supervision of non-credit institutions) stipulates that non-credit institutions must be subject to adequate authorisation, registration and supervision. This should ensure that all creditors, whether they are a credit institution or not, are adequately regulated and supervised.
Article 24 (penalties) requires Member States to ensure that appropriate administrative measures or sanctions can be taken in the case of non-compliance with the Directive.
Article 25 (dispute resolution mechanisms) requires Member States to establish out-of-court redress bodies for the resolution of disputes between creditors and consumers and between credit intermediaries and consumers.
Articles 26 to 28 (delegated acts) sets out the procedures to be followed to allow certain elements of the Directive to be adapted, specified or updated.
Article 29 (imperative nature of this Directive) and Article 30 (transposition) stipulate respectively that the Directive should be implemented by Member States and how it should be implemented.
Article 31 (review clause) provides for a review of the appropriateness and effectiveness of the Directive in meeting its objectives after five years.