Thursday, 16 October 2014

A guide to the impact of the EU Mortgage Directive

The consultations on implementing the EU Directive and transferring second charge lending are out and the clock is counting down to implementation in March 2016. There is obviously a lot to digest and there are more consultations to come, particularly on regulated buy to let lending for ‘reluctant landlords’. Some of the rules are quite complex, if they go ahead as planned. By deciding to implement the EU Directive in a minimalistic way it will actually create more complexity rather than simplifying things as was first expected.

Here’s a quick look at some of the changes and implications.

EU Directive

The definition of a regulated loan changes to ‘a charge’ as expected and the 40% occupancy rate is removed as well. This will bring more properties into regulation. For commercial property the proposal is to look at the level of residential use, with 40 percent residential being the cut-off point to remain non-regulated. Buy to let loans are mainly to be deemed as ‘for business purposes’ and will therefore remain non-regulated. This covers properties that are let or to be let so doesn’t necessarily cover all investment properties.

The Directive only covers loans to consumers (someone acting outside of their business, trade or profession), hence the ability to create a business purpose exemption. By proposing that when looking at commercial property, 60 per cent commercial means it is for business purposes and therefore exempt, the Treasury are in danger of setting a ‘by default’ standard for ‘predominantly for business purposes’ of 60 per cent as there is now a reference point that could be used. This may be an unintended consequence.

Loans to Limited Companies will remain outside of regulation as the loan is to the business.

There is a new definition of a bridging loan. This will be “A credit agreement of either no fixed duration or which is due to be repaid within 12 months, used by the consumer as a temporary financing solution while transitioning to another financial arrangement for the immovable property”.

The big question that needs to be considered is what’s covered by ‘transitioning to another financial arrangement’. Hopefully a sale of the property is covered by ‘another financial arrangement’. Assuming that it is, what about where the property to be sold is not the one that the loan is secured against?

Second Charge Transfer

The main impact is that second charge loans which are currently written under consumer credit regulations will be under the same basic rules as first charge regulated rules, i.e. MCOB. This will bring with it affordability assessments and will lead to reducing the ability of some borrowers to achieve loans they want, or indeed borrow at all.

In proposing to create an exemption for second charge loans for business purposes there is a need to gain clarification as to the impact for intermediaries in this respect. Currently Consumer Credit exempt loans require intermediaries to have Credit Broking permissions. With the new exemption this will not be Consumer Credit exempt so it is not clear at this stage what, if any, permissions will be needed to introduce business exempt loans including buy to let exempt loans.

The change will also mean that intermediaries who sell these loans will need to give advice rather than just sell the loans and will have to be become authorised for this. This will mean having to obtain appropriate qualifications as well. Some will find having to take exams a challenge and the FCA will have to consider whether the current qualifications are appropriate enough to cover second charge lending to a realistic standard. They may as well take the opportunity to look at making sure there is enough content about bridging as well whilst they are at it!

From an advice perspective, the proposals are very weak. You have to highlight the availability of other options such as a further advance or re-mortgage but not investigate them or quote costs for them before recommending a secured loan (or vice versa) leaving it to the borrower to decide if he should look into this. Given that all of the feedback to date demonstrates that people don’t shop around it is astonishing to believe the FCA expect this to be a sufficient trigger to get borrowers to act! This is, in due course, bound to lead to another miss-selling scandal with accusations of product sales predicated on returns for the seller rather than the best interests of consumers. You can almost hear those fines ratcheting up for the banks again if they get this one wrong…

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