EU Mortgage Credit Directive: A lender’s perspective For Intermediary Use Only EU Mortgage Credit Directive: A lender’s perspective Tony Fullbrook Policy & Regulatory Manager

Today’s Content: What is the Mortgage Credit Directive? What are the key changes? How are lenders addressing these changes? What does this mean for intermediaries?

What is the Mortgage Credit Directive? Europe’s response to the financial crisis Focused on consumer protection Traces to Consumer Credit Directive United UK position on Directive Implementation 21 March 2016 (some transitional elements are later) Significant overlaps with MMR; which leaves changes still to do

Arrears and foreclosure Advice Responsible lending ERCs Arrears and foreclosure Best interests MMR MCD

What are the key changes?

Disclosure changes Lenders will provide an ESIS or KFI+ Broadly similar content but different layout KFI+ includes additional elements; 20 year APRC, Foreign Currency loans KFI+ valid until March 2019 Must be ESIS for second charge loans Until full roll out intermediaries will need to be familiar with both ESIS and KFI+ as the approach will vary from lender to lender

Disclosure changes ‘Binding’ offers including ‘right of reflection’ Lender is bound by offer for reflection period Reflection period minimum of seven days APRC & 20 year APRC 20 year APRC based on highest rates in the last 20 years Adequate explanations Service & product disclosure Explain essential mortgage characteristics Explain the effects of taking out a loan

Foreign Currency Loans Specific Intermediary changes Additional sales and offer disclosures Ongoing disclosure requirement Limiting arrangements Specific Intermediary changes Scope of service Professional Indemnity Insurance Passporting

Knowledge and Competency Changes in scope Appropriate to role: extended deadline to 2017 Changes in scope Consumer Buy to Let (CBTL) Second charge mortgages

What is meant by consumer BTL? A ‘consumer’ means a natural person who is acting for purposes which are outside his trade, business or profession Excludes lending to Limited companies or SPVs Consumer BTL is defined by:- Borrower circumstances Borrower BTL experience Borrower intentions

Categories of BTL BTL segments fall into three categories: Regulated Mortgage Contracts “family BTL” Investment property loans “business BTL” Consumer BTL “accidental landlords?”

Which BTL borrowers become consumers? Anyone who is NOT entering into an agreement for the purposes of a business carried on, or intended to be carried on, by the borrower Business BTL is defined as… A customer who already owns or is looking to buy the property It would be let out but NOT occupied by themselves or a close relative AND Since purchase, neither they or a close relative have lived there OR failing the above:- If the customer is already a landlord i.e. lets another property (but not to themselves or family)

Which BTL borrowers become consumers? Property purchased for investment purposes will NOT be classed as CBTL Remortgage COULD be classed as CBTL if: Not already a landlord (mortgaged or not) AND property has been occupied by borrower/related persons since purchased Potential scenarios (not an exhaustive list) Moving home and letting existing home “Let to Buy” Property currently let to a related person Inheritance

What changes will BTL borrowers see? Alternative framework sets standards for lenders and intermediaries Act honestly/ fairly/ transparently/professionally taking account of rights and interests of consumer Advisory standards, remuneration, knowledge & competency, tying and bundling Sales Process and disclosure requirements Initial disclosure Information requirements Illustrations – APRC, foreign currency Declaration Adequate explanations including consequences of default Creditworthiness Exercise reasonable forbearance; arrears charges reflect costs

A Lender response to MCD

Lessons Learnt from successful MMR implementation Early mobilisation and engagement with stakeholders is key Multiple technology releases ESIS or KFI+? KFI+ KFI/Offer augmented to cover the additional MCD requirements Existing Offer document will be used as the Binding Offer with a 10-day Reflection Period Receipt of COT from solicitor waives reflection period

Foreign Currency Loans Customers with foreign currency income continue via Barclays Wealth channel and systems Major currencies will be accepted; loans will be in Sterling only Warning letters will be issued monthly if 20% negative currency swing against borrower, no currency switches

Consumer Buy to Let Business as usual Standard process Additional upfront filtering questions Enhanced pre-submission declaration ‘KFI’+ illustration and offer with additional disclosures across ALL BTL, not just Consumer BTL CBTL categorisation set by system No need for borrower/intermediary to choose status No differential treatment Consumer BTL register

Timeline MCD has no pipeline provisions Does not capture cases offered before MCD implementation Upstream questions for CBTL & Foreign Currency Offer covering letter information for pipeline cases

Finally Implementation – minimise disruption Another regulatory layer Differences in lender approach Lenders and intermediaries in partnership

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