Mortgage consumer rules: Safe as houses?

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This article is part of our special report Vulnerable Consumers.

A spat in the European parliament over how much protection should be afforded to consumers buying mortgages reflects ongoing tensions between the right to invest in property and the need to curb the type of easy credit at the origin of the 2008 financial crisis.

A report on the proposed directive on “credit agreements relating to residential property”, which includes a number of new provisions to protect consumers against excessive debt, was due to be voted in the economic and monetary affairs committee this week, but has been delayed for the second time in a month.

Parliamentary sources – who preferred to remain anonymous because of the sensitivity of the matter – said that there were numerous disagreements over the scope and extent of consumer protections in the proposal.

The dispute reflects ongoing controversy over the origins of the financial crisis in the US sub-prime mortgage market and attempts to curb abuses of credit offerings that were at the source of the 2008 global financial crisis.

Disagreements hamper progress

EURACTIV understands that the rapporteur, Spanish MEP Antolín Sánchez Presedo who broadly favours stronger consumer safeguards against banking institutions, faces stiff opposition from a number of other influential committee members.

Presedo may be influenced by the dire situation in his native Spain where a property bubble and crash has resulted in part from rash credit offerings.

In addition, the committee faces difficulty squaring its proposals with those from the internal market and consumer protection committee, which shares authority on the paper and has already issued its own report.

Ironically, the consumer affairs committee has taken a weaker consumer protection line than some within the economic committee would like to see.

In particular those favouring stronger safeguards are unhappy that MEPs are often using a hypothetical “informed consumer” as a benchmark for designing new EU mortgage rules, saying this would lead to less protection for vulnerable, or less-aware consumers.

A mortgage industry source said that the delay was causing jitters for mortgage suppliers, claiming it was making the issue even more difficult to agree because “the longer the issue remains unresolved the more controversy seems to swirl around it”.

Consumers want protection – industry wants balance

BEUC, the European consumer group, this week issued a statement calling for a number of specific protections to be included within the report including protection from "locking in" to long contracts and offering an early repayment right for every borrower.

“Taking a mortgage is the most important financial decision in a consumer’s life. No European household can afford a bad deal. Irresponsible lending practices which put people’s homes at risk must be stopped,” said Monique Goyens, BEUC's director-general.

A spokesman for the European Mortgage Federation, which represents the mortgage industry, said: “The challenge is to find a balance between protecting consumers – also the most vulnerable ones – and ensuring the business remains viable, which in concrete terms means lenders continuing to be able to provide low cost, low risk access to homeownership to all segments of the population.”

Consumer groups also support wide access to homeownership, even for the less well-off. But not if this leads to irresponsible lending behaviour and over-indebtedness.

A Parliament resolution on vulnerable consumers, adopted last week, warned about the risk of excessive debt and difficulties in "comprehending relevant consumer information" in the financial sector. Without mentioning the mortgage market in particular, the resolution said the complexity of financial markets was such that in the majority of cases, any consumer can be considered vulnerable.

The resolution cited a recent EU Commission survey, which showed that 70% of financial institutions’ websites "were making basic errors in their advertisements," saying the cost were often "presented in a misleading way."

"More should be done by the financial services industry to provide clear and simple explanations about the nature of the products and services they provide," the resolution stressed.

“EU lawmakers should prevent the conclusion of unsuitable contracts which are likely or bound to fail. Assessing the creditworthiness of a future client is one thing, but it’s also key to ensure the consumer can afford the loan for its full duration,” according to Monique Goyens, director-general of BEUC.

“Financial supervisors must ensure risk-taking by lenders’ pursuit of profit is not resumed once the crisis blows over. Consumers expect their financial regulators to be real watchdogs,” Goyens concluded.

Mortgage lending is of vital importance to the European economy, representing almost 50% of EU GDP. 

Housing bubbles have emerged in member states as diverse as the Baltic states, Romania, Spain, the UK and Ireland, demonstrating that complex lending has not only been at the source of the financial crisis in the US, but also in the EU.

According to the dominant view, at the origin of the crisis lies the spread of a risk-prone approach to lending money and, by reverse, in borrowing it.

The sub-prime mortgage crisis highlighted practices which have pushed lenders to give money away without properly assessing borrowers' ability to pay it back, and these need total redress, read a 2009 paper from the European Commission.

Lenders were encouraged to give loans in cases of high risk of default by exploiting a system that allows them to transfer the risk to third parties by issuing mortgage-backed securities. This is what the controversial proposal for a directive aims to remedy.

  • June 7 2012: Next date by which - unless it is once again delayed - the economic and monetary affairs committee of the Parliament will push for a vote on the proposal.
  • European Mortgage FederationWebsite

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