1 Impact of the EU Directive on credit agreements relating to residential property for creditors in...

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Impact of the EU Directive on credit agreements relating to residential property for creditors in Europe

Christian König, LL.M., Attorney and Head of Legal Affairs of the German Association of Private Bausparkassen

Stockholm11 April 2013

Agenda

- EU Procedure - European Commission‘s proposal- Outcome of the European Parliament votes- Revolutionary ideas from the European Parliament- Impact for European consumers and mortgage

lenders

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EU Procedure

Chronology:

31.03.2011 Proposal for a Directive on credit agreements relating to residential property for creditors

Co-decision procedure

ECON, IMCO, IURI Committees of the EP are working together in the context of the enhanced procedure

25.03.2012 Vote in IMCO Committee

07.06.2012 Vote in ECON Committee

30.05.2012 Council agree on „general approach“

12.06.2012 Start of the Trilog-negociations

Spring 2013 Vote of the Plenary of the European Parliament

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Procedure in the European Parliament

Enhanced procedure within EP ECON, IURI, IMCO With divided competences depending on each articles

ECON = MEP Sanchez Presedo

IMCO = MEP Lechner JURI = MEP Thein

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Procedure in the European Parliament

Trilog ? What is it ?

Negociate compromises

moderate the discussions

European Commission’s proposal

Proposal for a Directive on credit agreements relating to residential property dated 31.03.2011

Target: Creation of an internal market, reaction on the subprime crisis

< 1% all EU consumer ever concluded a mortgage credit cross border Need to regulate mortgage credit, since amount of foreclosure has risen up Reason for “crisis”: increase in foreign currency loans, subprime lending by non

deposit lenders and increased risk appetite due to securitisation practices Need to regulate responsible lending and borrowing

Need to create EU wide standards, similar to the Consumer Credit Directive

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Previous ideas on responsible lending

- No excessive LTV over 120%

higher own equity requirements - Risk guidelines for special products (FX) - Credit worthiness assessment and documentation- Suitability test concerning the product design as well as

for consumers (buy-to-let, interest-only, self-certification mortgages, revolving credit, FX loan, LTV, LTI)

- Advice standards (GB, DAN, IRL)- Encourage responsible lending as well as financial education

European Commission Consultation on responsible lending and borrowing 15. June 2009

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European Commission’s proposal

Content of the proposed Directive, 31.03.2011

Transfer of competence to the Commission for regulating delegated acts

Duty to check the credit worthiness and suitability of the loan product for the consumer

Introduction of a subjective reflection period

Early repayment as a legal or contractual right but fair compensation

If advice is granted, possibly duty to recommend products from competitors

Standard information in the advertisement together with credit conditions, LTV, total cost of credit, repayment details, warnings, etc.

Standardised pre-contractual information, changed ESIS, possibly second ESIS handover

Rules for credit intermediaries, similar to Insurance Mediation Directive

Appropriate explanation of the credit offer

APRC formula, inclusion of costs for the registration of land charge

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Outcome of the ECON vote

Scope of the Directive

EP voted for certain excemptions from the scope:-Similar to the Consumer Credit Directive (CCD), credits granted by an employer, credits granted to a restricted public under a statutory provision with a general interest purpose, credits as an outcome of a court settlement are excluded from the scope in Art. 2 II.-Art. 2 I. c also includes unsecured renovation loans -Member States, which adopted the CCD for mortgage credits will have an extra transposition time to implement the Directive for mortgage credits -In order to respect UK law, Member States will be entitled to exclude certain provisions of the Directive for „buy-to-let loans“

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Financial literacy/education

-A new Art. 4a now regulates financial literacy/education

-A leftover from the previous „responsable borrowing and lending“ ideas,

-Member States now ensure that all stakeholders are involved in the design and development of clear, informative documents for first time buyers

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General Conduct of Business Obligations

General conduct of business rules (Art. 5) have been changed;-Now creditor and intermediary do not alwayshave to act in the best interest of consumer but taking due account of rights and interest of the consumer

-Art. 5 II b also regulates that Member States ensure that the manner in which creditors remunerate their staff and intermediaries do not impede compliance with the above mentioned obligation,

-Remuneration practice should not prejudice the ability to provide objective recommendations or include individual product results or sales targets

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Proposal by the EU Commission

Proposed rules for credit intermediaries Standards for credit intermediaries according totheir status (tied vs. untied /broker) So far no uniform rules for creditintermediariesConflict of interest (fees/bonus/commission)Disclosure of broker fees Registration and supervisionMinimum professional standards for credit intermediaries (indemnity insurance or comparable guarantee, professional requirements or experience, good reputation, etc.)Minimum requirements for employees and management of the creditor

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Minimum requirements for qualification

-Staff and intermediaries now have to possess an appropriate level of knowledge and competence in relation to product design, the offering or intermediation, advising or granting of credit agreements (Art. 6 I),

-Details concerning the field of knowledge is regulated in a new Annex III,

-Member States should develop details

-New, according to Art. 6 II a obligation to update knowledge and abilities on a regular basis

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Product tying and bundling

Definition of Tying:

“offering of one or more ancillary services with the credit agreement in a package where the credit agreement is not made available to the consumer separately”

Definition of Bundling

“offering of one or more ancillary services with the credit agreement in a package where the credit agreement is also made available to the consumer separately but not necessarily on the same terms or conditions as when offered bundled with the ancillary services”

-According to Art. 8a I „Tying“ should be prohibited in general !-But Member States may permit tying practices with payment account or savings product if it is a fully integrated part of the credit or whose only purpose is to accumulate capital to repay or service the credit, or hold a relevant insurance policy

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Proposed Directive by the Commission

Information requirements:

Information requirements in the advertisementGeneral information Standardised pre-contractual information dutyInformation within the contract

information overload

EU mortgage credit regulation

Warn the consumer !

Please make sure you are able to pay back your mortgage when your income falls

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Reflection period (Art. 9 II)

“Member States shall ensure that the creditor and, where applicable, the credit

intermediary, without undue delay after the consumer has given the necessary

information on his needs, financial situation and preferences in accordance with

Article 14, provides the consumer with the personalized information needed to

compare the credits available on the market, assess their implications and take

an informed decision on whether to conclude a credit agreement.”

How long is sufficient time?

French CodeCons: 10 days reflection period after the binding offer by the bank, no waiver

German Civil Code: right of withdrawal 14 days after the loan contract (closing)

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Pre-contractual information duties and reflection period •Consumer now should have either a 14 days pre-contractual reflection period or 14 days withdrawal period after contract (Art. 9a II) •Pre-contractual reflection period should be guaranteed by a binding offer of the creditor at least for 14 days•Different to French law, consumers can also wave the 14 days pre-contractual reflection period by signing the contract •No more right of withdrawal if there has been a transfer of a right in a property connected to or using funds obtained under the credit agreement or in the cases where the credit agreement is established through notary

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Pre-contractual information duties and reflection period •Creditor now has to hand over the standardised pre-contractial information sheet „in good times“ to the consumer before the consumer is legally bound (Art. 9a), similar to the Consumer Credit Directive •Amendments from British MEP did not obtain a majority which would have allowed Member States to issue other information sheets, than the ESIS •Now similar to the Standard European Consumer Credit Information (SECCI), European consumers will get now the European Standardised Information Sheet (ESIS) for mortgage credits

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Duty to explain

The rules concerning the duty to explain the pre-contractual information and ancilliary services in Art. 11 have been adjusted to the wording of the Consumer Credit Directive

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Advice•Now brokers and untied intermediaries are obliged to consider a sufficiently large number of credit agreements available on the market (Art. 17 III b, c) •the advise need to be given to the consumer on a durable medium•Member States have to prohibit the use of the term "independent advice" or "independent advisor" when creditors, that provide advisory services are not remunerated at all by one or more creditors (Art. 17 IV)

=> First step for regulating the „fee only adviser“ at EU level !

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Advice•Lenders now do not have to undertake a market comparison of products if they offer advice as the Commission proposed •The question was what is advice and when is an contract with advisory service concluded ?•Art. 17 now foresees that consumers need to be informed at an early stage, if advice is offered or not •Creditors and tied intermediaries now only have to recommend a suitable credit agreement from their own product range

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Rules on the calculation of the APRC APRC contains all costs of the transaction such as Third party costs, except notary costsCosts for ancillary servicesCosts for the registration of the mortgage in the land register are included, as well as stamp duties, etc.

if APRC wrong calculated

interest rate will be reduced to the nominal

interest rate

Aim of the EU = comparison of mortgage credit products

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APRC / FX loans

•ECON voted for amendments tabled by the Greens

•For vartiable rate loans, creditor has to inform the consumer about the maximum borrowing rate and the minimum borrowing rate for the past 20 years (Art. 18 b III)

•Foreign currency loans: consumer has a right to change the currency and he need to be informed what would happen to his obligations if the national currency loses 20 % of value in relation to the currency of the loan (Art. 18a IV)

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Credit worthiness assesment•Proposal of the COM with a duty to deny credit if creditworthiness test is negative was refused and changed•Art. 15 I now foresees a duty to assess credit worthiness•Expenses of the borrower have to be considered, database also can be checked •Price increase of the financed real estate should generally not be considered within the credit worthiness assesment

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Real estate valuation•Previous ideas about an external property valuation have been weakened•Art. 14a regulates now that Member States should ensure that sound valuation practices are applied in accordance with international standards and that appraisers are supervised •Real estate valuation can be done by external or internal appraisers •Real estate valuation need to be documented and stored by lender

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Idea behind: US Dodd-Frank Act (Art. 1471); but in the US applicable only for „high risk mortgages“


Early repayment Art. 18 IIContractual or legal right to repay the loan earlierRight to repay the loan earlier in the so called cases “accidents of life”Member States can restrict the right of early repayment and the early repayment compensationMS shall not make the exercise of the right excessively difficult or onerous for the consumer

•How much is excessively difficult or onerous for the consumer ?

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Early repayment •Consumer now has a right to fully or partially pay back the loan earlier (Art. 18 I) •No „penalties“•But creditors are entitled to a compensation•Member States may restrict the right of early repayment for fixed interest agreements Art. 18 III

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Early repayment •Compensation shall not excede the economic damage •Consumer need to be informed about the methodology of the calculation of the early repayment fee or the concrete amount before signing the contract •Member States can regulate caps on the compensation or maximum periods after which compensation may no longer be claimed

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Institut für Finanzdienstleistungen e.V. „Vergleichende Übersicht zur Vorfälligkeitsentschädigung für die vorzeitige Beendigung von Hypothekarkrediten in acht europäischen Staaten“ (2004)


Foreclosure•The previously discussed lialibity limit within the foreclosure procedure to the property valuation done by the bank did not get a majority,•Creditor now has to take reasonable steps to obtain the best price for the foreclosed property,•charges to compensate damages for default to be paid by the consumer need to be proportionate to the costs incurred by the creditor (Art. 18 b II)•Exclusion of personal liability (datio in solutum) did not get a majority as well

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Flexibility of the mortgage credit

Consumer should have the possibility to

-change the creditor during the contract duration if the new offer has an economic advantage for the consumer (e.g. 100 basis point cheaper)

-transfer the loan (debt obligation) to another creditor (change of debtor)

-Exchange the security

Other revolutionary ideas from the European Parliament

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„use“ the loan contract for another real estate (cross-border)change the currency in the case of a FX loan change the amount of installment (higher/lower) without compensation, etc.

Higher transparency in the mortgage market by theintroduction of a national mortgage register and a mortgagekey identifier with details of the loan contract and the security contract, valuation, etc.


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• Prohibition of securitization• Prohibition of product tying/bundling• Variable interest loans (APRC calculation

with the highest possible interest rate from last 15 years)

• National limits for variable interest rates• Consumer should get the right to extend

credit repayment duration of 5 years, if interest rate changes

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• 30 (working) days reflection period before contract conclusion plus withdrawal period (2 weeks)

• Prohibition of FX loans except if salary is paid in this currency

• Limited debt liability of the consumer restricted to LTV assessment by the creditor

• Profit sharing for the consumer; if after early repayment interest environment is better than within the agreed contract and bank could make a profit

• LTV limit to 90% or 100%

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Impact for lenders and consumers

Outlook:-EP plenary vote-Council approach quite balanced, no final decision yet

Implemention for EU creditors within the next 2 - 3 years-Huge impact for credit business, -Much more than Consumer Credit Directive implementation

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Impact for lenders and consumers

• Changes in internal procedures– External apraisers and valuation

procedures– Educational requirements for staff and

intermediaries – Explanation, possible advice standards

and new information requirements• Certain product restrictions are possible

– Restriction on bundling/tying (Cross selling)

– Early repayment right influence product design, price and refinancing structure

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Tack så mycket !

Christian König, LL.M.

Attorney

Head of Legal Affairs

Association of

Private Bausparkassen e.V.

Klingelhöferstrasse 4

10785 Berlin

Tel: +49 (0) 30/590091-500

Fax: +49 (0) 30/590091-501

Email: [email protected]

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