A New Mortgage Credit Regime for Europe
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A NEW MORTGAGE CREDIT REGIME FOR EUROPE SETTING THE RIGHT PRIORITIES HANS-JOACHIM DÜBEL MARC ROTHEMUND JUNE 2011 This CEPS Special Report has benefited from discussions that took place within the CEPS-ECRI Task Force on A New Retail Credit Regime for Europe – Setting the Right Priorities, which met between May 2010 and January 2011. Given the policy directions, the discussions focused largely on the largest component of retail credit, mortgages. The principal author of this report is Achim Dübel, Director of Finpolconsult and former staff member of the financial sector development department of the World Bank and of empirica, a German housing and urban economics policy think tank. Marc Rothemund (Research Fellow, CEPS/ECRI) initiated the project and co-authored chapter 3. They wish to thank the Task Force members for their helpful comments on the report. ISBN 978-94-6138-112-5 © Copyright 2011, Centre for European Policy Studies/European Credit Research Institute. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of CEPS or ECRI. Centre for European Policy Studies ▪ Place du Congrès 1 ▪ B-1000 Brussels ▪ Tel: (32.2) 229.39.11 ▪ www.ceps.eu TABLE OF CONTENTS Introduction ..................................................................................................................................................... 1 Executive Summary and Recommendations ............................................................................................. 2 1. Mortgage Credit Markets in Transatlantic Perspective .................................................................... 6 1.1 EU and US markets compared ....................................................................................................... 6 1.2 The decline of the highly leveraged consumer finance system ................................................. 8 1.3 Drivers of financial regulation and consumer protection ........................................................ 11 1.3.1 United States – Breakdown of a capital market-based system ..................................... 11 1.3.2 Europe – A less vulnerable bank-based system? ............................................................ 14 1.4 The role of fiscal policy .................................................................................................................. 24 2. The Policy Response so far................................................................................................................... 28 2.1 Are finance and housing markets self-correcting? .................................................................... 28 2.2 Current financial regulation reform discussion ......................................................................... 29 2.3 Current fiscal (and monetary) policy actions ............................................................................. 33 2.4 Assessment ...................................................................................................................................... 34 3. Selected Mortgage Consumer Protection Issues .............................................................................. 37 3.1 Introduction .................................................................................................................................... 37 3.2 Credit distribution .......................................................................................................................... 37 3.2.1 Mandatory provision of standardised pre-contractual information ............................ 37 3.2.2 Standardised APRC calculations ....................................................................................... 41 3.2.3 Financial advice and qualified credit intermediation .................................................... 46 3.3 Underwriting .................................................................................................................................. 52 3.3.1 Assessing loan affordability ............................................................................................... 52 3.4 Contractual phase ........................................................................................................................... 60 3.4.1 Improved early repayment rights and indemnity design ............................................. 60 3.4.2 Rate adjustments and caps ................................................................................................. 66 3.4.3 Dealing with more far-reaching consumer protection issues, the role of Commission vs. member states ................................................................................................................ 70 References ...................................................................................................................................................... 74 Annex. Additional Data .............................................................................................................................. 76 List of Abbreviations ................................................................................................................................... 77 INTRODUCTION arly in 2003, the Forum Group on Mortgage Credit set up by the European Commission met for the first time in order to take on the ambitious tasks of identifying and assessing the E impact existing obstacles to the functioning of an Internal Market for mortgage credit and coming forward with concrete political recommendations on the necessary steps to aid its formation. The group’s work, which ended with the publication of its final report in late 2004, was followed up by a Commission Green Paper on mortgage credit in the EU, a related public hearing, the creation of the Government Expert Group on Mortgage Credit (GECMC), the Mortgage Industry and Consumer Dialogue Expert Group (MICEG), the Mortgage Funding Expert Group (MFEG) and the Expert Group on Credit Histories (EGCH), the publication of the respective reports, a White Paper on the integration of mortgage markets and a public hearing on responsible lending and borrowing. Several studies – on costs and benefits of integration of EU mortgage markets; the role and regulation of non-credit institutions in EU mortgage markets; credit intermediaries in the internal market; equity release schemes; consumer testing of possible new format and content for the European Standardised Information Sheet on home loans; and the costs and benefits of different policy options for mortgage credit (undisclosed) – complemented the Commission’s initiatives. It was, however, the financial crisis that had the greatest impact on the awareness of the interdependence of mortgage markets and of the need for a common EU-wide legal framework for home loans. While mortgage lending moved into the worldwide spotlight with the subprime lending disaster in the US, developments in several European markets served as a gentle reminder that loans for house purchases are not (yet) covered by EU-wide legislation – despite accounting for the lion’s share of the indebtedness of European households. The turmoil has provoked the European Commission to now – after years of consultation – come forward with a proposal for a Directive on credit agreements relating to residential property in March 2011. The Commission simultaneously published the 2008-09 study on the costs and benefits of different policy options for mortgage credit and its own impact assessment on the proposed Directive. The EU executive thereby confronts critics from both camps: banks and mortgage lenders, which oppose tougher rules and insist on waiting for the impact of the new Consumer Credit Directive (CCD); and consumer representatives, who fear the proposal will fall short of sufficiently enhancing consumer protection. In May 2010, CEPS and ECRI formed a Task Force in a joint effort to contribute to the debate on how the EU could most efficiently respond to the challenges posed and the deficiencies revealed by the financial crisis in the area of retail credit. Composed of a diverse group of bankers, industry and consumer representatives, independent experts and academics, the group met four times over a period of nine months. The members’ work, and this report resulting from it, closed in February 2011. This report therefore does not contain a full analysis of the proposal for a Directive, which was unknown at the time. However, as per May 2011, it has been updated by the rapporteurs to make cursory references to the Directive. The report starts with an Executive Summary, which comprises observations and general recommendations. It is subdivided in three chapters. Chapters 1 and 2, comparing mortgage credit markets in the EU and the US, and in the EU member states, serve as a background for the discussion in chapter 3 discussing the policy response. The first two chapters are authored by Achim Dübel, chapter 3 by Marc Rothemund in cooperation with Dübel. | 1 EXECUTIVE SUMMARY AND RECOMMENDATIONS* olicy-makers have long hesitated to embark on harmonising the consumer protection regime in mortgage lending in the EU. This has been motivated by the strong idiosyncrasy of P member state mortgage banking structures, their funding and lending products, and the housing, capital market and subsidy environments. Also, the absence of a cross-border market rendered an intervention