EN    EN EN 
 
EN    EN  EUROPEAN COMMISSION 
Brussels, 31.3.2011 
SEC(2011) 355 final 
  
COMMISSION STAFF WORKING PAPER 
SUMMARY OF THE IMPACT ASSESSMENT 
  
Accompanying document to the 
  
Proposal for a 
DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 
on credit agreements relating to residential property 
  
(Text with EEA relevance) 
SEC(2011) 356 final 
SEC(2011) 357 final 
COM(2011) 142 final 
 
EN 2   EN 1. INTRODUCTION  
Responsible lending is defined as the care ta ken by creditors and intermediaries to lend 
amounts that consumers can afford and meet their needs and circumstances.  Similarly, 
responsible borrowing implies that consumers s hould provide relevant, complete and accurate 
information on their financial situation, and are encouraged to make informed and sustainable 
decisions. 
2. PROBLEM DEFINITION  
2.1. Problems 
Rising household debt levels ex ist throughout Europe. However, they are not in themselves 
a sign of irresponsible lending and borrowing as long as the levels  of debt are sustainable and 
repayments can be met. Figures show though that  citizens are having incr easing difficulties in 
meeting their debts: in 2008, 16 % of people repo rted difficulties in paying bills and 10 % of 
all households reported arrears1. The difficulty in meeting repayments has led to an increase 
in default rates and a rise in foreclosures.2 Data can be influenced  by factors other than 
irresponsible lending and borrowing such as the general economic downturn. However, the 
data collected for this impact  assessment, combined with qualitative evid ence through 
stakeholders’ contributions, and anecdotal evidence from across Europe shows that this is not 
just a conjunctural problem limited to one or  two Member States but  can be found throughout 
the EU. 
A range of factors drive the decision to grant a particular mortgage credit, the borrower’s 
eventual choice of mortgage product and the borrower’s ability to repay the loan. These 
include the economic climate, information asy mmetries and conflicts of  interest, regulatory 
gaps and inconsistencies, as well as other fact ors such as a borrowers ’ financial literacy and 
mortgage financing structures. While these other factors clearly play a role, the fact remains 
that irresponsible behaviour by certain market act ors was at the source of the financial crisis. 
It is therefore clear that irre sponsible lending and borrowing n eeds to be addressed to avoid 
a repeat of the current financial crisis. 
The following problems were identified in rela tion to irresponsible mortgage lending and 
borrowing practices. In addition, to the proble ms described below, several problems were 
identified relating to the early repayment of mortgage loans. These problems, which create an unlevel playing field, inhibit cross-border activity and customer mobility and impact on 
consumer confidence, are described in deta il in the impact assessment accompanying the 
White Paper on the Integration of EU Mortgage Loans .
3 
                                                 
1 Europeans’ state of mind , Eurobarometer 69, November 2008. Towards a Common Operational 
European Definition of Over-indebtedness , Observatoire de l’épargne Européenne in cooperation with 
CEPS and the University of Bristol, February 2008. 
2 Information provided to the Commission by Member States. 
3 SEC(2007) 1683. 
 
EN 3   EN 2.1.1.  Non-comparable, unbalanced, incomplete and unclear advertising and marketing 
Cases of inappropriate advert ising of mortgage products ca n be found throughout the EU. 
Incomplete and unclear advertising and marketi ng material is often difficult to compare and 
does not allow consumers to shop around. Despite national legislation and EU rules forbidding misleading advertising, inconsistencie s and gaps exist. Different rules also mean 
that those creditors and/or credit intermediari es offering products and services cross-border 
will face an additional burden. 
2.1.2.  Insufficient, untimely, co mplex, non-comparable and unclear pre-contractual 
information 
Efforts have been made to improve the qu ality and comparability  of pre-contractual 
information, e.g. the European Code of Condu ct on pre-contractual information for home 
loans. However, application of the Code ha s been mixed, and enforcement and monitoring 
mechanisms ineffective. The timing of the provision of the agreed European Standardised Information Sheet (ESIS) varies, limiting its use,  for example, to compare offers. Despite the 
existence of the Code, a series of market failures persist. First, pre-contractual information is difficult to compare. Different methodologies and cost bases also  make a key element of the 
ESIS, the Annual Percentage Rate of Char ge (APRC), incomparable. Second, consumers 
view the information provided as complex a nd unclear. Third, the information provided is 
often incomplete. Finally, there are no rules in  place governing the disclosure of information 
on the relationship between the creditor and credit intermediary. 
2.1.3.  Provision of inappropriate advice 
Misaligned incentives in the provi sion of advice can lead to market failures. Advisors may 
face disincentives to provide impartial advice, e.g. because they receive different levels of 
remuneration from different creditors for the sa le of specific products. Evidence shows that 
inappropriate mortgage advice ha s been given in a number of in stances, leading to consumer 
detriment. In the absence of rules or standard s against which the provision of advice can be 
assessed, it is difficult to determine whet her the advice given was appropriate. 
2.1.4.  Inadequate suitability and creditworthiness assessment 
An important market failure in this area is  the lack of incentives  to undertake thorough 
creditworthiness and/or suitability assessmen ts. Creditors may rely on the value of the 
underlying collateral (mortgaged property), transfer  the risk of default or sell the loan to 
a third party. Similarly, consumers may also have  an incentive to overstate their income in 
order to obtain the loan. Regulatory failures in th e form of inexistent, un clear or inconsistent 
regulatory frameworks further contribute to inadequate suitability and creditworthiness 
assessments. Regulatory barriers al so inhibit the ability of cred itors to access information on 
a borrower’s creditworthiness cro ss-border via a credit database. 
2.1.5.  Ineffective, inconsistent or non-existen t registration, authorisation and supervision 
regimes for credit intermediaries and non- credit institutions providing mortgage 
credit (NCIs) 
Not all Member States require credit intermediari es to be registered or  authorised, which may 
create the potential for irresponsible behaviou r. The lack of registration or authorisation 
requirements also means that authorities ha ve little scope for supervision of credit 
 
EN 4   EN intermediaries’ activ ities or imposing sanctions for misc onduct. This has the potential to 
create an uncompetitive environment in whic h misconduct, excessive risk taking or poor 
advice is not held to account. Cross-border activ ity of credit intermediaries is extremely 
limited at present: the regulator y patchwork prevalent at EU le vel can inhibit a business’s 
decision whether to engage in cross-border business. 
Six Member States have no registration a nd authorisation requirements for NCIs, and 
requirements vary widely between the other Member  States with regulation in place. The lack 
of registration or authorisation requirements m eans that authorities have little basis for the 
supervision of NCIs’ act ivities or for requiring sanctions fo r misconduct, with similar effects 
to those described above. 
2.2. Consequences 
The problems identified result in consequences for consumers, credit intermediaries, creditors 
and the economy at large. 
2.2.1.  Significant spill-over eff ects on the wider economy 
Mortgage credit markets play an important role in the EU economy. In 2008, outstanding 
residential mortgage lending in the EU27 repr esented about 50 % of EU GDP. Therefore, 
irresponsible lending a nd borrowing can have a significan t effect on the wider economy. It 
affects the solvability of mortgage lenders. As  financial institutions need to put aside 
increasing amounts to capital to cover bad losses , the availability of credit for responsible 
borrowers and companies is reduced, which in  turn places limits on economic growth and 
consumption. Irresponsible lending and borro wing also has a financial impact through 
government bail-out programme s or nationalisation, and as a consequence, government 
budgets are put under strain and bud get cuts are often necessary. Fi nally, social safety nets are 
put under strain with rising unemployment and in creased demand for social expenditure and 
housing. 
2.2.2.  Risk of consumer detriment 
Consumers who are sold unsuitable products ofte n run into financial difficulties, leading to 
overindebtedness, as well as default or fo reclosure. Consumers may be damaged by 
regulatory barriers that prevent creditors properly assessing creditworthiness and suitability or 
the additional costs faced by creditors operatin g on a cross-border business. Such consumers 
could face a direct financial detriment (e.g. pa ying a higher price for a product that could be 
available for less) or a potential social detr iment (e.g. not obtaining a mortgage credit despite 
being able to repay). Finally, consumers may also lose confidence in creditors and credit 
intermediaries. 
2.2.3.  Low customer mobility 
Several of the problems identified above impede  customer mobility. A lack of transparency 
and comparability can lead to consumers failing to shop around for the best offer for their needs. Consumers seeking to take  out a loan in a country other than their country of origin 
may face higher prices or be deni ed the opportunity due to the f act that the foreign creditors 
are unable to access sufficient information on the consumer’s credit history. 
 
EN 5   EN 2.2.4.  Low cross-border activity 
Economic barriers such as the costs of accessing infrastructu res and the need to adapt 
advertising material, information disclosures, products, business models and pricing strategies 
raise the costs of doing busine ss in another Member State. These barriers deter market 
entrants and limit competition. For example, cr edit intermediaries seeking to operate cross-
border face an additional burden: unlike investment  or insurance intermediaries, there is no 
'passporting' regime. 
2.2.5.  Unlevel playing field between  market actors and products 
The regulatory gaps and inconsistencies in the regulatory frameworks have created a situation 
where mortgage market actors engage in the same activities, face similar risks but do not 
necessarily face similar rules. The different regulatory frameworks on consumer credit and 
mortgage credit can also lead to arbitrage be tween the two different loan products (consumer 
credit and mortgage credit). 
3. POLICY OBJECTIVES  
There are two general objectives that are comm on to all problem areas. First, to create 
an efficient and competitive Single Market for c onsumers, creditors and credit intermediaries 
with a high level of consumer protection by fo stering the following four specific objectives: 
– consumer confidence; 
– customer mobility; 
– cross-border activity of creditors and credit intermediaries; 
– a level playing field. 
Second, to promote financial stability by ensuri ng that mortgage credit markets operate in 
a responsible manner. 
4. THE CASE FOR EU ACTION  
Action from Member States alone will result in different sets of rules, which may undermine 
or create new obstacles to the functioning of the internal market and create unequal levels of 
consumer protection throughout the EU. Comm on standards at EU level are therefore 
necessary to promote an efficient and competi tive internal market with a high level of 
consumer protection and to avoid the developm ent of divergent rules and practices in the 
Member States. The Treaty provides for action to  ensure the establishment and functioning of 
an internal market with a hi gh level of consumer protection as well as the free provision of 
services. Such a market for residential mortgages is far from completion as several obstacles exist to the free provision of serv ices and the creation of an in ternal market. The legal basis 
for action is in the following Treaty pr ovisions: Article 114 (ex-Article 95). 
 
EN 6   EN 5. POLICY OPTIONS  
A number of policy options have been identifi ed. The table below summarises these options. 
The retained options are highlighted. The analys is has proven that thos e options are the most 
effective and efficient in achieving the objec tives described above. The policy options for 
early repayment are analysed and assessed in detail in the impact assessment accompanying 
the White Paper on the Integra tion of EU Mortgage Loans4 and the study assessing the costs 
and benefits of different polic y options for mortgage credit5. 
Advertising and marketing  
1: Do nothing  
2: Introduction of advertising rules sim ilar to those contained in Article 4 of  the Consumer Credit Directive (CCD)  
3: Introduction of specific rules on the form and content of advertising and marketing materials  
Pre-contractual information 
1: Do nothing  
2: Ensure that consumers receive the ESIS 
3: Ensure that the ESIS is provided in su fficient time to enable consumers to shop around  
3.1: Principles-based requirement 
3.2: Specify a deadline for the provision of information 
4: Improve the format and content of the ESIS 
5: Standardise the APRC  
5.1: Standardise on the basis of a narrow list of costs  
5.2: Standardise on the basis of Article 19 of the CCD  
5.3: Standardise on the basis of a broad list of costs  
6: Additional pre-contractual information on the actor who offers the mortgage (e.g. remuneration) 
Mortgage advice 
1: Do nothing 
1.2: Requirement to provide adequate explanations (Article 5(6) of CCD)  
1.3: Principles-based advice standards 
1.4: Requirement to provide mortgage advice 
Remuneration strategies of advisors 
2.1: Do nothing  
2.2: Principles-based guidance on remuneration policies 
2.3: Specific rules on methods and levels of remuneration  
Creditworthiness assessments 
1.1: Do nothing 
1.2: Requirement for the creditor to assess the borrower’s creditworthiness 
1.3: Requirement for the creditor to deny the credit in the case of negative creditworthiness assessment 
1.4: Non-discriminatory access to databases for creditors 
1.5: Homogenise the content and characteristics of data bases 
1.6: Requirement for the borrower to provide correct information on his/her situation 
Suitability assessments 
2.1: Do nothing 
2.2: Requirement for the creditor or the credit interm ediary to assess the suitability of the product offered 
2.3: Requirement to warn the borrower if the chosen credit product is not suitable to him/her 
2.4: Requirement for the borrower to provide correct information on his/her situation 
2.5: Specific product regulation including bans or caps on certain credit products 
Credit intermediaries: Registration and authorisation 
1.1: Do nothing 
1.2: Principles-based requirements 
1.3: Specific requirements 
1.4: Introduce a passport 
                                                 
4 SEC(2007) 1683. 
5 Study on the costs and benefits of different policy options for mortgage credit , London Economics with 
Achim Dübel (Finpolconsult) in association with the institute für finanzdienstleistungen (iff), 
November 2009, p. 200-336. 
 
EN 7   EN Credit intermediaries: Prudential requirements and supervision 
3.1: Do nothing 
3.2: Principles-based requirements 
3.3: Specific requirements 
3.4: Introduce EU level supervision 
NCIs: Registration and authorisation 
1.1: Do nothing 
1.2: Principles-based requirements 
1.3: Specific requirements 
NCIs: Prudential requirements and supervision 
3.1: Do nothing 
3.2: Principles-based requirements 
3.3: Specific requirements 
3.4: Introduce EU level supervision 
6. IMPACTS  
The preferred options will re duce the likelihood of consumers purchasing an unsuitable 
mortgage credit product. A strong positive effect on consumer confidence is also expected to 
underpin the demand for credit products and enc ourage consumer mobility both at national 
and, albeit to a lesser extent, cross-border level. 
The implementation of some of the retained opti ons will not lead to significant changes to the 
operation of market actors on the supply side in  a number of Member States, where similar 
obligations already exist. However, the preferre d policy options will have an important impact 
on the cross-border activity of creditors and cred it intermediaries. The entry of foreign credit 
providers and credit intermediaries should strengthen competition and, thus, translate in 
a wider range of credit products for the consumer  and potentially even a decrease in prices. 
The global impact of this packag e cannot be calculated as a simp le sum of individual impacts. 
This is due not only to the risk of double c ounting overlapping costs and benefits, but also 
because of the synergies between some options that should amplify their impact. According to 
Commission calculations based on current evidence, EUR 1 272–1 931 million appears as a conservative estimate for the range of expect ed benefits. Expected total one-off and ongoing 
costs are in the range of EUR 383–621 milli on and of EUR 268–330 million respectively. 
Most of the preferred options’ impacts will be sp read all across the EU. However, for some of 
these options, the benefits and costs will be amp lified in those Member States which will need 
to substantially adapt the rules in place or introduce a comple te regulatory framework (e.g. in 
those countries where credit intermediaries  or NCIs are not regulated at all). 
Two opposite potential social impacts can be identif ied: there is a risk th at responsible lending 
practices may result in reduced access to credit,  particularly for certa in groups of borrowers 
(e.g. with a low income), however, respon sible lending policies also enhance the 
sustainability of lending practi ces and thus social cohesion. 
For most of the retained options no increase of the administrative burden is expected. The 
exceptions relate to the regulatory framework fo r credit intermediaries and NCIs where the 
costs linked to the authorisation and registration of these market actors, as well as to their 
ongoing compliance with the new legislation, w ill imply an administrative burden on those 
players. 
 
EN 8   EN 7. CONCLUSION  
The preferred policy instrument would be an EU Directive. A Directive enables 
proportionality to be taken into account th rough the level of harmonisation. Detailed 
harmonisation is not always necessary or appropri ate in all instances: the structure of housing 
markets and mortgage markets differs consid erably throughout the EU, the products and 
remuneration structures also va ry considerably. EU intervention needs to be detailed enough 
to be effective but high level enough to be able  to take into account Europe’s diversity. 
The proposed EU Directive would foresee a revi ew of its appropriatene ss and effectiveness. 
This review should take place a few years after its implementati on and include a public 
consultation.