A common EU standard for using APRs could be introduced through a regulation rather than a directive, admits John Purvis, Scottish MEP.
Since regulations - unlike directives - are automatically enforced by member states without recourse to national level debate or interpretation, the danger is the UK market would be forced to switch to using the Annual Percentage Rate of Charge (APRC) proposal in the European Commission's Green Paper on mortgages.
As European Parliament Rapporteur on mortgage credit, Purvis will lead the debate next week when the full Parliament debates the paper and its formal response as part of the EU legislative process.
He says the APRC issue is far from a done deal given the lobbying set to take place before the Green Paper advances to the White Paper stage, but it is a challenge the UK mortgage market should be aware of.
Other ideas Purvis will be putting forward in his role include the need to create a single, open funding market, especially with regard to the need for a stronger secondary market.
For example it is currently the state that in some EU member states it is illegal for businesses other than banks to lend to the retail mortgage market.
Purvis says this does not mean the debate will propose a European equivalent of Freddie Mac or Fannie Mae as exists in the US market.
Part of the reason for not copying the US model is the uncertainty that has existed over whether they really represent government backing of last resort against risk in the market.
The objective of the European debate will be to keep such government involvement out of the EU mortgage market, although it must be the case the European Central Bank as well as other national central banks and regulators should be involved in keeping en eye out for system risk.
The role of mortgage brokers will also be in the fray, as they are seen as crucial in getting EU consumers to more widely accept the idea cross-border mortgages could be in their financial interests.
Purvis agrees the FSA has some basis in its argument there is unlikely to be a major market on the basis of current consumer sentiment: research around the EU suggests consumers are not rushing towards the idea of being able to borrow across borders.
Evidence from other markets, such as automobiles and pharmaceuticals, suggests, however, once given proper information and acting within a more transparent pan-European context, markets and market participants at the retail end will increasingly turn.
Where UK consumers have got used to the idea of comparing prices of cars to ensure they are not being ripped off by higher UK prices, so too they are likely over time to get used to the idea of comparing the cost of mortgages across borders.
Also as part of this process, lenders will have to look to move away from the focus on income multiples as part of the lending process. Purvis clearly states the proposals currently on the table argue against usury caps in order to ensure greater access to the sub-prime market, also recognising working habits are changing, with more potential borrowers working on fixed term contracts or for other reasons not meeting the standard profile of a prime borrower.
For a truly harmonised market to work there will have to be changes to law, to allow transfer of loans across borders, to better clarify under which jurisdiction a loan is being taken out and the relevant contract being signed – for example, how to treat an Italian mortgage where the contract is being signed in the UK involving UK borrowers and brokers – and the need to open up credit databases in member states where there currently are restrictions on their use.
The current proposals will also encourage the use of a common land valuation system such as EULIS – the European Land Information Service - which is already in operation, to help speed up the transfer of land registry and other data. The big unknown remains taxes, which are the preserve of individual member states, Purvis says.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Jonathan Boyd on 020 7484 9769 or email [email protected].IFAonline
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