Enhanced regulation for residential mortgage lending under way
Significant levels of debt undertaken by consumers within the EU for the purpose of acquiring residential immovable property, in combination with a series of irresponsible and underhand banking practices maintained by a considerable number of market participants have been the driving factors behind the enactment of tighter regulations in the provision of mortgages for residential purposes within the EU.
In pursue of enhancing consumer protection and promoting transparency within the internal market, the European Parliament and the Council have enacted the Directive 2014/17/EU, which aims at regulating the conduct of financial institutions and credit intermediaries when providing consumers with mortgages and loans in foreign currency for the purpose of purchasing houses for residential purposes. The Directive purports to ensure that consumers have all the relevant information that allows them to make informed choices when considering the terms of the loan offered and obliges financial institutions to carry out the necessary creditworthiness assessment before granting credit. Cyprus is obliged to incorporate the Directive into national law by March 2016 and this is likely to bring about significant changes in the mortgage lending procedure.
The Direcitve applies to credit agreements secured by mortgages relating to residential immovable property. By way of minimum harmonisation, it obliges financial institutions to provide consumers-debtors with the European Standardised Information Sheet (ESIS) before signing the loan agreement. This standard pre-contractual information sheet contains personalised information free of charge tailored to the prospective debtor, allowing him/her to compare the credits available on the market, assess their implications and make an informed decision on whether to conclude the credit agreement on offer or not.
Furthermore, this Sheet explains in layman’s terms the provisions of the proposed loan agreement, giving examples, explaining how the interest rate is calculated and bringing to the attention of the consumer the exchange rate risks that he/she should bear in mind if obtaining the loan in a foreign currency. The form of this document is standard, meaning that EU member states cannot amend the ESIS and any information that the financial institutions may wish to add should be included in a separate document.
The Directive also sets out a uniform way of calculating the Annual Percentage Rate of Charge (APRC), i.e. the interest rate. To this end, the Directive provides a mathematical formula for the calculation of the APRC and provides considerable guidance to the financial institutions on how to come to the exact figure.
Consequently, despite the complexity of the formula laid down in the Directive, it may be argued that putting such a formula on statutory footing will evidently increase transparency in the calculation of outstanding loan balances and interest rate charges, as well as boost the consumers’ trust in financial institutions.
Furthermore, the Directive touches upon the hot topic of providing loans in foreign currencies, obliging financial institutions to provide prospective debtors with an indication of the foreign currency at the date of the offer, as well as an explanation of the implications of obtaining a loan in foreign currency.
All EU member states are also required to provide for the enactment of an appropriate regulatory framework in relation to foreign currency loans, giving the right to consumers to convert their credit agreement into an alternative currency, which may be either the currency in which the consumer primarily receives income or the currency of the member state in which the consumer is currently resident or was resident at the time the credit agreement was concluded.
Lastly but rather vaguely, the Directive states that EU member states should ensure that there are other arrangements in place to limit the exchange rate risk to which the consumer is exposed under the credit agreement, without embarking in any further details as to how this should goal should be effected.
In light of the above, it seems fair to say that the transposition of the aforesaid Directive into Cypriot law by 2016 will come as a positive development to proponents of more effective banking practices and higher transparency in the process of residential mortgage lending.