New legislation for mortgage brokers

The European directive on credit agreements for consumers relating to residential immovable property came into effect in February 2014.

Who and What is covered by the directive?

This directive provides protection for consumers. The definition of a consumer is a natural person who is acting outside their trade, business or profession.

The directive does not prevent Member states from extending the requirements under the directive to protect consumers in relation to credit agreements related to other forms of immovable property such as investment properties. Where Member States decide to exclude these types of credit agreements they must ensure that another appropriate framework for this type of credit is in place at national level. The directive does apply to refinancing but not to equity release or similar products. Unsecured credit agreements for renovations above 75,000 will fall under the scope of the directive.

Requirements

Pre-Contractual Information

The Directive specifies that advertising materials and personalised pre-contractual information should include adequate specific risk warnings about, for example the impact of a rate change etc. This is already in place in ireland through the consumer protection code that al intermediaries must comply with.

Consumers will now be given at least seven days to consider the implications of entering into a credit agreement. This can be provided for by the member states by either a period of reflection or a period of withdrawal. Member states may provide that consumers cannot accept the offer for a period not exceeding the first ten days of the reflection period.

Valuation of Property

The way in which a property is valued will now be standardised across the EU, taking into account the internationally recognised valuation standards.

Credit Intermediaries Minimum Competency And Fitness And Probity Requirements

There are now standardised minimum competency and fitness and probity requirements introduced through the directive. In Ireland there are already minimum competency and fitness and probity requirements in place and it is likely that these will remain the same.

Remuneration Of Credit Intermediaries And Staff

Member States may prohibit or impose restrictions on payment from a consumer to a creditor or credit intermediary prio to the conclusion of a credit agreement.

The directive also provides for rules impede compliance with the obligation to take account of the interests of the consumers. It specifically states that credits, credit intermediates and appointed representatives should not design their remuneration policies in a way that would conflict with their requirements to work in the best interests of the consumer.

There is also a requirement to disclose commissions or other inducements payable to credit intermediaries by creditors or any third party consumers prior to any work being carried out.

Member states will be free to introduce or maintain provisions prohibiting payment of fees by consumers prior to any work being carried out.

Member states will be free to introduce or maintain provisions prohibiting the payment of fees by consumers to some or all categories of credit intermediary.

Advisory Services

Providing advice in the form of a personalised recommendation is a distinct activity that may but need not be combined with other aspects of the granting of credit. Member states shall ensure that the consumer is explicitly informed whether advisory services are being or can be provided to the consumer before a transaction takes place.

This information can be provided to the consumer in the pre-contractual information and should specify.

Whether the recommendation will be based on considering only their own product range ir a wide range of products from across the market.

Where applicable the fee payable by the consumer for the advisory services or where the amount cannot be ascertained at the time of the disclosure , the method used for its calculation.

Advisory services should be based on a fair and sufficiency wide-ranging analysis of the products offered. Member states will be allowed to prohibit the use of the term advice or advisors or other such terms when advisory services are being provided to consumers by creditors, tied credit intermediaries or appointed representatives of tied credit intermediaries.

Where member states do not prohibit the use of the term ‘advice’ or ‘advisors’ they shall impose the following conditions on the use of the term ‘independent advice’.

  • Creditors, credit intermediaries or appointed representatives shall consider a sufficiently large number of credit agreements available on the market and
  •  Creditors, credit intermediaries or appointed representatives shall not be remunerated for those advisory services by one or more credit intermediary.

Point B shall apply only where the number of creditors considered is less than a majority of the market.

Member states may impose more stringent requirements on the use of the term ‘independent advice’ or independent advisor including a ban on commission.

Member states shall ensure that advisory services are only provided by creditors, credit intermediaries or appointed representatives. However member states may decide not to apply this to certain persons:

Carrying out the credit intermediation activities or providing advisory services where those activities are carried out or services are provided in an incidental manner in the course of a professional activity, and that activity is regulated by legal or regulatory provisions or a code of ethics governing the profession which do not exclude the carrying out of those activities or the provision of those services.

Providing advisory services in the context of managing existing debit who are insolvency practitioners where that activity is regulated by legal or regulatory provisions or public or voluntary debt advisory services which do not operate on a commercial basis or

Providing advisory services who are not creditors credit intermediaries or appointed representatives where such persons are admitted and supervised by competent authorities in accordance with the requirements for the credit intermediaries under this directive.

Sanctions

Member states shall lay down the rules on sanctions applicable to infringements of the national provisions adopted on the basis of this directive and shall take all measures necessary to ensure that they are implemented. Those sanctions shall be effective, proportionate and dissuasive.

Member states shall provide that the competent authority may disclose to the public any administrative sanction that will be imposed for infringement of the measures adopted in the transposition of this directive unless such disclosure would seriously jeopardise the financial markets or cause disproportionate damage to the parties involved.

Accessing the Client – Creditworthiness

The creditors’ decision as to whether or not credit will be granted will depend on the clients creditworthiness. Creditworthiness will be based on the information on the financial and economic situation including income and expenses of the consumer.

Each member state shall ensure access for all creditors from all member states to databases used in that member state to databases used in that member state for assessing the creditworthiness of consumers and for the sole purpose of monitoring consumers compliance with the credit obligations over the life of the credit agreement. The conditions for such access shall be non discriminatory. Member states may within their jurisdiction, allow credit intermediaries to have access to credit databases.

 Rates And Calculatrion Of Annual Percentage Rate Charge (APRC)

The Calculation of APRC will be uniformed to provide comparability of information. Member states shall ensure that any fees paid to the credit intermediaries by the consumers for their services will be communicated to the creditor by the intermediary for inclusion in the calculation of APRC. The method of the APRC is clearly laid out in Annex 1 of the Directive.

Member states should be able to maintain or introduce restrictions or prohibitions on unilateral changes to the borrowing rate by the creditor and where changes are imposed to ensure that the consumer is entitled to receive an updated amortisation table.

Early Repayment

Consumers will have the right to early repayment of the credit agreement. In such cases the consumer shall be entitled to a reduction consisting of the interest and the costs for the remaining duration of the contract.

Where the early repayment falls within a period for which the borrowing rate is fixed, exercise of the right may be made subject to the existence of a legitimate interest, eg unemployment or divorce.

Member states may provide that the creditor is entitled to fair and objective compensation, where justified, for the possible costs directly linked early repayment but shall not impose a sanction on the consumer.

Bundling Security And Insurance

Member states shall allow bundling practices but shall prohibit tying practices. Member states may provide that creditors can request consumer on their family members to;

  • Open or maintain a payment or a savings account to accumulate capital to repay the credit or as additional security
  • Purchase or keep an investment product or as private pension product that provides additional security
  • Conclude a separate credit agreement in conjunction with a shared equity credit agreement to obtain the credit.

Member states may allow creditors to require the consumer to hold a relevant insurance policy related to the credit agreement.There are a number of articles that allow member states discretion in how stringent and practical these regulations will be when they are enforced by March 2016.

PIBA have been in consultation with the department of Finance and the Central bank in relation to how the directive will be transposed into Irish law. This interaction is ongoing and will hopefully ensure that our member’s views are taken into account.