MORTGAGE CREDIT

Necessity and obstacles for a European Legislative Harmonization

The European Legislation in relation to the consumers protection with regard to financial services could be qualified as “flexible”, given that it is composed of recommendations, ethical codes or good practice agreements.
Especially in the context of the mortgage credit, every attempt of the European Union Institutions to proceed to approve a harmonizating binding regulation has finished in a spectacular failure.
It goes without saying that the resource to mortgage credits to finance real state properties, specially the housing, has become in a generalized practice in all the countries of the European Union, that has reached alarming levels. All of that has been caused by the reduced interest rates of the Euro Area of the last years, and on the other side, by the decision of the financial institutions and authorities to facilitate massively the concession of this financing instrument. It has turned into an instrument of economic policy, because the real-state sector and their derivatives, and the families consumption has become a very high percentage of the GDP of many of the member states.
It could be thought that the great proliferation of the inland mortgage market would be the favourable breeding ground for that in a European common economic area, financial institutions of a member state had could be able to extend their area of performance to other member states. However, the reality is that this mortgage common market is only an entelechy. The consequence of all is detrimental to the consumer because the lack of competition implies that the market becomes closed and dominated by the great financial groups of their respective countries.
It should be questioned what are the causes by which that unique mortgage area has not been able to be established, specially, a unique market for consumers. And to answer this question we will have to turn to the fact stated at the beginning, that is to say, the lack of harmonization of the European Mortgage Legislation.
The attempts to achieve an harmonization in this field by the European Commission go back a long way and have finished with the approval of a mere Recommendation in the year 2001, relating to the pre-contractual information to be given to consumers by lender offerings home loans, that in some aspects reduce the protection given to consumers by the national legislation of some Member States, such as Spain.
In this direction, between 1984 and 1987, the Commission tackled three projects that leaded to achieve the already mentioned harmonization: the project of the directive of harmonization of the mortgage market, the Vorms Report for the APR harmonization in regard to mortgage credit and the Empírica Report about the possibilities to harmonizate the mortgage credit. All of them finished in the same way: with no approval of a regulation of compulsory observance in this subject.
The reasons why this so quoted harmonization is so necessary were already explicated by the Economic and Social Committee, when it pronounced in favour of the proposal of Directive relation to establishment and service providing freedom, in the field of the mortgage credit, that was never approved:
? The national legislators, after diverse legislative reforms over the last few years, have directed the mortgage credit toward housing acquisition, which facilitates a greater social insertion of the groups with more difficulties to access to ownership, such as the young people.
? The conditions to access a decent and adequate housing have to be improved and facilitated by the authorities through all the instruments that were available, as it could be in this case the regulation of mortgage credit, in an harmonized way in all the Community scope.
? The freedom of establishment of financial institutions in all the member states in this mortgage context will facilitate a greater competitiveness that will benefit consumers.
? Consumers of a country will be able to access to financing formulas that are from or are characteristic of other states, not only in the financing aspect but also in the saving’s one.
After the first failure to approve a directive of harmonization the European Commission ordered the named Empírica Report, which consisted of a study of mortgage credits. This study tackled the situation of the mortgage credit sector in Europe, the criteria to justify the writing of a Directive and their technical elements, clarifying the different perspectives as the directive of minima or maxima criteria and justifying the necessity of this regulation against behaviour codes.
The conclusions of the Empirica Report develop proposals that have a high value to the protection of consumers rights, insofar as it is said that against a good behaviour code, do not result at the time of harmonization of the mortgage subject, it could be interesting as a complement of a binding regulation, insofar as the strength of a behaviour code lies in their flexibility and dynamism, since if it is developed by means of consensus, adapting it agilely to the technology and market changes.
On the other hand, there have to be no doubt about the advantages, in relation to the consumers protection that involves a maximum harmonization through a binding regulation, against a minimum harmonization. It should not be left out that the consumer reliability will be a fundamental aspect in the establishment of this unique mortgage market, and in this way, by protection their rights against national regulations that are weak in this field, the establishment of financial institutions in a country different from theirs will be encouraged.
Given the impossibility or incapacity to approve the directive of harmonization in the mortgage field, the Community institutions chose finally by the way of dialogue between the consumers and financial sector representatives. All of that in spite of the mentioned reports that advocated the necessity of a binding regulation. It was thought that better that nothing was to have a minimum reference, even if it were a voluntary character. In this manner the European Agreement relative to a Voluntary Behaviour Code about Pre-contractual information for Home Loans, signed by the European Associations of Consumers and European Associations of the Credit sector was arisen. It became the European Commission Recommendation of 1 March 2001 on pre-contractual information to be given to consumers by lenders offering home loans.
This Recommendation, laudable as it meant an attempt of standardization of criteria to a Community level, in respect of the transparency and information in the home loans, in certain aspects, what did was to reduce the protection given to consumers by some of the national regulations, such as the Spanish one. In Spain, an order of 1984 about transparency of the financial conditions of the mortgage credits had been approved, whose essential purpose was to grant a proper information and protection to consumers in these cases, stressing the aspects concerning the free election of the financial institution and the regulation of the contents of informative prospectus that gather the financial conditions of the loan.
Well, the Recommendation stipulates the possibility of modification unilaterally of the mortgage credit conditions that are sent previously to the consumer by means of the named “customized information”, unless the consumer himself /herself had requested in an explicit way that the said information had a binding character to the institution. On the quoted Spanish regulation considers always the mortgage offer that has been previously formulated by written by a credit institutions, as binding for the institution itself, without being necessary the explicit request of the consumer that has been mentioned. All of this implies a considerable loss in the protection of consumers rights.
However, all this initial way of approaching this issue, in respect of the advantages of an harmonization of maximum, runs counter frontally to two great obstacles: firstly, the bitter opposition of the banking Lobby that pressures in order to establish a tailor-made single market, keeping consumers away from the “limelight” and prioritizing over all other things, the free trade of goods and services by means of an purely mercantilist application of the free market rules with the least possible constraints.
The second fundamental obstacle is referring to the juridical technique itself, which regulates the mortgage context. At first, the remarkable localistic character of the national regulations has to be emphasized, because the mortgage is associated with the property rights: the nature itself of the mortgage guarantee is territorial, that is why the regulation of this right in the national legal systems is substantially different. So, in many countries, there is a very formalistic that regulates very strictly the system of mortgage constitution, by means of public documents and its registration in a public register with a constituent character. The proceedings of execution, that also protect to the consumers themselves who cannot lose their mortgaged properties if there are not given strict conditions, and, on the other side, there are some legislation about the land register publicity subject for third parties to be able to know the state of burdens and liens that hang over the real states. However, in other countries, in order to constituting a mortgage, formalities of the signature of title deed or land register publicity are not required.
All those is indicative of that an harmonization of the regulations of mortgage guarantee should give rise to some deep reforms of the civil and mercantile law of the member States, or, what it would be more important: the creation of an authentic body of European civil and mercantile law.

If we enter into the analysis of the particular aspects that the harmonization directives should regulate in the mortgage scope, as a proposal the following could be stressed:
- The first question is the one referring the name itself of this subject. The utilization of ambiguous terms as “home loan” is counterproductive if the wanted is to give European consumers an effective protection. This is not a trivial question, as in the Spanish law, the distinction between a loan and a credit with a mortgage guarantee have different juridical effects all over the mortgage life. In this way, it is proposed that the European legislation that were issued, is applied to any type of credit or financing product, whose aim were home purchase independently of their denomination.
- Previous information to consumer: the new European regulation has to encourage and guarantee the previous information to consumer. To that, it should be established that the given information have a binding character for the credit institution for a period of time that will not be less than 15 working days, in which the consumer, in view of all the conditions offered by the institutions has a reflection period where he/she will be able to become aware of all the aspects and circumstances, and will be also able to turn to other different financial institutions and find a better offer. As it has the binding condition for the institution, none of the offered conditions will be able to be unilaterally changed. The binding character of the offer will not depend on what the consumer requests it explicitly, on the contrary, the offer should always have this character without possibility to agree explicitly that that offer is only for merely informative purposes.

The contents of this binding customized offer have to refer to the following issues in clear and understandable terms, and in totally readable letters: the amount and deliver way of the loan capital, such as the receipts dates and the amount of the instalments, supplying always a repayment scheme; the conditions of the totally or partially early repayment, and all their charges and commissions; the special features of the regular interest rates, types, review methods, dates, settlement period, possible maximum or minimum limits, rounding up or down, form and contents of the communication to customer of the periodical reviews in case of variable interest rates, annual or equivalent percentage rate (APR), proceedings to claim against these reviews; commissions and charges to consumer that will be able to be charged during the loan life. Those charges that fall to the customer and that legally would not be demanded to the mortgage constitutions (e.g. insurance) have to specially highlighted; delay interests in case of non-payment; claiming systems in case of conflict with the financial institutions, specifying the periods, forms and addresses in which the claim have to presented; specific circumstances that would allow the institutions to execute the mortgage, pointing out the legal costs to be charged to consumer, and highlighting specially the possibility of loan rehabilitation in case of breach of consumer.
- Previous or initial charges: the building valuation and the appraisal of the burden situation of the real state that is to be mortgaged, as well of as the financial situation of the consumer and other administrative or judicial charges. In order to do the binding quotation that has been mentioned before; it is necessary to pay these previous or initial charges. In the written application of the offer, the consumer is to be informed if he / she shall pay them even if the operation would not be performed. To protect customers effectively, they shall be provided with the option to deliver the land register and administrative certificates and checking that were required, such as the valuation of a independent technical expert, regulating the conditions of official approval that were precise so the valuation reports submitted by the customer could be verified by the institutions.
In order to make really effective all this previous information to consumers, it is necessary to establish a system of legal consequences of the nonfulfillment of the forms as well as the contents of the quotations by the financial institutions. It is not enough to provide the possibility of economic sanctions to the institution. It will have to grant to consumer the right to revoke the consent one signed the mortgage in the event of the form and content of the binding quotation would not comply with the legal precautionary measures. This revoking procedure has to be simple, without any cost to consumer, and will have to entail the reciprocal restitution of benefits, being always favourable to consumer. It is a logical consequence, if consumer has not been able to reflect previously on the conditions themselves, because of the fault of the financial institution non-fulfillment, it is coherent that once signed the contract, he or she would have the possibility to revoke, because it is then when he or she is fully aware of the scope of his or her duties and rights.
Due to the large increase of volume of mortgages, financial institutions make great investments on commercial campaigns on a large scale, utilizing an aggressive language, and encouraging in a great level this consumption increase. The contents of the information provided to consumers through these campaigns have to be strictly regulated. Every approach should not leave out that publicity have to inform mainly of the financial conditions and cost of products offered, that consumer have to aware of (for example, in all commercials of medicines, it is compulsory to introduce determined information with a compulsory character, or in tobacco or alcoholic drinks commercials.
It would be very positive that also at a European level, the minimum contents of the informing prospectuses about mortgage products that compulsorily must be at disposal of consumer in the branches of credit institutions would be regulated. The delivery of these prospectuses to consumers will have to be free. The conditions that are publicized in these prospectuses will not have a for-guidance-only character, but they will be considered as a part of the contract if at the end it is signed, except for an express change of the conditions themselves that were favourable to the consumer.
With the purpose that the consumer has a complete, independent and neutral information, Consumers Associations should have access to the information contained in the informing prospectuses of mortgage products. Due to that, financial institutions will be forced to deposit the updated informing prospectuses, in the bodies of representation of Consumers Associations, this is for they to query them, or give them out in those Consumers Associations that legally have the condition of being the most representatives ones.
- A public document and registration in an official register as constituent elements: It has been seen that the national legislations that are more effective in the protection of consumers rights are those that requires with a constituent character the signing of a contractual document before a public notary and afterwards its registration in an official register with public access. That is why the Community regulation will have to require that the national legislation establishes that every operation by means of that financing were supplied to consumers, putting as a guarantee the housing that constitutes their home, must be documented in writing, where a public notary will have to intervene (notary, justice of the peace or a professional of analogous characteristics that could vouch for the acting in which he / she intervenes), and that it had a free choice nature for the consumer if there are several notaries, and afterwards, registering that document in an official register that could be access by the public in general in order to check their data. Without these two requirements, the operations that were performed would not have any validity, and therefore, the housing would not be useful in this case as a guarantee. Costs and expenses of the fulfillment of these formalities will have to be as minimum as possible for the consumer, having to be in any case of his/her previous knowledge before their realization. The contractual document will have to gather without any changes the integer contents of the binding quotation, and the consumer will have in an inalienable way the right to examine the document during the five working days before the signing in the public notary office.
- Guarantees or securities: the only guarantees or securities that are required to a consumer that mortgage his / her house to get financing to its purchase, are the derivative of the mortgage security itself. The financial institutions have to be prevented from recording in the contractual document any sort of guarantee different or a personal security of a third party in the case of financing the housing purchase with a mortgage guarantee.
- Costs and additional expenditures: It is a usual practice of financial institutions that, on the occasion of the signing of a mortgage credit, sell other kinds of products and services: unemployment, death or disability insurance, fire insurance, home insurance (buildings and contents covers), the obligation to open current accounts, or banking cards or having their salary paid directly into their current account. It is necessary that the proliferation of this practice would be limited, firstly, providing the proper information to consumer about the non-compulsoriness of this connected products or services, not only in the binding quotation and the contractual document but also in the informing prospectus, pointing out clearly and in an outstanding and specific way what is its exact cost and allowing the consumer that once having contracted them, could be easily unbind them without the main contract getting any change. In the case that the national legislation establishes any kind of compulsory insurance to underwrite the mortgage (as in Spain, it is only the fire insurance of the mortgage property), it should be stated in every type of document underwritten by the consumer (insurance policy inclusive), if the underwritten insurance policy is legally compulsory or not.
- Tax Expenditures: the taxation of housing purchase by means of the mortgage concession is very disparate in the different Member States, due to that, it would be convenient to harmonize the tax system and the tax rates that tax these operations within the Community framework.
- Right to revoke: in the cases that the binding quotation or the contractual document were not adequate in the form and content to the issued compulsory arrangements, the consumer will be able to retract his / her consent by a communication in writing, in that case, the parties will have to return reciprocally the facilities supplied to date if the consumer demands it in this way, without this suffering any damage and releasing the housing property from the burden in any case. All the costs and expenditures that are involved to the revoking exercising will be paid by the financial institution, as it is the party that has breached the contract.
- Moratorium Interests: The maximum moratorium interest rate by consumer nonfulfillment that will not exceed in any case the legal interest rate of money that is officially fixed, with and increment of a 50%.
- Mortgage Foreclosure: Bearing in mind that nowadays the mortgages average repayment period usually exceed 20 years, during this very large period of time the familiar economy can suffer ups and downs and crises periods that should not involve the loss of the familiar home. That is why, the non-payment of a single instalment of the mortgage credit is totally excessive that were sufficient to give rise to the proceedings of mortgage foreclosure. This aspect is framed within the specific treatment that should be done to the problem of families over-indebtedness, that lacks European regulation applying and even in most of the national legislations it has a satisfying solution. The solution implies to confer waiting periods and acquittals to consumers, in a similar way to what happens in case of business crises with the bankruptcy proceedings. This issue is more extended in dictum about families over-indebtedness, to which we refer.
- Mortgage Reinstatement: Spanish national legislation, by means of a modification of the procedural regulation, has introduced the possibility that consumers, when their customary housing is going to be sold at auction, were able to avoid it, paying the unpaid instalments, interests and other expenditures, reinstating in this way the mortgage credit. Although it involved an advantage at that moment, it has been revealed as insufficient because it seems that granting this possibility a single time during more than twenty years than can last the mortgage repayment period does not improve the protection of the consumers substantially. For that reason, the Community regulation will have to extend this possibility to all the Members States, enlarging the possibility of its exercise proportionate to the repayment period, so that the mortgage of the customary home will be able to be reinstated so many times as it is necessary (for example settling down maximum limits, of a certain number of times per year based on the particular economic situation of each family). The consumers cost of this reinstatement does not have to go beyond the unpaid quotas until the moment when this one is made and the judicial costs (expenses of lawyers, solicitors and experts), as regards the moratorium interests, the national regulation will have to be applied, in relation to the interests yielded in the judirical execution, from the claim presentation to the moment of consignment. Anyway, in the binding quotation and in the contractual document, as well as in all communication of the financial institution or from Court to consumer, the reinstatement possibility has to be pointed out, specifying the way, cost and deadlines (if knowing them) to be able to do it.
- New Costs: for any cost or commission that are not considered in the binding quotation and contractual document that the financial institution intends to charge the consumer, it will be necessary that the consumer gives his or her consent in writing, from the moment that it will come into force, because it implies a change in the contractual conditions that requires the consent of all the parties and that should not been imposed unilaterally by one of them, in this case, the financial institutions.
- Total and Partial Repayments: given that in certain national legislation, consumers are not allowed to pay off the mortgage credit before its date of expiration, paying totally the capital pending to be repaid, or doing partial repayments, decreasing the capital pending to be repaid, a new European regulation will have to guarantee these consumers rights. The conditions and expenditures that such advanced total or partial repayments of capital should be known by consumer, specifying in a outstanding way in the binding quotation as well as in the contractual document. Anyway, a maximum limit will be established in respect to the commissions that financial institutions are able to charge to consumer by the exercise of this right. And the authorities should be urged to facilitated these operations, establishing a tax system that were less burdensome with tax advantages and reduced registration, notary or similar costs.
- Contractual changes later that the signing act: The chance to modify by mutual agreement the initially agreed conditions regarding general conditions will be considered expressly: changes of the financial institution, and changes of mortgage debtors, as well as the rest of conditions (interest rates or repayment period renegotiations…). Moreover, all this changes will have to count on a harmonized tax system being more favourable to consumer, with legally limited commissions as regards its maximum amount and with reduced notary and registration costs.
- Consumer Subrogation in the builder or property developer mortgage of the purchased property: in case of loans granted to builders of property developers, when it is planned the subrogation of consumers that are purchasing these houses in these loans, it will be compulsory to inform the consumer in writing that the subrogation is not compulsory and that it is up to the consumer the choice of financing in any other way.
- In case of not choosing the subrogation in the place of the builder or the property developer, these last ones would be charged all the expenditures, costs and commissions derived from the loan cancellation, that correspond to the house itself, being considered as full right invalid, all the consumer renunciation to any aspect of these rights performed in any type of document. The consumer will able to choose in any time not to subrogate in the builder or property developer mortgage of the house that is being purchased, even if he or she had not been informed about that in his or her purchase or subrogating documents, being the builder or the property developer charged with all the expenditures, costs and commissions derived of the exercise of this option.