On January 28, 2014, a majority of the members of the Council of the European Union adopted a Directive to grant more protection to persons participating in mortgage loan proceedings. The Directive applies to all loan contracts of real estate for residential purposes.
The Directive is novel in the panorama of European regulation because it is the first time that the European Union has legislated on mortgages. Previously, pre-contractual information for mortgages was subject to voluntary codes of conduct that were not harmonized. Moreover, until now, applicable contract law on consumer protection contained no specific rules on mortgages. Lastly, only mortgage-loan legislation regulated loan institutions so that there was no specific regime applicable to loan intermediaries and recipients at the European level. In recent years, the European Union Member States have suffered an increase in non-refundable loans, defaults, and foreclosures of mortgaged property. This Directive on mortgages was a response to this situation to prevent the irresponsible behaviour of lenders and borrowers.
The objectives of the Directive are to (i) decrease the excessive authorization of mortgages to prevent another housing crisis such as the one that occurred in Spain, and (ii) improve the protection of consumers against eviction in case of default.
The Directive establishes the principles and obligations specifically related to the information of consumers and the loan intermediaries. Particularly, the Directive imposes on lenders verification and evaluation criteria regarding the solvency of the consumer. This is an additional protection measure for lenders as well as for consumers because the consumer would have indirect protection against the worsening of his or her insolvency situation. Additionally, the Directive establishes the supervision principles of agencies that are not loan institutions. Among other measures, when a consumer fails to complete his or her mortgage payment obligation and must sell the property, the rule establishes the necessary measures to accelerate the process and thus prevent the over-indebtedness of consumers in the long term.
One of the causes of the housing crisis in Spain was the high number of mortgages that banks granted without conducting a preliminary examination of consumers’ financial situation and ability to make payments. The adoption of this Directive will create a unified, efficient, and competitive mortgage loan market.
The Directive establishes limitations on loan grants and evictions to stabilize the financial situation in the area of mortgages at the European level and promote more responsible behaviour for both lenders and borrowers.
This Directive, approved by the European Parliament and the Member States, will have a two-year transition period.
Hélène Dagousset
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