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

A call for more transparency over mortgage fees

A campaign designed to put pressure on lenders to provide greater transparency when quoting financial fees and charges has had a degree of success with the Chancellor George Osborne announcing in the delivery of his Autumn Statement plans to make mortgage fees clear. 

Spearheaded by the consumer champion Which the move by the Chancellor came after 45,000 people supported the campaign and a further 3,000 contacting their local MP. 

The Council of Mortgage Lenders has been asked by the Government to investigate and come up with some practical solutions  as well as guidelines to make it easier to compare mortgage fees and the cost of mortgages generally. 

Selecting a mortgage can be quite costly and Which report that a couple with a new £100,000 mortgage could find themselves paying £1503 more over two years because of mortgage fees. 

Which also found that only 3 % of consumers could correctly compare five mortgage deals from cheapest to the most expensive from information currently presented by the lenders. 

For more details of the campaign and to provide support visit :http://www.which.co.uk/campaigns/insurance-bank-card-fees/ 

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

Lender and client relationship and the potential for conflict

Article by Georgie Harrington - Trainee Lawyer 

Where a client seeks the aid of a mortgage, they are no longer the only party legally represented. Where the same firm of solicitors represents the client and lender, there are many scenarios in which a conflict of interest may arise.

This article will focus on the unusual, yet extremely important scenario whereby the client creates a charge in the property in favour of the lender for the purpose of providing financial support and benefit to another party. This scenario is known to the conveyancing industry as “third party security”.

What is third party security?

A modern example is that of a second mortgage against a property to create a source of capital to finance the start-up of a new business. It is obvious to assume this arrangement may be between a married couple or partnership, but this is not always the case.

The potential for conflict

(1) The danger within such an arrangement is largely associated with the right the lender has to reclaim possession of the property from the third party for default in payment.

(2) Furthermore, a “client conflict” may arise if a solicitor opts to act for the third part, borrower and the lender.  Chapter 3 of the SRA handbook describes client conflict as: “any situation where you owe separate duties to act in the best interests of two or more clients in relation to the same or related matters, and those duties conflict, or there is a significant risk that those duties may conflict”.

Case Law

The topic of third party security cannot be discussed further without reference to the leading judgment of Royal Bank of Scotland plc v Etridge (No.2). The House of Lords declared how lenders are to operate under these circumstances as well as steps to be satisfied by the acting legal representative.

The case involved a wife acting as the third party, who sought her property for security to account for her husband’s debts. The loan was not repaid to the lender and repossession was claimed on the property. The wife attempted to sue the solicitors for professional negligence on the grounds that they had not acted within their duty to advise accordingly. The question considered by the Court of Appeal was: Had the wife been properly advised, would she have signed the necessary documents to enter into such a transaction? The Court of Appeal held that the solicitors firm were in breach of their duty as they has failed to evaluate and advise the wife of the risks.

Judgment requirements

Lender responsibility	Solicitor responsibility
Write to the third party informing that for their own protection, the lender will require written confirmation from the solicitors that the nature of the charge will be explained.	Explain to the client that the lender may rely on the written confirmation from them that the nature of the transaction and charge has been sufficiently explained.
Ask that the third party instruct a solicitor. It is for the solicitor to decide whether there is a potential conflict of interest in taking on the instruction for the third party, borrower and lender and whether this is in the best interests of the client.	Seek confirmation that the third party is happy for legal representation under the circumstances and advise accordingly thereafter of the legal and practical implications.
Provide the third party with the financial information necessary for advice to be provided accordingly.	Check that no earlier lending is secured under the third party’s guarantee.
Provide the solicitors with any information that is reasonably considered may evidence the fact that the third party has been mislead in coming to such a decision.	Explain the nature of the documents to be executed by the client and the consequences of entering into the transaction. The solicitor must obtain consent from the client to write to the lender confirming this has been explained to the client.
Do not proceed on the transaction without written confirmation from the solicitor.	Discuss the client’s financial means and whether any other assets may be the subject of repayment in place of third party security. The solicitor can at this point offer to negotiate the terms of the transaction with the lender under instruction of the client.
	Meet with the client face to face without the borrower present. An attendance note of the meeting is necessary.

Decision in Etridge

The consideration of Lord Neuberger M.R. was that the length of the client meeting in relation to third party security did not necessary satisfy the duty the solicitor has in advising the client. Mere advice to proceed was simply not sufficient: “…she should have been told in clear terms that a hurried short meeting was simply inappropriate, bearing in mind the importance, riskiness and probable pointlessness of the transaction she was about to enter into…”. The solicitor acting on behalf of the wife did not recall the meeting with her and therefore was not able to give any real evidence that the advice provided was satisfactory for the purposes of his duty to the client. All the solicitor was able to offer was that of what his usual practice with clients would be. The court founds that, had the wife been properly advised, the wife would not have signed the documents to the transaction.

Conclusion

The requirements listed within the table above were considered to bet he core minimum to be obliged by the lender and solicitor in their relationship and capacity to the third party, to ensure they enter into the transaction with realistic understanding of the implications and risks involved. Equally allowing the lender the comfort to make the necessary loan without fear that the transaction will be set-aside in the future. The solicitor must exercise their due skill and judgment in every individual case of such a nature and whether to act on the matter. It is a modern day requirement of a solicitors firm, acting in this capacity, to check their insurer’s conditions that they may even be covered to proceed in doing so.

MJP Conveyancing