En­hanced reg­u­la­tion for res­i­den­tial mort­gage lend­ing un­der way

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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