According to a report in the Financial Times, the directive proposes that all loans in the EU must be declared in default if they are 90 days in arears, potentially overruling UK rules that allow borrowers up to 180 days.
The definition change would increase the likelihood of mortgages defaulting, as lenders would have less time to show forbearance to struggling borrowers, and result in banks’ capital charge costs increasing by 15% to 20%. As a result, lenders may cut lending or increases charges to borrowers.
Clive Stanton, head of risk at the Rule Financial consultancy, told the FT: “We are looking at a very worrying development. Whole books of business become unviable.”
Around 1% of all UK mortgages are in forbearance, compared to 1.2% in arrears, according to Bank of England financial stability report. It said that, without such leniency from lenders, arrears rates would be almost 50% higher.
The British Bankers’ Association called the 90-day cut off in the draft directive one of its “top concerns”, with a spokesman saying: “We believe that the reduction in the maximum number of days at which default occurs is not reflective of the underlying risk fundamentals.”
However, a spokesman for Michel Barnier, the European Union internal markets commissioner, told the FT: “Our objective is to ensure consistency across the EU, and a level playing field for all financial institutions, which is not currently the case.”
