Mortgages.scot

The Mortgage Credit Directive (MCD) is an EU initiative. It aims to create a single market for mortgages across the EU. Enhancing consumer protection MCD came into effect in 2016 and was implemented in the UK.

We are not in the EU anymore

Indeed, the UK left the EU in 2020, almost 3-years ago now. So why is this still important? Although the UK has left the EU there was no immediate removal of all the EU-related regulations and laws already in place. Over time they are being amended and withdrawn. Until then they are kept in place and in some cases, changes that continue to be introduced by the EU are still applied.

Mortgage Credit Directive

When it comes to MCD it can be best summed up as:

an EU initiative designed to create a single market for mortgages within the European Union. It aims to standardize mortgage regulations and enhance consumer protection across EU member states.

What are the key areas that MCD sets out to standardize?

• Standardize Information and procedures
• Consumers will find it easier to compare mortgage products across the EU
• A standard approach to assessing the creditworthiness of mortgage applicants
• Disclosure of information through a standard document called ESIS - European Standardized Information Sheet
• Standardised consumer rights and protections

Even if we are not in the EU anymore, this would still feel like a positive initiative to continue with, right?

To cover a bit more of MCD in detail here are a few specific elements.

Consumer Buy to Let

I have covered consumer Buy to Let here

Foreign Currency Loans (FCL)

These are defined as mortgages which are in a different currency to the customer's income. It can also refer to a mortgage in a different currency to the EEA state than the customer resides. For example.

• A customer applies for a mortgage on a property in the UK. The mortgage will be in GBP, and the customer's income is in EUR.
• A customer resident in France, earns in EUR but wishes to purchase a property in France with a GBP mortgage.

In both examples, these would be deemed as Foreign Currency Loans. The reason these are specifically important is due to exchange rates. Where there is income in one currency and a mortgage in another there is a risk that exchange rate movements could mean income is under stress due to the increased requirement to convert more of one currency to another in order to meet mortgage payments.

In order to meet a mortgage payment of £1,000 a client earning €5,000 would need to convert €1,160 based on a rate of 1.16. If that rate moved to 1.25 the client would need to convert €1,250 to meet that same £1,000 mortgage payment. That may not seem like a significant difference. That;s only the mortgage payment, Factor in council tax, gas, electric and so on. Therefore much more than the mortgage payment needs to be converted.

If the exchange rate moves too much the client may struggle as they also need to keep part of their income to cover costs in France.

Second Charge Lending

In the past, second-charge lending wasn't regulated. Under MCD it became a regulated activity. There were several issues with this part of the market which caused concern. The amount of arrears and the speed at which second-charge loans fell into arrears was alarming.

Disclosures

Greater transparency and clarity for borrowers. Unfortunately, something that should be a given needed more. MCD ensures lenders and their advisers must keep customers better informed. Borrowers must be able to see the 'bigger picture'. There may be alternatives available to customers when it comes to raising funds, they must be made aware of them.

Bindiing offers with a 7-day reflection period

MCD ensures that when a lender issues an offer to a customer it's binding and cannot be withdrawn (unless there is a material change in customer circumstance). At no point in normal circumstances can the borrower change or withdraw the offer during the binding period.

In addition, the customer must have the right to a 7-day reflection period. This is designed to ensure they have sufficient time to consider the offer provided by the lender. At any point during those 7 days, the customer can accept or reject the offer.

Declining Applications.

In the past lenders have declined applications without telling the customer why. Again, this is about transparency. If the application is declined more information must be provided. For example, if the reason for declining the application was due to information received from a credit reference agency, the lender must tell the customer which agency provided the information.

If the reason for declining the application was due to the customer not meeting the lender's application criteria or affordability assessment then they must be told that. The lender does not have to disclose how they assess affordability or which part of the assessment the customer failed.

Summary

Now if I talk through everything I know about all the different parts of MCD it would be the longest post ever and you would likely not be interested to read through to the end. Those that would, likely already know more of the detail in there.

Hopefully, this provides enough of a guide to give a good understanding of why MCD exists.