The MCD introduces a European framework of conduct rules designed to foster a single market for mortgages and to protect consumers. The CML Handbook Working Group looks at the consequences for conveyancers.
The Mortgage Credit Directive (MCD) was designed to provide better protection for consumers of financial services across the EU. Most of the MCD provisions set minimum regulatory requirements that member states are required to meet in order to protect consumers taking out credit agreements relating to residential property. This includes residential mortgages secured against the borrower’s home, and also any other lending secured against property.
The main requirements imposed on member states by the MCD include ensuring that:
• mortgage firms act fairly and professionally, and that their staff have an appropriate level of knowledge and competence;
• the advertising of products is fair and not misleading, with certain standard information included where specific rates are being quoted;
• certain information is provided to the consumer ahead of a mortgage contract being completed;
• lenders conduct an affordability test, looking at customers’ income and expenditure, to determine whether they can afford the mortgage loan;
• minimum standards are followed where advice is provided to consumers;
• lenders put in place additional consumer safeguards where loans are in a foreign currency, to protect the customer against exchange rate risk;
• consumers are given a right to be able to exit a mortgage before it reaches the end of the term;
• lenders exercise reasonable forbearance to customers in payment difficulties before initiating repossession proceedings;
• it is easier for mortgage intermediaries to operate across borders; and
• consumers have access to cross-border redress.
The UK is required to implement the MCD requirements by 21 March 2016. This requires the UK government to make changes to mortgage regulation in order to meet the requirements set out in the MCD.
Under the Financial Services and Markets Act 2000 (FSMA), the Financial Conduct Authority (FCA), the independent regulator, has the authority to put in place, supervise and enforce a range of rules to ensure that firms act responsibly in their mortgage activities.
The UK already has a detailed regulatory regime to protect consumers who take out first legal charges in the residential mortgage market. Therefore, the FCA, which is responsible for implementing the MCD in the UK, has, rightly in our view, decided that it will not simply copy the MCD into legislation in the UK, but, in order to minimise the impact on the UK market as far as possible, will build on the existing UK regulatory regime – the Mortgage Conduct of Business (MCOB) rulebook – in order to give the MCD effect in the UK.
The MCOB rulebook is a set of rules and guidance detailing the way in which lenders sell mortgages. The FCA’s recent mortgage market review (MMR) has made more detailed provisions in relation to the investigation of prospective borrowers’ outgoings, with the aim of reducing the risk of borrower default.
What it means for conveyancing solicitors
One of the changes introduced by the MCD that may impact on conveyancing solicitors is the proposal to give prospective borrowers a ‘reflection period’ once they have received their mortgage offer.
The MCD requires lenders to make a ‘binding offer’ to consumers and to give them a ‘reflection period’ of at least seven days. The reflection period is intended to allow the consumer sufficient time to compare offers, assess their implications and make an informed decision.
However, not all lenders have a system whereby they issue an offer to a consumer who then formally accepts the mortgage offer at a relatively early stage in the process; this makes the issue of a ‘binding offer’ difficult to define. Most lenders effectively leave the offer open so that there is no ‘binding offer’.
For this reason, it is proposed that the submission of the Certificate of Title acts as confirmation that the borrower wishes to proceed.
Amendments to the CML handbook
As of 1 February 2016, an amendment has been made to clause 10 of the Council of Mortgage Lenders’ (CML) Handbook.
The amendment adds the wording in bold below into clause 10.2:
10.2 We shall treat the submission by you of the certificate of title as confirmation that the borrower has chosen to proceed with our mortgage offer and as a request for us to release the mortgage advance to you. Check part 2 to see if the mortgage advance will be paid electronically or by cheque and the minimum number of days notice we require.
The CML says:
‘The amendment is designed to reflect the introduction of a requirement, as the result of the Mortgage Credit Directive, for mortgage customers to have a “reflection period”, of at least seven days before accepting a mortgage offer. Recital 23 and Article 14(6) of the Directive set this out. The customer can bring that reflection period to an end earlier, by accepting the mortgage offer.
‘The wording intends to clarify that, in cases where the mortgage lender does not already require a formal acceptance from the borrower, that the current practice of the conduct of borrower in drawing down the loan, acts as acceptance of the mortgage offer, and creates the contract; this in turn, in cases where the draw-down happens before the end of the reflection period, confirms that the customer has brought the reflection period to an end by their conduct, which Recital 23 expressly allows for.
‘Lenders will explain the concept of the reflection period in information provided to prospective borrowers, for example, in the mortgage illustration, mortgage offer and mortgage terms and conditions. Many lenders are either allowing a 10 day reflection period (to account for postage time) or aligning the reflection period with the existing offer expiry date (which can be up to 6 months).’
We are very keen to see how this operates in practice and whether it causes any delays or other concerns. Please send your views to firstname.lastname@example.org. The Law Society will review these to see how this operates in practice, and then consider issuing some practical guidance.
By the CML Handbook Working Group – a sub-group of the Law Society Conveyancing and Land Law Committee.