The Mortgage Credit Directive ("MCD") applies to first and second charge mortgages and must be implemented in the UK by 21 March 2016. The aim of MCD is to introduce responsible lending practices across the EU, by creating a level playing field for operators and a more efficient and competitive single market for mortgages.
The MCD places various requirements on member states in areas including, without limitation:
- Assessing affordability - lenders must conduct an affordability test, looking at customers' income and expenditure to ensure whether they can afford the mortgage. This will apply when a lender takes on a new customer and when advancing additional borrowings to an existing customer.
- Provision of advice - minimum standards of professionalism must be followed where advice is provided.
- Disclosure - from 21 March 2019 lenders must provide customers with a European Standard
- Information Sheet ("ESIS") to enable customers to shop around. Lenders can continue to use the existing Key Facts Illustration ("KFI") until 21 March 2019 provided that certain "top-up" disclosures are also provided to customers either within the KFI or separately. On and from 21 March 2019 only the ESIS may be used.
- Staff training - lenders must act fairly and professionally and ensure that their staff have the appropriate level of knowledge and competence.
- Binding offers - lenders will require to make a binding offer to customers. Lenders will be able to make a conditional offer whilst carrying out due diligence on the customer, however once due diligence is completed, the lender will need to make its offer binding.
- Consideration period - lenders must allow customers a seven day period of reflection from the date of making the binding offer. The customer can accept the offer at any time during this seven day period.
If they have not already done so, UK lenders, administrators and intermediaries operating in both the first and second charge mortgage markets need to review their policies, processes, systems and staff training to ensure that they are ready for the new regime on the fast approaching implementation date of 21 March 2016.
The Financial Conduct Authority website contains useful information on MCD for lenders, administrators and intermediaries operating in the UK first and second charge mortgage markets.