The UK will have a number of exemptions from the scheme including shared equity, buy-to-let and Lend a Hand products. Self-certified loans are banned under the legislation and it will be illegal for those carrying out credit checks within a lender to have pay linked to mortgage approvals.
Further measures against misleading advertising are also included in the directive, which will need to be approved by each of the EU’s 27 member states before coming into force.
The lengthy negotiations began in March 2011 but the directive will not affect any mortgage products until its introduction, likely to be in the middle of 2015.
The directive will create a single European-wide framework for the €6.5tn European mortgage market. It will implement rules about the credit worthiness of customers and standards of assessment.
A statement released by the EU said that the directive will ‘put a brake on the excesses of the past’.
It is designed to encourage cross-border competition from lenders and intermediaries who are authorised, registered and supervised at national level will be able to pursue business opportunities in all 27 member states.
Other rules introduced include an obligation for lenders to hand consumers a standardised information sheet (ESIS) that is intended to help them shop around to identify the best and cheapest credit offer for their needs.
Mortgage providers will need to take account of ‘the consumer’s real interests’ and ensure any loans do not involve excessive risk taking. It will also require lenders to use ‘reasonable forbearance’ when customers enter payment difficulties.
While the directive has introduced a general ban on packaged products, those that have proven to be beneficial to consumers in the past will be allowed, including some insurance or savings products. Future products will need to be assessed by individual national regulators before they can enter the market.
Commissioner Michel Barnier said: “The financial crisis started with the subprime debacle in the United States where mortgages were being handed out with no background checks carried out on whether consumers could afford them, and ill-informed and often vulnerable consumers were encouraged to take excessive risk.
“We have seen similar excesses in Europe, for example with the housing booms and the inevitable busts which followed in Spain and Ireland.
“The consequences for the financial sector and the economy as a whole have been enormous. And there have been too many very real tragedies for those who have lost their homes because they could no longer meet their mortgage repayments.
“This Directive will help put an end to these excesses and foster responsible lending practices. Consumers will finally get the protection they deserve. They will be better informed so they can choose the mortgage product which best meets their needs, at the best price, and fully aware of the risks they are taking.”
Responding to the announcement,CML director-general Paul Smee said: “The government, FCA and the industry have worked positively together to ensure that the new rules will broadly suit the UK mortgage market and appear unlikely to cause problems for lenders.
“There will inevitably be additional work for both regulators and lenders to ensure that the requirements are fully reflected in UK rules, especially as they come hot on the heels of the implementation of the FCA’s new domestic requirements for mortgages.
“UK customers already receive significant consumer protection and information as our regulatory regime is already the most advanced among European member states, but for customers in some other member states the changes will result in increased protection and greater consistency.”