The European Parliament regulates home loans

The new regulations of the Internal Market Committee seeks to better protect the borrower.

To this end, the committee amended a draft directive which aims to curb irresponsible mortgage borrowing, and also tighten up the supervision of lenders, whilst respecting existing lending practices in EU Member States.

The Internal Market and Consumer Protection Committee’s opinion on the Commission proposal concerns consumer information requirements such as advertising and pre-contractual information. Other aspects, such as calculating annual charges and authorising and supervising credit intermediaries, will be handled by the Economic and Monetary Affairs Committee.

In 2008, outstanding residential mortgage lending in the EU27 represented about 50% of EU GDP. Household debts, of which mortgage debt is the largest component, accounted for some 70% of euro area households’ total financial liabilities at the end of 2008, says the committee’s report.

Borrower’s right to information

The choice of a mortgage is affected by many factors besides the borrower’s ability to repay the loan. These include the information provided by lenders, the borrower’s financial literacy, conflicts of interest and irresponsible behaviour by certain market players.

MEPs therefore backed a Commission proposal to ensure that mortgage lending is governed by general rules on marketing and advertising, and which would require prospective lenders to make available information such as annual percentage rates and total costs of credit before the borrower signs the contract.

This information should be tailored to the borrower’s knowledge of and previous experience with lending practices, and should enable him or her to take a reasoned decision on whether he or she wishes to conclude the credit agreement. The information on the proposed mortgage agreement should be always made available on paper, another durable medium or in electronic form, adds the text.

MEPs also amended the text to say that a warning that the buyer could lose the property if he or she defaults on the mortgage commitments should appear in the standard information provided, rather than in advertising, because a full explanation of this risk would be too long and too costly for smaller advertisers to provide, and requiring it would therefore hand a an unfair competitive advantage to larger ones.

Dispute resolution

To put borrowers and lenders on a more equal footing, the proposed legislation would require Member states to establish out-of-court redress bodies to resolve disputes. An amendment inserted by the committee would align the dispute resolution mechanism with the EU consumer credit directive, to prevent the proliferation of similar, but differing, rules.

Next steps

The proposed directive now goes to the Economic and Monetary Affairs Committee, which will endeavour to take account of the Internal Market Committee’s opinion, but reserves its right to a final say on those parts of the directive that fall within its sphere of competence.

The Economic and Monetary Affairs Committee will vote its amendments to the text on 28 or 29 February.

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