THE EUROPEAN Commission unveils plans today to clamp down on “irresponsible” mortgage lending with measures to ensure borrowers are warned of the consequences of their actions.
The commission wants to eliminate opaque lending practices and provide better information to consumers before they tie themselves to onerous loan contracts.
Internal markets commissioner Michel Barnier believes lenders, brokers and other intermediaries engaged in irresponsible behaviour during the housing bubble, leaving a legacy of negative equity, indebtedness, unpaid bills and threatened foreclosures.
Mr Barnier wants clearer advertising, more and comparable “precontractual information” and tougher scrutiny of borrowers’ creditworthiness. With defaults and negative equity rising in several European states, he wants to reduce the likelihood of consumers getting “inappropriate” loans.
“Unclear or difficult-to-understand adverts or information can make it difficult for the consumer to choose the best product for their needs as can inadequate assessments of the consumer’s ability to repay the loan,” he will say.
Some of the proposals are already enshrined in national law, but he believes rules are required to ensure consumers’ ability to repay loans are taken into account. He will also say the main focus of a new system of banking rules is on risks to the lender.
While the commission estimates 90 per cent of European lenders assess a borrower’s creditworthiness, this does not mean they decide against granting a loan if such assessments are negative.
It is open to lenders to rely on the value of the property, as underlying collateral, in the event of a default. They can also engage in financial transactions to transfer the risk of default to a third party.
The commission believes this leads to a risk that lenders grant loans to people who cannot repay. The plan seeks to avoid such risks by preventing lenders from granting loans to consumers with “negative” creditworthiness. He will say borrowers should be adequately informed about possible risks.
The draft directive is subject to negotiation with EU governments.
