The Mortgage Credit Directive - Guidelines for Conveyancers

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:

Assessing affordability:

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.

Providing advice:

Minimum standards must be applied when providing advice to consumers.

Disclosure:

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

Staff training:

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’ .

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at david@mjpconveyancing.com

Referral Fees - Good or Bad?

There is nothing more entertaining than watching two conveyancing lawyers engaged in an argument over the use of referral fees within the property market.   There are always plenty of sparks and it is clear that feelings around this subject run high.  

So what are referral fees?

They take several different forms.  The most common is the introduction fee.  This involves  for example a solicitor paying an estate  agent for referring a client looking for conveyancing services to that solicitor.  The fee can be anything up to £300.  Another common one is the  marketing fee.  This where a  a solicitor pays an intermediary for a ‘lead’, that is a name and contact number, to enable that solicitor to contact the potential client direct.  Its not just estate agents who refer work on for payment.  Insurance brokers also do it and can receive substantial payments for referring clients to panels of solicitors run by  third parties who also take a payment. 

Referral fees have already been outlawed in the area of litigation but still remain lawful in the property industry. 

So what are the perceived  benefits?

To begin with those referring will argue that by having control over the choice of solicitor albeit for payment, the referrer can keep control of quality and ensure the client receives the best service.  There is some credibility to this argument as agents and brokers are in making the referral putting their reputation at risk if the conveyancer fails to deliver.   The problem arises however when you bring conflict into the equation and question the motive behind the referral.  Is it as it should be to ensure the best possible outcome for the client or is it more sinister than that?  Is it because the introducer is out to maximize his return on acquiring that client?  In other words the introducer may be focused solely on the money.  In this case there is a real danger the client will be directed in the direction of the highest bidder. 

The other fundamental flaw in all of these arrangements is that the client if left to pay for the referral.  The client may not be aware of this even though there is a professional duty on the part of the lawyer to disclose the existence of the referral fee.  So this is how it flows.  The agent for example may direct a client to a conveyancer and tell the client the conveyancer is good and will only charge say £450.   The agent is more likely than not to keep from the client that out of that £450 the agent will receive a ‘kick back’ of say £150.  So in the end the client is paying £150 more than if she or he had gone the the conveyancer direct.   

The conveyancer may argue that if the client had come direct the fee would have still been  £450 because without the arrangement the conveyancer would have to spend more on advertising to generate new work.   It is unlikely therefore that profitability of a forward thinking conveyancing business would improve if referral fees were banned.  Instead these businesses would have to pay a high price for more general marketing initiatives. The only difference and one that means a lot to many practitioners is the latter situation would leave the lawyer to practice without ties and with integrity and professional independence fully intact. 

The difficulty many practitioners encounter is the inability to compete for clients on a level playing field.  Brokers and agents have access to the client at the very outset of a client’s desire to sell and or buy.   The conveyancer does not get a look in!    The opportunity presented by conveyancers to offer to the public direct Home Information Packs when they were obligatory, helped but as we know the present government in its wisdom did way with these.  It is clear that if lawyers could get to the potential client first the client would have a far greater opportunity to avoid pressure from agents and brokers alike and perhaps be left to make a more informed choice.  

Sadly I can not see any future government having the courage to bring in reform would provide this opportunity and for this reason right or wrong referral fees are likely to be here  for many years to come. 

Morgan Jones and Pett are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877000 or via email at davidpett@m-j-p.co.uk

EPC Changes - Are you advising your buy to let clients about these?

The Energy Act 2011 contains a number of provisions which will affect owners and occupiers of property. 

Probably most significant are the proposed minimum energy standards. 

These changes will have a significant impact on the buy to let market and need to be considered now by not only investors, but also lawyers acting for those purchasing buy to let property.

From April 2018, the proposed legislative changes would make it unlawful to let residential or commercial properties with an EPC Rating of F or G (i.e. the lowest 2 grades of energy efficiency).

The significance of this which cannot be under estimated could mean that the marketability of certain properties would become impossible unless they were upgraded to meet the  minimum standards. It is estimated that approximately 20% of non-domestic properties could be in the F & G  rating brackets.

Although not clear at this stage the new minimum standards could apply to all lettings and re-lettings, including sub-lettings & assignments.

Valuations of such properties could be affected if their marketability is diminished and rent reviews for properties in this situation could also be affected. Š

Given this risk to property owners and occupiers it is clear that a full understanding of the energy efficiency of current and future acquisitions of buy to let property assets should be attained.

Thereafter owners and occupiers will need to assess the costs and viability of undertaking retrofits or refurbishments, and possibly bringing forward properties for marketing prior to 2018 or re-gearing leases.

Property owners and occupiers should also seek advice on how property values may be impacted. 

This could lead to a renewed interest in the currently doomed “Green Deal” Scheme.   This may provide a financial solution to support energy efficiency refurbishment and retro-fit projects. Landlords and sub-letting occupiers will need to achieve an EPC “E” rating or have implemented the maximum package of works allowable under the Green Deal (even if they fall short of the “E” rating required).

Those acting for purchasers of buy to let should be aware of these changes and ensure clients are advised accordingly.

The situation is likely to become worse than better given the Government’s aim to see by 2030 a minimum rating of C.

Morgan Jones and Pett are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877000 or via email at davidpett@m-j-p.co.uk