The Mortgage Credit Directive (MCD) introduces 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 MCD, once implemented, will impose various requirements on lenders, including:
Lenders must conduct an affordability test, looking at consumers' income and expenditure to ensure that they can afford the mortgage. This requirement to undertake an affordability assessment is different from the requirements of the Consumer Credit Directive 2008 and will apply when a lender takes on an existing borrower from another lender or when advancing additional borrowing to existing customers; however, there will be no requirement for an affordability assessment where a borrower switches products with an existing lender unless there is an additional borrowing and/or changes to the terms affecting affordability. This could make it difficult for older purchasers for example to purchase but to let properties if as is likely the lender will be looking to the mortgage being paid in full before retirement.
Minimum standards must be applied when providing advice to consumers.
Lenders must provide a "European standard information sheet" (ESIS) to enable consumers to shop around. This will replace the existing "Key Facts Illustration" (KFI) which applies in the UK - firms will be able to continue to use the KFI document until March 2019 but may need to make "top-up" disclosures to meet the new requirements
Lenders will be under a duty to act fairly and professionally and must ensure that staff have the appropriate level of knowledge and competence.
There will be a new requirement to provide a borrower with a "binding offer", which will prompt an entitlement to a seven-day period of reflection. Current practice is usually to make a conditional offer subject to further checks. The making of a "draft" or "indicative" offer will still be permissible provided that a binding offer is issued at a later stage.
Binding offers may still contain conditions, for example, a material change in circumstances or fraud.
Consequences for conveyancers
There will be a need to check the offer of mortgage carefully to check the lender requirements for acceptance and also the length of the reflection period. 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). It is clear that the offer can be accepted by the borrower within the reflection period. This will essentially bring the reflection period to an end.
If the lender requires the offer to be accepted this will need to be done before the advance can be relied upon.
An important amendment was made to clause 10 of the CML Lenders’ Handbook on 1st February 2016 which clarifies 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.
This seems to suggest that where there is no formal requirement for acceptance of the offer then the submission of the COT will be viewed as an acceptance of the offer and the automatic termination of the reflection period.
Under the changes though it is not clear is seems the mortgage offer once issued will not be capable of being extended. This means a fresh offer will be required and this could cause delay.
This means conveyancers are when submitting the COT saying to the Lender that the client accepts the offer and has no longer to think about it. For this reason conveyancers should look to amend terms and conditions along the following lines.
‘If you are a buyer and using a mortgage to purchase you should be advised by your mortgage broker of changes to the law which relate to your mortgage offer. If you have not then please refer back to your broker and ask for information on how the Mortgage Credit Directive may affect the issue and acceptance of your mortgage offer.
Under these changes your lender is required to provide you with at least 7 days to reflect on the offer before deciding whether you wish to accept it. Your lender or broker are required to advise you on how long this period is and whether they require you to formally accept the offer before it will become a live offer. It is therefore very important to consider this information carefully.
It is also important for you to keep in mind that when we apply to your lender for the release of mortgage funds you will be providing us with your authority to accept the mortgage offer on your behalf and to dispense with the reflection period if this is still active. In other words by singing these terms and conditions you will be providing us with authority to bind you to the offer of the mortgage. IF THEREFORE YOU DO NOT WISH FOR THIS TO HAPPEN IT IS IMPORTANT TO LET US KNOW IN WRITING STRAIGHT AWAY.
Please also keep in mind that if you offer of mortgage is allowed to expire you will be required to apply for a new mortgage. Extensions to your existing offer may not be allowed. Responsibility for checking and monitoring the expiry date rests with you and we will not accept any liability for loss which may arise from the expiry of the offer’ .