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Government clarifies new rules on mortgage lending in line with EU Mortgage Credit Directive

Following a recent consultation process the government has now published legislation which will incorporate new EU regulations on mortgage lending into UK law.

The new regulations, as set out by the Treasury, transpose the Mortgage Credit Directive (MCD) into UK law, and encompass other changes such as bringing the regulation of ‘second charge’ mortgage lending into line with ‘first charge’ lending.

A new set of regulations for buy to let lending, where the lending is to consumers rather than for business purposes, has also been introduced.

The introduction of these new rules is predicted to have little impact, however, because most buy to let mortgages are classified as existing for business purposes and would only become subject to the new regulations if the borrower had long periods of residence in the property.

Lenders themselves will also be able to confirm that a loan does not require regulation, so long as the borrower signs a declaration saying they are acting wholly for business purposes and the lender has no reason to believe otherwise.

Under the new directive, buy to let broking will remain outside the scope of credit broking.

Other exemptions from the new regulation will include properties where a portion is being used as a residential dwelling for the borrower or a relative (i.e. a live/work unit) or where the property is being used predominantly for business purposes, such as a bed and breakfast.

The Building Societies Association (BSA) is reported as saying that ‘no significant impact is expected as a result of this legislative change.’

Similarly, as part of the consultation, an impact assessment indicated that just 11% of the market, or 18,000 transactions a year will be affected by the changes.

Robert Sinclair, chief executive of Association of Mortgage Intermediaries (AMI), said:

“AMI is delighted that Treasury has listened to the voice of the broker and made changes to take brokers out of the scope of the consumer credit regime for unregulated buy-to-let loans. In addition, the clarification on what comprises regulated consumer buy to let is positive.”

Paul Broadhead, head of mortgage policy at the BSA, added:

“The BSA is still of the view that the Mortgage Credit Directive will offer little or no benefit to UK consumers, but will add cost, complexity and some confusion to the mortgage process. However, we welcome the Government’s approach to implementation, putting in place the minimum requirements to meet European law. The introduction of an appropriate framework for consumer buy-to-let will keep the majority of buy-to-let lending outside the scope of regulation, minimising the disruption to this market.”

The Treasury received responses to its consultation from over 30 stakeholders, primarily banks and building societies, as well as a range of trade bodies and some consumer groups.

In response to concerns regarding the timeline for the roll out of the new regulations, the government has stated that it will make it possible for all firms subject to the MCD to adopt the revised rules up to six months ahead of implementation in March 2016.

The legislation will now be laid in parliament and will be subject to scrutiny by both houses.