HM Treasury has this afternoon published the final legislation to be laid before Parliament in relation to the European Mortgage Credit Directive (MCD) which from March 2016 will bring in additional mortgage regulations which will apply to both homebuyers and lenders.
In the legislation the Government has reiterated that its “policy intent is to preserve the UK’s existing regulatory framework as far as possible, putting in place the minimum requirements to meet the UK’s legal obligations.”
The new rules introduce a legislative framework for consumer buy-to-let mortgages. Responding to concerns about the definition of “consumer” buy to let, some clarity has been provided in the legislation:
If a buy-to-let loan is for business purposes, and a property has been purchased with the sole intention of letting it out, the borrower has never lived in it, and/or the borrower taking out the loan has other buy-to-let properties then the loan will be outside the scope of the regulation.
Alongside this, the legislation has a provision that allows lenders to evidence the categorisation of a buy-to-let loan through a borrower declaration. In this a borrower can confirm that they are acting wholly or predominantly for business purposes. The lender can act on this declaration, provided that they do not have reasonable cause to suspect that it is incorrect.
On this basis both government and lenders have concluded that “consumer” buy-to-let mortgages, including some accidental landlords, represent a minority of transactions in the buy-to-let market, which in itself represents a relatively small proportion of the overall mortgage market.
The current market practice of treating such consumer buy-to-let loans as regulated mortgage lending anyway means that no significant impact is expected as a result of this legislative change.
The FCA, will supervise and enforce this legislation and they will consult shortly on implementation.
In response to concern from lenders that there was a lack of clarity on the treatment of mortgage pipeline’s – loan applications made but not completed - at the implementation of the MCD, the new legislation states that “where credit is granted pursuant to an agreement that exists before the implementation date of 21 March 2016, the affected mortgage does not need to be subject to the MCD”
This is important as it will hopefully avoid home buyers and lenders having to re-do applications in the pipeline in the run-up to March 21 2016.
All firms subject to the MCD can choose to adopt the revised rules up to six months ahead of the implementation date of 21 March 2016, giving some flexibility to firms who wish to implement early to minimise disruption for their customers.
Commenting, Paul Broadhead, Head of Mortgage Policy at the BSA said:
“The BSA is still of the view that the Mortgage Credit Directive will offer little or no benefit to UK consumers, but will add cost, complexity and some confusion to the mortgage process. However, we welcome the Government’s approach to implementation, putting in place the minimum requirements to meet European law. The introduction of an appropriate framework for consumer buy-to-let will keep the majority of buy-to-let lending outside the scope of regulation, minimising the disruption to this market.”
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