The European Mortgage Credit Directive creates a single mortgage market across the EU
In a previous article, we addressed the possibility of non-Italian nationals obtaining a mortgage to purchase an Italian property. This article explores the main provisions in the European Mortgage Credit Directive (EMCD). This came into force across all EU Member States in 2016.
During the global financial crisis of 2008, the EU launched a process to draw up prudential measures aimed at containing risk in real estate credit agreements. The majority of sub-prime mortgage problems occurred outside the EU. Nevertheless, consumers within the EU hold significant levels of debt related to residential property.
The EU process resulted in the introduction of the EMCD. The purpose of which is to create a single, harmonised residential mortgage credit market across the EU with a high level of consumer protection.
The European Mortgage Credit Directive is part of Italian legislation
Italy’s Council of Ministers through Legislative Decree no. 72 of 21st April, 2016 approved the EMCD, (2014/17/EU) known as Direttiva Mutui in Italian. The Directive then became a national law on 20th May, 2016 and has been in force since 4th June, 2016.
In Italy, Bankitalia, ensures enforcement and application of the EMCD.
The EMCD applies to credit agreements entered into with consumers that are secured by a mortgage, or equivalent security, on residential property. It is also applicable to credit agreements for the acquisition or a retention of property rights on buildings or land. Italian law defines a consumer as, ‘a natural person acting outside their trade, business or profession’.
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The European Mortgage Credit Directive impacts EU and non-EU residents alike
For example, a UK consumer takes out a Euro mortgage to buy property in Italy. However, their main income is derived in Pounds Sterling.
In the first instance, because of the risks attached to borrowing in a foreign currency, the EMCD therefore provides for measures to ensure that consumers are aware of the risk they are taking.
If a credit agreement relates to a foreign currency loan, EU Member States must ensure that the consumer has the right to convert the credit agreement into an alternative currency. This will be subject to specific conditions. Additionally, EU Member States must ensure that there are other arrangements in place in order to limit exchange rate risks to the consumer.
Main provisions of the European Mortgage Credit Directive
The EMCD stipulates that information must be provided to consumers at the pre-contractual stage.
In Italy lenders provide pre-contractual information in a prescribed form, the European Standardised Information Sheet (ESIS), or Prospetto informativo europeo standardizzato (PIES)” in Italian. This is to assist consumers in comparing lenders and their products. Furthermore, additional information must be attached to the PIES. This includes the identity, status, capacity and remuneration of any credit intermediary involved in the application.
Lenders must conduct a rigorous assessment of the proposed borrower’s creditworthiness prior to granting credit. In Italy, this includes an assessment of the borrower’s income, expenses, financial and economic circumstances. In accordance with Central Individual Credit Register (CICR) regulations, Italy grants cross-border access to its creditworthiness databases. Lenders in EU Member States use these databases to assess a consumer’s ability to comply with the financial obligations for the duration of a credit agreement.
Code of conduct
Lenders and their intermediaries must act honestly, fairly, transparently and professionally. They must take into account the rights and interest of consumers.
Bankitalia has an obligation to protect these consumer rights. It ensures that Italian lenders and their intermediaries have an appropriate level of knowledge and competence regarding their credit products.
Once authorised in italy, a credit intermediary gains passporting rights to operate in any EU Member State.
Forbearance on foreclosures
EU Member States must adopt measures encouraging creditors to exercise reasonable forbearance before the initiation of arrears and foreclosure proceedings.
The aim is to encourage creditors to deal proactively with any emerging credit risk. In effect, this means ensuring that creditors have adequate measures in place so that they can exercise reasonable forbearance. Thus they can make reasonable attempts to resolve the situation through other means before initiating foreclosure proceedings.
Italian legislation prohibits foreclosure on a main residence. This is subject to the condition that this home is the only property the debtor owns. However, this is not applicable to luxury homes, such as a castle or villa.
The EMCD provides discretion about applying certain provisions
In Italy, prior to the conclusion of a credit agreement, the consumer has the right to a cooling-off period of at least seven days. This is in order to allow for comparison of different loan offers on the market. In addition, the cooling-off period aims to provide enough time to evaluate implications and make an informed decision. During this period of reflection and comparison, the offer remains binding on the lender. The consumer may accept the offer at any time.
While the EMCD permits consumers to repay their loan before the term expires, EU Member States may impose restrictions on rights to early repayment. Creditors may make a charge for early repayment to cover any losses directly arising from the repayment. In Italy, however, in accordance with Bersani’s Decree, Law No. 40, 2nd April, 2007, a consumer cannot be charged for early repayment.
If you are seeking a mortgage or loan for an Italian property investment, we would recommend you seek independent legal advice to ensure you receive fair treatment and protection.
De Tullio Law Firm specialises in Italian and international property law. If you need advice or help with matters related to a mortgage for Italian real estate property, please contact us for a free consultation.
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