Briefing McDonald: Responsible Borrowing and Lending
03 November 2009
The Commission is still taking soundings on this issue as part of its work on driving recovery forward. The concern now is: what next after ECOFIN’s Roadmap on future retail policies?
Briefing: Responsible Borrowing and Lending
The Commission is still taking soundings on this issue as part of its work on driving recovery forward. The concern now is: what next after ECOFIN’s Roadmap on future retail policies?
Introduction.
handle their risks, including credit risks. This provides an incentive to lend responsibly as the risk profile of their borrowers affects the amount of capital they must hold. However, the credit crunch shows that there is still room for irresponsible borrowing to take place.
The Single Market Review (November 2007) and the White Paper on the Integration of EU Mortgage Credit Markets, 2007 identified areas of work to ensure responsible lending, including pre-contractual information, advice, assessment of credit worthiness and conduct of business. Progress has been made on many of these issues, but the Commission is aware that more needs to be done, especially in terms of the implementation of the Consumer Credit Directive, due by June 2010.
The Commission also has in mind the growing importance of mortgage lending. In 2007, outstanding residential mortgage lending in the 27 EU member states represented over 50% of EU GDP. Mortgage debt to GDP ratios have also risen steadily, reflecting the higher value of household assets as well as the increase in mortgage borrowers. Developments in mortgage markets are thought to have played a significant role in the financial crisis in Latvia, Lithuania, Spain, Ireland and the UK.
The Next Steps?
The Public Consultation on Responsible Lending and Borrowing in the EU ended on August 31. According to Commissioner McCreevy, many responses were received from lenders, consumers, trade unions and intermediaries and more were expected. The Commission plans to publish both the results of the consultation and the minutes of the Hearing on Responsible Lending and Borrowing at the end of September. The Commission will then consider its response to both and prepare the next steps. That is unlikely to occur before the new Commission is established. It is worth noting that there may then be a somewhat different tone. This may happen when the current Commissioner for Health and Consumer Protection will not be reappointed. It appears that the Bulgarian government has already announced that it has decided not to reappoint her.
The themes emerging from the Hearing on 3rd September were instructive. Inevitably, the focus was on mortgage lending, which some believe was the cause of the financial crisis in the European Union. The presentations from the platform did not in general support that view, especially those from BNP Paribas and Mary O’Dea, Acting Chief Executive and Consumer Director of the Irish Financial Services Authority, who took the view that any deficiencies in mortgage lending were part of a much bigger picture and that, say, improving the quality of information given to borrowers, would not have helped. Other banks represented at the hearing stated that although the share of mortgage lending in their particular markets had increased, the percentage of defaults remained very low, including BNP Paribas, Unicredit Family Financing bank, Rabobank and the Banque Nationale de Belgique.
The themes which did emerge regarding mortgage lending included the focus on the quality and extent of information given to prospective lenders. This only applied to member states, where the range of mortgage products on offer is both wide and complex, and that is by no means the case in all member states. The idea that advice on mortgage borrowing should be compulsory was rejected by all present at the Hearing. When advice was given, the nature and presentation of the advice should be regulated and in more detail than some regulatory authorities currently require.
The Commission has considered creating a level playing field for mortgage provision throughout the EU, so that consumers could consider taking out a mortgage for the purchase of a property in their own country from another member state. Such borrowing has taken place in some of the Eastern states, but the foreign currency loans have proved to be a disaster for many such borrowers and may well not occur again. The overriding consensus of the Hearing was that it would just be too difficult to provide such a level playing field, since there is clearly little appetite for such loans amongst consumers and many legal and cultural differences between the member states. Harmonisation would not be welcomed and should not be pursued for its own sake. The findings of the Expert Group on Credit Histories suggest that it would not be possible to establish a single pan-European retail Register of Credit Histories in the foreseeable future. It suggests that Data Protection Authorities work towards greater convergence instead and that creditors seek to use all access models available to them.
Some member states, such as the Netherlands, have introduced stricter loan-to-value and loan-to-income rules as a result of the financial crisis, but not all supported that approach. The UK Financial Services Authority provided a taster of the research it has conducted into the alleged connection between loan-to-value and loan-to-income ratios. The results seem to be that either lending too high a percentage of the then-value of the property or lending too much in relation to the borrowers’ income was a significant factor in the current problems in the housing market. Self-certified borrowing might be the focus of the attention of the regulators in the future.
What might happen next.
Both Sharon Bowles, MEP, chairman of the Economic and Monetary Affairs Committee and Malcolm Harbour, chairman of Internal Market and Consumer Protection Committee, emphasised the importance of implementing the Consumer Credit Directive and giving due consideration to the effectiveness of the Directive over time. Their views were echoed by many present.
The issues which may well be addressed by the Commission will include more work on the information given to customers of consumer credit and further requirements may be developed for consumer and mortgage credit. There could also be further regulations for mortgage advisers and clarity on their remuneration.
Since the focus was so much on mortgage credit, the danger is that onerous requirements could be placed on those offering consumer credit, for white goods or cars, for example. The brokers, agents, dealers and retailers involved in the provision of credit at the point of sale. Some of the requirements for other kinds of consumer credit would simply be irrelevant to such sales.
The most significant changes may come in the mortgage market, especially given the publication on Oct 19 of the UK Financial Services Authority’s Mortgage Market Review Discussion Paper. The proposal here is that affordability tests should be imposed on all mortgages and lenders should ultimately be responsible for assessing a consumer’s ability to pay and that all mortgages should require verification of a borrower’s income. Lenders should seek to ascertain the unintended consequences of such tests; such as unwillingness to take overtime payments into account, or to take a wife’s or partner’s (of child-bearing age) income fully into account or into account at all on the grounds that she might have a child at any point. It would also open up opportunities for consumers in difficulties to claim that lenders did not carry out affordability tests properly, so that the lender would be liable for compensation. The FSA declares that ”we have been constrained by the view that mortgage customers will act rationally to protect their own interests…(we should ) recognize the behavioural biases of consumers and be more interventionist to protect consumers from themselves”.
This is all on the assumption that the financial crisis was caused by irresponsible lending in the UK. No evidence is produced for that assumption. The only evidence which could be provided is to show that the cause of serious arrears or repossessions was due to irresponsible lending as opposed to unemployment (where the unemployed would be unable to pay the mortgage, no matter how much or how little had been borrowed), serious illness, sudden death of one of the partners or divorce. These are the common causes of arrears or repossessions. Lenders should conduct analyses of their own lending and the causes of repossessions. What is interesting is that the FSA’s presentation at the Hearing recognized that loan-to-value and loan-to-income ratios were not the cause of the financial crisis, but given the strength of the Prime Minister’s comments, the FSA’s review (delayed for a week) are much more restrictive than expected. The consultation continues until January 30, 2010. Careful responses are important, if access to mortgages is not to be unduly restrained.
In October 2009, ECOFIN set out a Roadmap of reform for financial services. The fourth component was “Promoting integrity of financial markets” and the following retail policies were listed: Ensure responsible lending and borrowing; Promote best practices for pre-foreclosures arrangements; Empowering retail clients; and Packaged Retail Investment Products (PRIPs). The current “state of progress” on these files is essentially one of thinking about the next steps. The next European commission seems likely to deliver substantial thoughts that will be of great interest to retail-facing financial institutions.
© Oonagh McDonald
