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Home loans: better advice for borrowers, more stable markets for lenders

Proposed new rules to ensure that house buyers are properly informed before taking on a mortgage were approved by the Economic and Monetary Affairs Committee on Thursday. These rules should also ensure that buyers are offered mortgages that are tailored to their needs and that their creditworthiness is properly assessed. Buyers who fail to repay a loan would be better protected against seizure of their assets. To curb irresponsible lending, mortgage sellers would be better supervised.

Some of the legislation's requirements would be adapted to reflect differences among EU Member States' national mortgage and property markets, but the basic rules would apply EU-wide and information for buyers would have to be presented in a consistent format across the EU.

Information and advice for borrowers

MEPs have stiffened the requirements proposed by the Commission on information to be provided before the borrower signs a mortgage and inserted rules on the borrower's "financial education".

The text says that any financial advice given to borrowers should be impartial, and enable them to understand the long-run financial consequences of taking out the loan. Everyone signing up for a mortgage should receive comparable information about the products available, and be informed whether there is any financial incentive that might lead the adviser to recommend a particular product.

The credit terms offered to borrowers must be in line with their present financial situation and their prospects, it adds.

Borrower's assessment and protection

The rules aim to protect borrowers not only from irresponsible lending, but also from their own misjudgements and also to ensure that mortgages go only to those who can afford them.

To protect borrowers better, MEPs have added a new rule stipulating that the return of collateral such as the property will suffice to repay the loan, provided that the lender and borrower expressly agree to this in the contract.

Where a borrower defaults on a loan, MEPs want arrangements to ensure that the lender makes every reasonable effort to solve the problem before initiating foreclosure proceedings. They also aim to ensure that arrangements for settling the debt outstanding after the property has been sold are reasonable with regard to the borrower's circumstances, e.g. family situation. These arrangements could include limiting the seizure of wages, retirement pensions, etc, so as to ensure that the borrower retains a minimum household income.

Borrowers would also have a 14-day cooling off and reflection period after signing the mortgage deal, during which they could withdraw from it.

Greater flexibility

Most home loans are long term, yet both lenders and borrowers need flexibility during the life of the product to manage risk and changing circumstances for both.

MEPs therefore inserted flexibility provisions, including a right for the borrower to repay the loan early and a right for the lender to receive a fair compensation for such early repayment. However, obliging borrowers to pay penalties for early repayment would be prohibited.

Proposed rules for loans denominated in a foreign currency would allow the borrower, on certain conditions, to change the currency of the loan, while the lender would be entitled to be compensated for this change.

Finally, MEPs decided that where expressly agreed by both parties to the mortgage deal, borrowers should be able to transfer the mortgage from one residential property to another when moving house. However, to make this possible, Member States would have to develop means to ascertain whether the borrower has a clear legal title to the property.

Stimulating competition among lenders

Lenders should be authorised, registered and supervised to ensure that they meet strict professional requirements, without encroaching upon their right to operate in other Member States in accordance with the principles of freedom of establishment and to provide services, say MEPs;

MEPs have also sought for the first time to regulate "tying practices". As amended, the legislation would prohibit lenders from making loan offers conditional upon the purchase of insurance or other financial products from a specified provider, although lenders could nonetheless require borrowers to take out an insurance policy with specific characteristics, and refuse the loan if they declined to do so. Banning "tied" products would make it easier for borrowers to switch providers.

Under the legislation, national authorities responsible for supervising credit entities, information exchange and dispute resolution, would be united under the auspices of a European Banking Authority (EBA).

Next steps

The vote enables MEPs to open negotiations with the Member States in order to strike a deal.