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Member Briefing: Regulation of Second-charge Mortgages Implications of EU Mortgage Credit Directive (MCD)

Date: 20/08/15

Regulation of Second-charge Mortgages Implications of EU Mortgage Credit Directive (MCD)

1.   Background

The EU Mortgage Credit Directive (MCD) will take effect in the UK on 21st March 2016. From that date, back books of regulated second-charge mortgages will have to be administered by a regulated body - whether the house builder, having become fully regulated, or a regulated third party.

House builders’ interim Consumer Credit Licences should have all been extended to 31st March 2016.

HBF continues to have discussions with the FCA and Treasury on issues relating to the MCD.

2.   Regulated and unregulated second-charge loans

I have indicated in previous Briefings, quoting information received from HM Treasury, that regulated loans will have to meet the requirements of the MCD, but that unregulated loans will not have to.

A solicitor acting on behalf one member questioned this view, so I asked Treasury again for clarification. Treasury is reluctant to give formal advice. However they have quoted two key consultation documents which set out the situation:

HM Treasury. Implementation of the EU Mortgage Credit Directive (Updated January 2015) – section 2.3

“The existing consumer credit regime currently provides for a number of regulatory exemptions for second charge mortgage lending. The government’s proposed approach is to maintain these exemptions, where the MCD allows it. This means that some exemptions will exist for second charge lending that do not exist for first charge lending, for example in respect of some types of second charge bridging loans with four or fewer repayments, second charge business loans which exceed £25,000 and some second charge loans by credit unions. This reflects the government’s objective to minimise the impact of the directive where possible. However, it also introduces further complexity into the regime and government would welcome views on this proposal.”

HM Treasury. Implementation of the EU Mortgage Credit Directive: summary of responses (January 2015) – section 3.13

“In response to comments on the decision to maintain second charge exemptions in the new regime where possible, the government has concluded that it will not make any changes to the draft legislation in this area. However, it is an area that the government will be keeping under review, and will consider taking action if evidence of detriment emerges. In terms of the use of some of the exemptions provided by the MCD, which are conditional on some high-level requirements on pre-contractual disclosures and advertising, firms should look at what is set out in the legislation. It will ultimately be for a court to decide whether these requirements have been met.”

Treasury have said that the correct regulatory treatment of unregulated loans is the same now as it has been previously - they will remain exempt.

While previous Treasury comments did not explicitly make the point, Treasury has now noted that the Courts are the final arbiter of the effect of any legislation, including the MCD. This is not intended to alarm house builders. Only the Courts can give a definitive view of the effect of all legislation that house builders comply with already. However, it is ultimately for home builders to satisfy themselves that they have met the relevant legislative requirements.

3.   FCA information

The FCA now has a web page dedicated to house builders. This provides links to a Factsheet on second-charge lending, a flowchart and a Webinar.

The FCA has indicated to HBF that it does not expect to provide any further material for house builders.

4.   Origination of company shared-equity loans

New loan origination cannot be treated in the same way as back book loans – i.e. a house builder cannot simply appoint a third part to originate new second-charge loans on its behalf.

To have new loans originated, a lender has to do this in its own right. The house builder would provide funds for the lender, with some sort of legal protection of its beneficial ownership of the loans, but with the lender lending as a completely independent regulated body. Because a body regulated to originate new loans must make a loan within 12 months to retain its regulatory status, any lenders willing to undertake this role would probably need to have an existing loan business (e.g. first-charge lending) to ensure it did not fall foul of this 12-month requirement.

The new Government has confirmed that Help to Buy Equity Loan (HtB1) will be available until 2020. Therefore it seems unlikely house builders will need to introduce their own shared-equity schemes in response to an economic downturn until after 2020.

However some house builders have been using their own shared-equity scheme as part of S106 Affordable Housing (AH) agreements, and one or two house builders have introduced such products in Scotland. Therefore until recently it seemed likely that new loan origination would in fact be required in the short-medium term, rather than leaving it until post-2020.

Since the general election, however, the new Government’s approach to AH, and in particular the Starter Homes scheme, has created a lot of uncertainty. The Starter Homes scheme is strongly backed by the Prime Minister and a great deal of work is going on within HBF and within Government to design a workable scheme. Whereas it was originally intended to apply to ‘exception sites’ (i.e. redundant commercial sites not already identified in a Local Plan), the scheme is now to be extended to “every reasonably sized site” (not yet defined).

At this stage it is not at all clear whether Starter Homes will be required alongside existing AH commitments, or added to the range of products available within the definition of AH, or substituted almost completely for existing AH tenures, especially Social and Affordable Rent. The degree to which house builders will need to, or be able to use their own shared equity schemes within S106 agreements will depend on the answer to this question.

However several of the third parties whose details we circulated in July are already able to originate new loans, or are planning to become regulated so as to be able to undertake new loan origination. To offer second-charge loans in the context of shared-equity schemes, they will need to devise the necessary legal structures. HBF members will have to discuss these legal structures with the relevant third parties.

5.   Third-party update

On 16th June, I circulated details of five third-party organisations offering to administer back books of second-charge loans and, in some cases, undertake new loan origination.

I have since discovered the Places for People document did not have contact details. An amended document is attached.

I have also been in touch with a sixth third-party organisation with experience in this area, Fi-Nest. A short note is attached. Please note that Fi-Nest is planning to hold a focus group and is seeking replies by 4th September from companies who would like to attend the discussion.

6.   Member feedback

I would welcome any member feedback on the regulation of second-charge loans and house builders’ experiences so far.

Please click here, for Places for People document:

Please click here, to view HBF letter to members:

John Stewart

07989 384435