Mortgage Credit Directive impact on overseas lending

When the European Union Mortgage Credit Directive (MCD) came into force in 2015, it brought with it a raft of measures to tighten up the largely unregulated international mortgage arrangements.

For Julian Sampson, head of lending for TWM Solicitors, the MCD has “been in European minds since 2003”, so in some respects, he believes “the Directive has been relevant to certain cross-border mortgage lending decisions for some time”.

Mr Sampson continues: “The impact on advisers is to consider with care the fact that internationalisation of finance means advisers may well assume a relatively consistent approach in general terms, but the nuances in internal regulation could spring unwelcome surprises.”

Scrutiny

There is a sense of much greater scrutiny under MCD. Daniel Howarth, head of Enness International, comments: “The MCD has put a large emphasis on national financial bodies regulating intermediaries, which were previously un-regulated in arranging international private finance.

“In addition, banks have to be more conscious of the rules and regulations of mortgages of the countries in which their clients reside.”

MCD has had a big effect on the market and has made cross-border lending more difficult, in particular for expats and internationals who used to live in their property but have now let it.Mark Posniak

He points out that in the case of lending to UK residents and tax domiciles, brokers must refer to the Financial Conduct Authority (FCA).

Mr Enness adds: “Intermediaries and banks now have to be conscious that all written material and advice is compliant to the FCA’s various sourcebooks.”

Moreover, according to Mark Posniak, managing director at Octane Capital, this level of scrutiny has had a big effect on how the end client is finding it more difficult.

He says: “MCD has had a big effect on the market and has made cross-border lending more difficult, in particular for expats and internationals who used to live in their property but have now let it.

“These are now classed as consumer buy-to-let and the effect is much heavier underwriting and qualification of products.”

For Stuart Marshall, managing director of Liquid Expat, the overall effect of the MCD has been to create more "positive options" for clients. It's the UK's own laws that are making more of an impact, Mr Marshall says.

"Across the EU, countries have interpreted the MCD requirements differently and some have seen little impact. In the UK, it has taken lenders a bit of time to fully understand the changes but this has meant there have been more positive options created for clients.

"The change that has brought the most impact is the interest ratio cover from the Prudential Regulation Authority, which was brought into effect in January 2017."

Currency

Gareth Hill, spokesman for the Council for Mortgage Lenders also highlights a new complication with regard to currency.

He explains: “In regards to the MCD, lenders offering a mortgage that a borrower can repay in a foreign currency have new requirements under the directive.

“They will have to monitor the rate of exchange between the currency in which borrowers pay their mortgage, and that in which they receive their income.

“They will also have to warn customers about their level of exposure, and if the two currencies fluctuate beyond a certain limit, the lender would have to offer the borrower the option of switching currency.”

The CML has produced a policy update on its website which outlines more information on how the MCD will affect cross-border borrowers.

In a nutshell, the CML outlined the effects of MCD as:

• Some buy-to-let mortgages will become regulated by the FCA.
• There will be a phased move to a Europe-wide standardised set of disclosure information to customers, via a European Standardised Information Sheet (ESIS).
• The requirements that relate to foreign currency loans will change.
• Lenders' sales processes and documentation will need to be reviewed for compliance.

Positive effects

For Nigel Green, chief executive of the deVere Group, some elements of MCD have been positive.

He states: "For clients, a positive effect of MCD is centered around protecting their welfare. MCD has aligned EEA member states' regulations and standards and by ensuring lenders exercise consistent client practices."

He admits this may have increased regulatory costs on firms, but claims the stringent anti-money laundering checks are in place and lenders are monitoring client affordability more closely is "surely a good thing".

Careful consideration

But how much do mortgage brokers need to abide by the MCD? In the case of UK residents, Mr Howarth comments: “There is still a lot of room for interpretation given it is a directive and not a regulation, and the FCA still has to make an official confirmation on how it will be interpreted by them.”

Mr Sampson adds: “The consistency of minimum harmonisation that applied to many Directives similarly applies to MCD, such that certain lending is wholly exempt, irrespective of jurisdiction, and countries other than the UK selecting alternative-tough regulation to supplement or dampen.”

For now, it is best to abide by both the spirit and the letter of the law – both in Europe and in the UK.

simoney.kyriakou@ft.com