KFIs scrapped in EU Mortgage Directive

KFIs are to be scrapped after the EU Mortgage Directive was overwhelmingly approved this week.

On Tuesday, MEPs passed the final rules of the EU credit mortgage directive, the purpose of which is to harmonise regulation throughout EU member states.

The regulations apply to mortgages on residential property, residential property with office space, and building land.

The FCA is currently drafting a paper to depict how the new regulation will affect mortgage professionals. One of those affects will see a new EU standardised information sheet which will replace the UK’s KFI model. However, lenders may be able to still use the illustrations for another five rules.

The information sheet, known as ESIS, will include information on worst-case scenarios for variable interest and foreign currency loans.

Commissioner for internal markets and services Michael Barnier said on Tuesday: “The European Parliament as today confirmed its willingness to make the mortgage credit sector subject to improved consumer protection measures at EU level by approving new rules on mortgages. Consumers have lost trust in the financial sector: these new rules will help rebuild that trust.”

Barnier added: “The aim of the Mortgage Credit Directive is to make responsible mortgage lending the norm across Europe. The purchase of a property entails substantial costs which are often financed by a mortgage. Mortgages account for the entire outstanding debt of two-thirds of European households.

“This Directive introduces responsible lending practices across the EU. Consumers will be better informed as lenders will have to provide them with a standardised information sheet so they know the risks but can also shop around for the best product.”

Lenders must give borrowers either a seven-day “reflection period” before signing a contract for a loan, or a seven-day window to cancel after the contract is signed. Lenders also must apply new EU-wide standards to determine an applicant's credit-worthiness.

The directive gives borrowers more flexibility for early repayment of loans. While the new rules prohibit penalties for early repayment, the regulation does give member states the ability to decide what compensation a lender would be entitled to for costs directly associated with the early repayment.

Lenders and intermediaries must inform the customer if they are receiving advice or just supported information. Brokers must allay in writing to borrower clients how much their commission they will receive from the lender.

Mortgage lenders will have to inform potential borrowers of the real cost and risks of a mortgage, eliminate early repayment penalties, and better screen the credit-worthiness of mortgage applicants, under the new approved mortgage regulations approved by the European Parliament.

The new rules could have been much worse if not for the constant lobbying of MEPs such as Vicki Ford, who has campaigned vigorously to safeguard the buy-to-let market from regulation.

What is clear is that lenders now have an important role to not only adapt but to educate intermediaries about the changes and the new processes they will have to use.

The Mortgage Credit Directive was approved overwhelmingly during parliament's 10 Dec. plenary session, in a vote of 596 to 31 with 65 abstentions. The package had already been approved by member states.

The UK will have to implement the new rules within two years of when the final text is published next year.