The goal of the Directive is to make “responsible mortgage loans” the norm across Europe. The European Parliament proceeded from the fact that two thirds of the debts of European households are made up of mortgage loans. As the financial crisis has shown, irresponsible lending practices by market players can undermine the foundations of the financial system and cause all parties to lose confidence. Moreover, outstanding loan amounts have had a dramatic impact on individuals and have negatively affected the economies of Member States as a whole.
Literacy, clarity and flexibility
Improving consumers’ financial literacy is a focal point. Under the Directive, mortgage lenders will have to provide pre-contractual information in a standardized information survey (ESIS). To alert consumers of potential rate variations, the ESIS will also include information on variable interest and foreign currency loans. This will allow consumers to choose the mortgage product that best suits their needs. Consumers will also be given a guaranteed period of time before being fully bound by a mortgage loan agreement (through a period of reflection, a right of withdrawal or both). In addition, to ensure that borrowers can meet their credit obligations, the Directive will introduce broad standards for assessing an applicant’s credit worthiness.
In general, mortgages will be more flexible for consumers. First of all, repaying a loan early will be easier, which could reduce the overall cost of the loan, since all sanctions for early repayment would be prohibited. However, Member States may decide that in such cases creditors are entitled to fair compensation for costs directly and exclusively linked to early repayment. Mortgages will also be “more transferable” to another borrower or currency and it will also be possible to negotiate in the contract that returning or transferring the security or transferring the revenues from its sale to the lender would be sufficient to repay the loan. Last but not least, the Directive aims to encourage lenders to apply reasonable forbearance if the consumer has serious problems making repayments.
The proposal for the Directive states that national mortgage markets are often excessively concentrated and the market is split between several large financial institutions. The Directive therefore sets forth principles for permitting and registering credit intermediaries and introduces a passport regime, which allows an intermediary to provide services throughout the Single Market once authorized in one Member State. This would help to achieve the aims of regulation and de-concentration.
The European Parliament adopted the Directive during its first reading.