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UK lenders lead the way in implementing new EU directive

With the deadline for the implementation of the EU’s new mortgage credit directive (MCD) just two weeks away, the Council of Mortgage Lenders (CML) has reported that UK lenders are ahead of their EU counterparts, with many already complying with the directive’s requirements.

The MCD has been designed to set minimum regulatory requirements for mortgage lending across Europe.

However, the CML has said that UK borrowers will notice few changes when applying for and taking out a mortgage once the MCD is operational and furthermore, they do not expect to see any significant effects on the market or on the availability of mortgages.

“In many ways, implementation of the directive in other European countries will align them with standards already applying in the UK, where the mortgage industry has been operating for the last two years under a system of enhanced consumer protection following the mortgage market review (MMR),”

the CML says in its latest report.

Changes that may become apparent over time to UK borrowers include revised disclosure documents, as given to them by lenders when applying for new mortgages, as well as the creation of a new class of ‘consumer’ buy to let borrowing and modifications affecting foreign currency loans and second charge lending.

An assessment published last year by the European Mortgage Federation, reviewed how well different countries were implementing the MCD.

The UK was highlighted as going beyond the core provisions of the directive and it was also estimated that many firms in the UK were six months ahead of most of their European counterparts on implementation.

Adoption of the directive has been widely supported by the government, regulators and lenders, despite the fact that the UK’s own Mortgage Market Review (MMR) was put in place in 2014 to safeguard consumers.

The CML reports that the directive does little in practice to further extend protection for UK borrowers.

However, borrowers will probably notice over time the new way information is presented to them as part of the sales process.

Consumers who have become familiar with the UK’s ‘key facts’ illustration (KFI) will gradually see it replaced by the new European standardised information sheet (ESIS).

By 2019, the process of transition to ESIS will be complete.

Until then, many firms will continue to use the KFI, as they will have to make significant changes to systems, staff training and other processes in order to adopt the ESIS.

“Even if lenders stick with the KFI for now, they will have to introduce a “topped up” version of the document, showing to borrowers what the monthly repayment cost of a mortgage would be if interest rates were to rise to a 20-year high. Firms can do this either by applying their own rate, or one specified by the FCA reflecting the Bank of England base rate,”

explains the CML.

The new MCD is to come into effect as from the 21 March 2016, but as many UK lenders have already adopted its key provisions, the CML says that the formal implementation date will have little direct impact on the mortgage market.

“Over time, consumers may notice some differences in the information about mortgages presented to them by lenders when they apply to take out a new loan. Other changes include the regulation of second charge mortgages and “consumer” buy-to-let loans. But protection for consumers in the UK mortgage market was extensively reinforced two years ago as a result of the MMR, so the European directive will have only a modest impact.”

The implementation of the MCD in the UK has been overseen by HM Treasury.