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)
Date: 2011-03-31
Institutions: European Commission
Subjects: competitiveness, consumer information, credit guarantee, financial solvency, financing, mortgage, real estate credit, single market

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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 

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1. 

INTRODUCTION 

Responsible  lending  is  defined  as  the  care  taken  by  creditors  and  intermediaries  to  lend 
amounts  that  consumers  can  afford  and  meet  their  needs  and  circumstances.  Similarly, 
responsible borrowing implies that consumers should 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  exist  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 increasing difficulties in 
meeting their debts: in 2008, 16 % of people reported 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  evidence  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  asymmetries  and  conflicts  of  interest,  regulatory 
gaps and inconsistencies, as well as other factors 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 actors was at the source of the financial crisis. 
It is therefore clear that irresponsible lending and borrowing needs to be addressed to avoid 
a repeat of the current financial crisis. 

The  following  problems  were  identified  in  relation  to  irresponsible  mortgage  lending  and 
borrowing  practices.  In  addition,  to  the  problems  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  detail  in  the  impact  assessment  accompanying  the 
White Paper on the Integration of EU Mortgage Loans.3 

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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. 
Information provided to the Commission by Member States. 
SEC(2007) 1683. 

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2.1.1.  Non-comparable, unbalanced, incomplete and unclear advertising and marketing 

Cases  of  inappropriate  advertising  of  mortgage  products  can  be  found  throughout  the  EU. 
Incomplete and unclear advertising and marketing material is often difficult to compare and 
does  not  allow  consumers  to  shop  around.  Despite  national  legislation  and  EU  rules 
forbidding  misleading  advertising,  inconsistencies  and  gaps  exist.  Different  rules  also  mean 
that  those  creditors  and/or  credit  intermediaries  offering  products  and  services  cross-border 
will face an additional burden. 

2.1.2. 

Insufficient,  untimely,  complex,  non-comparable  and  unclear  pre-contractual 
information 

Efforts  have  been  made  to  improve  the  quality  and  comparability  of  pre-contractual 
information,  e.g.  the  European  Code  of  Conduct  on  pre-contractual  information  for  home 
loans.  However,  application  of  the  Code  has  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  Charge  (APRC),  incomparable.  Second,  consumers 
view  the  information  provided  as  complex  and  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  provision  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  sale  of  specific  products.  Evidence  shows  that 
inappropriate mortgage advice has been given in a number of instances, leading to consumer 
detriment. In the absence of rules or standards against which the provision of advice can be 
assessed, it is difficult to determine whether 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  assessments.  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 the form of inexistent, unclear or inconsistent 
regulatory  frameworks  further  contribute  to  inadequate  suitability  and  creditworthiness 
assessments. Regulatory barriers also inhibit the ability of creditors to access information on 
a borrower’s creditworthiness cross-border via a credit database. 

2.1.5. 

Ineffective,  inconsistent  or  non-existent  registration,  authorisation  and  supervision 
regimes  for  credit  intermediaries  and  non-credit  institutions  providing  mortgage 
credit (NCIs) 

Not all Member States require credit intermediaries to be registered or authorised, which may 
create  the  potential  for  irresponsible  behaviour.  The  lack  of  registration  or  authorisation 
requirements  also  means  that  authorities  have  little  scope  for  supervision  of  credit 

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intermediaries’  activities  or  imposing  sanctions  for  misconduct.  This  has  the  potential  to 
create  an  uncompetitive  environment  in  which  misconduct,  excessive  risk  taking  or  poor 
advice  is  not  held  to  account.  Cross-border  activity  of  credit  intermediaries  is  extremely 
limited  at  present:  the  regulatory  patchwork  prevalent  at  EU  level  can  inhibit  a  business’s 
decision whether to engage in cross-border business. 

Six  Member States  have  no  registration  and  authorisation  requirements  for  NCIs,  and 
requirements vary widely between the other Member States with regulation in place. The lack 
of  registration  or  authorisation  requirements  means  that  authorities  have  little  basis  for  the 
supervision of NCIs’ activities or for requiring sanctions for 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 effects on the wider economy 

Mortgage  credit  markets  play  an  important  role  in  the  EU  economy.  In  2008,  outstanding 
residential  mortgage  lending  in  the  EU27  represented  about  50 %  of  EU  GDP.  Therefore, 
irresponsible  lending  and  borrowing  can  have  a  significant  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  borrowing  also  has  a  financial  impact  through 
government  bail-out  programmes  or  nationalisation,  and  as  a  consequence,  government 
budgets are put under strain and budget cuts are often necessary. Finally, social safety nets are 
put under strain with rising unemployment and increased demand for social expenditure and 
housing. 

2.2.2.  Risk of consumer detriment 

Consumers  who  are  sold  unsuitable  products  often  run  into  financial  difficulties,  leading  to 
overindebtedness,  as  well  as  default  or  foreclosure.  Consumers  may  be  damaged  by 
regulatory barriers that prevent creditors properly assessing creditworthiness and suitability or 
the additional costs faced by creditors operating on a cross-border business. Such consumers 
could face a direct financial detriment (e.g. paying a higher price for a product that could be 
available for less) or a potential social detriment (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 denied the opportunity due to the fact that the foreign creditors 
are unable to access sufficient information on the consumer’s credit history. 

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2.2.4.  Low cross-border activity 

Economic  barriers  such  as  the  costs  of  accessing  infrastructures  and  the  need  to  adapt 
advertising material, information disclosures, products, business models and pricing strategies 
raise  the  costs  of  doing  business  in  another  Member State.  These  barriers  deter  market 
entrants  and  limit  competition.  For  example,  credit  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 between the two different loan products (consumer 
credit and mortgage credit). 

3. 

POLICY OBJECTIVES 

There  are  two  general  objectives  that  are  common  to  all  problem  areas.  First,  to  create 
an efficient and competitive Single Market for consumers, creditors and credit intermediaries 
with a high level of consumer protection by fostering the following four specific objectives: 

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– 

– 

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consumer confidence; 

customer mobility; 

cross-border activity of creditors and credit intermediaries; 

a level playing field. 

Second,  to  promote  financial  stability  by  ensuring  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.  Common  standards  at  EU  level  are  therefore 
necessary  to  promote  an  efficient  and  competitive  internal  market  with  a  high  level  of 
consumer  protection  and  to  avoid  the  development  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 high 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 services and the creation of an internal market. The legal basis 
for action is in the following Treaty provisions: Article 114 (ex-Article 95). 

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5. 

POLICY OPTIONS 

A number of policy options have been identified. The table below summarises these options. 
The retained options are highlighted. The analysis has proven that those options are the most 
effective  and  efficient  in  achieving  the  objectives  described  above.  The  policy  options  for 
early repayment are analysed and assessed in detail in the impact assessment accompanying 
the White Paper on the Integration of EU Mortgage Loans4 and the study assessing the costs 
and benefits of different policy options for mortgage credit5. 

Advertising and marketing 
1: Do nothing 
2: Introduction of advertising rules similar 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 sufficient 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 intermediary 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 

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SEC(2007) 1683. 
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. 

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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  reduce  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  encourage  consumer  mobility  both  at  national 
and, albeit to a lesser extent, cross-border level. 

The implementation of some of the retained options 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 preferred policy options will have an important impact 
on the cross-border activity of creditors and credit 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 package cannot be calculated as a simple sum of individual impacts. 
This  is  due  not  only  to  the  risk  of  double  counting  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 expected benefits. Expected total one-off and ongoing 
costs are in the range of EUR 383–621 million and of EUR 268–330 million respectively. 

Most of the preferred options’ impacts will be spread all across the EU. However, for some of 
these options, the benefits and costs will be amplified in those Member States which will need 
to substantially adapt the rules in place or introduce a complete regulatory framework (e.g. in 
those countries where credit intermediaries or NCIs are not regulated at all). 

Two opposite potential social impacts can be identified: there is a risk that responsible lending 
practices may result in reduced access to credit, particularly for certain groups of borrowers 
(e.g.  with  a  low  income),  however,  responsible  lending  policies  also  enhance  the 
sustainability of lending practices 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  for  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,  will  imply  an  administrative  burden  on  those 
players. 

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7. 

CONCLUSION 

The  preferred  policy  instrument  would  be  an  EU  Directive.  A  Directive  enables 
proportionality  to  be  taken  into  account  through  the  level  of  harmonisation.  Detailed 
harmonisation is not always necessary or appropriate in all instances: the structure of housing 
markets  and  mortgage  markets  differs  considerably  throughout  the  EU,  the  products  and 
remuneration structures also vary 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 review of its appropriateness and effectiveness. 
This  review  should  take  place  a  few  years  after  its  implementation  and  include  a  public 
consultation. 

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