Regulating credit agreements related to residential property

The financial crisis has highlighted the dangers of irresponsible lending and borrowing. New rules endowing borrowers with a higher level of protection are being steered through a proposal for a directive on credit agreements related to residential property. There is as yet no EU legislative framework in place regulating mortgage lending, despite the size of the EU mortgage market. The Commission argues that the new directive will create a more efficient and competitive single market by extending the regulation of home loans to cross-border residential property purchases.

This draft directive introduces requirements for advertising of mortgage credit. Retail banks and other credit-lending institutions will be required to make information available at all time, provide sufficient personalised information and give relevant explanations to meet the new EU standards on credit agreements related to residential property. Customers’ ability to repay loans must be thoroughly assessed by the lending bodies.

Conversely, borrowers will benefit from this directive in so far they will obtain extra information therefore supposedly allowing them to make a more informed decision. Borrowers will be obliged to provide the necessary information enabling the assessment of their ability to repay the credit obtained from banks.

The new directive will impact the regulatory set-up discerning the kind and scope of mandatory information to be provided by local banks to prospective customers. It will certainly add an element of administrative burden at the assessment-stage of the residential loan applications lodged by customers. Whilst the objective of the directive is recommendable, it is important to ensure that the practical implementation of its provisions is commensurate to its intended purpose.

The client creditworthiness assessment must be proportionate to the risk assessment requirements that the principles of cautious sound management call for. This is particularly important at a time when the property market in Malta is stabilising itself following a market slump over the past recent years.