The Mortgage Credit Directive (MCD) has introduced a European framework of conduct rules designed to foster a single market for mortgages and to protect consumers.
The MCD will be implemented in the UK by the Financial Conduct Authority (FCA). The Rules are effective from 21 March 2016, although firms can elect to adopt the majority of them from 21 September 2015. This will assist lenders in managing pipeline in the absence of any transitional rules.
Any ‘new agreement’ entered into after 21 March 2016 will need to be MCD compliant and therefore, lenders will need to review their pipeline and ensure that, where required, additional disclosure is given to customers, along with the offer of a 7 day reflection period.
The main changes that will affect you are:
Consumer Buy to Let and Business Buy to Let:
The vast majority of (BTL) Buy To Let lending will now become non-regulated and will be called ‘Business Buy-to-let’ (BBTL) credit agreements.
Under the MCD Directive, some BTL mortgages become defined as regulated ‘Consumer Buy to let’ (CBTL) mortgages when:
- The borrower or related person (an immediate relative) has ever lived in the property or intends to live in the property in the future. Primarily we expect Lenders to treat let to buys as CBTL’s and possibly some inherited properties.
Non-regulated ‘Business Buy to let (BBTL)’ is when a customer is deemed to be, or has identified themselves, as acting by way of a business in taking out a BTL mortgage, or:
- A BTL loan is on a property that has been bought for business purposes for the sole purpose of letting it out.
- If the borrower has never lived in it and has a portfolio of properties.
- Lenders will require a signed declaration from the borrower to confirm the borrower is acting wholly for business purposes. Similarly, anyone associated with the transaction must have no reason to think this is incorrect.
Whilst these loans will not be regulated by the FCA, we will treat them the same.
Second Charge Lending:
The MCD seeks to cover all lending where the purpose is to buy or retain rights on a residential property.
This means that any firm electing to advise on second charge mortgages will need to adopt the Rules from 21 March 2016. Additionally, where the customer is increasing their borrowing, brokers will need to consider whether this is a more suitable option.
KFI and ESIS:
The European Standardised Information Sheet (ESIS) will replace the Key Facts Illustration (KFI).
This is one of the few areas where the MCD permits a transition period.
Lenders are required to either implement the ESIS from 21 March 2016, or elect to provide a KFI + (a KFI with some additional supplementary information), before fully transitioning to the ESIS by March 2019.
Homeline Mortgages will be fully trained on the differences in the ESIS and be able to explain its contents, in particular, the rates that will be illustrated:
- The APRC (Annual Percentage Rate of Charge) of the product recommended
- 2nd APRC – if the amount is variable, the ESIS will illustrate the rate at the highest of the preceding 20 years
- 2nd APRC – if the amount is capped, the ESIS will illustrate the highest amount at the earliest date it can rise
- The product rate before and after any initial benefit period
The document must be issued at the point of advice, before application, on request, as soon as reasonably possible after the customer has provided information regarding affordability and preferences, or prior to payment of a product related fee.
Introduction of a 7 day reflection period:
The MCD introduces an obligation on lenders to give customers the right to seven days of reflection. The trigger for this is likely to be the lender issuing a mortgage offer.
The MCD requires lenders to issue ‘binding’ offers, which means that unless a material change occurs post offer, or the customer has provided inaccurate information, the lender cannot re-underwrite the case. Binding Offers will only apply to MCD regulated mortgages this will not include Business BTL or MCD exempt Lifetime Mortgages.
Disclosure regarding increased borrowings:
Where a customer is increasing their borrowing, Homeline Mortgages is required to inform them of alternative options of raising funds, e.g. further advance, unsecured loan, second charge or remortgage.
Disclosure of lenders on panel and the range of procuration fees offered by each:
Homeline Mortgages will be required, on request from the customer, to provide a list of lenders on panel and the range of procuration fees paid by them.