Agenda

1. Impact of the EU Directive on credit agreements relating to residential property for creditors in Europe • Christian König, LL.M., • Attorney and Head of Legal Affairs of the German Association of Private Bausparkassen • Stockholm • 11 April 2013

2. Agenda • EU Procedure • European Commission‘s proposal • Outcome of the European Parliament votes • Revolutionary ideas from the European Parliament • Impact for European consumers and mortgage lenders

3. EU Procedure Chronology: 31.03.2011 Proposal for a Directive on credit agreements relating to residential property for creditors Co-decision procedure ECON, IMCO, IURI Committees of the EP are working together in the context of the enhanced procedure 25.03.2012 Vote in IMCO Committee 07.06.2012 Vote in ECON Committee 30.05.2012 Council agree on „general approach“ 12.06.2012 Start of the Trilog-negociations Spring 2013 Vote of the Plenary of the European Parliament

4. Procedure in the European Parliament Enhanced procedure within EP ECON, IURI, IMCO With divided competences depending on each articles ECON = MEP Sanchez Presedo IMCO = MEP Lechner JURI = MEP Thein

5. Procedure in the European Parliament Trilog ? What is it ? Negociate compromises moderate the discussions

6. European Commission’s proposal Proposal for a Directive on credit agreements relating to residential property dated 31.03.2011 Target: Creation of an internal market, reaction on the subprime crisis < 1% all EU consumer ever concluded a mortgage credit cross border Need to regulate mortgage credit, since amount of foreclosure has risen up Reason for “crisis”: increase in foreign currency loans, subprime lending by non deposit lenders and increased risk appetite due to securitisation practices Need to regulate responsible lending and borrowing Need to create EU wide standards, similar to the Consumer Credit Directive

7. Previous ideas on responsible lending European Commission Consultation on responsible lending and borrowing 15. June 2009 • No excessive LTV over 120% • higher own equity requirements • Risk guidelines for special products (FX) • Credit worthiness assessment and documentation • Suitability test concerning the product design as well as for consumers (buy-to-let, interest-only, self-certification mortgages, revolving credit, FX loan, LTV, LTI) • Advice standards (GB, DAN, IRL) • Encourage responsible lending as well as financial education

8. European Commission’s proposal • Content oftheproposedDirective, 31.03.2011 • Transfer ofcompetencetotheCommissionforregulatingdelegatedacts • Dutyto check thecreditworthinessandsuitabilityoftheloanproductfortheconsumer • Introductionof a subjectivereflectionperiod • Early repaymentas a legal orcontractualright but fair compensation • Ifadviceisgranted, possiblydutytorecommendproductsfromcompetitors • Standard information in theadvertisementtogetherwithcreditconditions, LTV, total costofcredit, repaymentdetails, warnings, etc. • Standardisedpre-contractualinformation, changed ESIS, possiblysecond ESIS handover • Rules forcredit intermediaries, similartoInsurance Mediation Directive • Appropriateexplanationofthecreditoffer • APRC formula, inclusionofcostsfortheregistrationoflandcharge

9. Outcome of the ECON vote ScopeoftheDirective EP votedforcertainexcemptionsfromthescope: • Similartothe Consumer CreditDirective (CCD), creditsgrantedby an employer, credits granted to a restricted public under a statutory provision with a general interestpurpose, creditsas an outcome of a court settlement are excluded from the scope in Art. 2 II. • Art. 2 I. c also includesunsecuredrenovationloans • Member States, whichadoptedthe CCD formortgagecredits will have an extra transposition time toimplementtheDirectiveformortgagecredits • In ordertorespect UK law, Member States will beentitledtoexcludecertainprovisionsoftheDirectivefor „buy-to-letloans“

10. Outcome of the ECON vote Financial literacy/education • A new Art. 4a nowregulatesfinancialliteracy/education • A leftoverfromtheprevious „responsable borrowingandlending“ ideas, • Member States nowensurethat all stakeholdersareinvolved in the design anddevelopmentofclear, informative documentsforfirst time buyers

11. Outcome of the ECON vote • General ConductofBusiness Obligations • General conductofbusinessrules (Art. 5) havebeenchanged; • Nowcreditorandintermediary do not alwayshavetoact in thebestinterestofconsumer but taking due accountofrightsandinterestoftheconsumer • Art. 5 II b also regulatesthat Member States ensure that the manner in which creditors remunerate their staff and intermediaries do not impede compliance with the above mentioned obligation, • Remuneration practice should not prejudice the ability to provide objective recommendations or include individual product results or sales targets

12. Proposal by the EU Commission Proposed rules for credit intermediaries • Standards for credit intermediaries according totheir status (tied vs. untied /broker) • So far no uniform rules for creditintermediaries • Conflict of interest (fees/bonus/commission) • Disclosure of broker fees • Registration and supervision • Minimum professional standards for credit intermediaries (indemnityinsuranceor comparable guarantee, professional requirementsorexperience, goodreputation, etc.) • Minimum requirements for employees and management of the creditor

13. Outcome of the ECON vote • Minimum requirementsforqualification • Staffand intermediaries nowhavetopossess an appropriate level of knowledge and competence in relation to product design, the offering or intermediation, advising or granting of credit agreements (Art. 6 I), • Details concerningthefieldofknowledgeisregulated in a new Annex III, • Member States shoulddevelopdetails • New,accordingto Art. 6 II a obligationtoupdateknowledgeandabilities on a regularbasis

14. Outcome of the ECON vote Producttyingandbundling Definition of Tying: “offering of one or more ancillary services with the credit agreement in a package where the credit agreement is not made available to the consumer separately” Definition of Bundling “offering of one or more ancillary services with the credit agreement in a package where the credit agreement is also made available to the consumer separately but not necessarily on the same terms or conditions as when offered bundled with the ancillary services” • Accordingto Art. 8a I „Tying“ shouldbeprohibited in general ! • But Member States may permit tying practices with payment account or savings product if it is a fully integrated part of the credit or whose only purpose is to accumulate capital to repay or service the credit, or hold a relevant insurance policy

15. Proposed Directive by the Commission Information requirements: • Information requirements in the advertisement • General information • Standardised pre-contractual information duty • Information within the contract information overload

16. EU mortgage credit regulation Warn the consumer ! Please make sure you are able to pay back your mortgage when your income falls

17. Proposed Directive by the Commission Reflection period (Art. 9 II) “Member States shall ensure that the creditor and, where applicable, the credit intermediary, without undue delay after the consumer has given the necessary information on his needs, financial situation and preferences in accordance with Article 14, provides the consumer with the personalized information needed to compare the credits available on the market, assess their implications and take an informed decision on whether to conclude a credit agreement.” How long is sufficient time? French CodeCons: 10 days reflection period after the binding offer by the bank, no waiver German Civil Code: right of withdrawal 14 days after the loan contract (closing)

18. Outcome of the ECON vote Pre-contractualinformationdutiesandreflectionperiod • Consumer nowshouldhaveeither a 14 dayspre-contractualreflectionperiodor 14 dayswithdrawalperiod after contract (Art. 9a II) • Pre-contractualreflectionperiodshouldbeguaranteedby a bindingofferofthecreditorat least for 14 days • Different to French law, consumerscan also wavethe14 dayspre-contractualreflectionperiodbysigningthecontract • Nomorerightofwithdrawaliftherehasbeen a transfer of a right in a property connected to or using funds obtained under the credit agreement or in the cases where the credit agreement is established through notary

19. Outcome of the ECON vote Pre-contractualinformationdutiesandreflectionperiod • Creditornowhastohandoverthestandardisedpre-contractialinformationsheet „in goodtimes“ totheconsumerbeforetheconsumerislegallybound (Art. 9a), similartothe Consumer CreditDirective • AmendmentsfromBritish MEP did not obtain a majoritywhichwouldhaveallowed Member States toissueotherinformationsheets, thanthe ESIS • NowsimilartotheStandard European Consumer Credit Information (SECCI), European consumers will getnowtheEuropean Standardised Information Sheet (ESIS) formortgagecredits

20. Outcome of the ECON vote Duty to explain The rules concerning the duty to explain the pre-contractual information and ancilliary services in Art. 11 have been adjusted to the wording of the Consumer Credit Directive

21. Outcome of the ECON vote Advice • Nowbrokersanduntied intermediaries areobligedtoconsider a sufficiently large number of credit agreements available on the market (Art. 17 III b, c) • theadvise need to be given to the consumer on a durable medium • Member States have to prohibit the use of the term "independent advice" or "independent advisor" when creditors, that provide advisory services are not remunerated at all by one or more creditors (Art. 17 IV) => First stepforregulatingthe „feeonlyadviser“ at EU level !

22. Outcome of the ECON vote Advice • Lendersnow do not havetoundertake a marketcomparisonofproductsiftheyofferadviceastheCommissionproposed • The question was whatisadviceandwhenis an contractwithadvisoryserviceconcluded ? • Art. 17 nowforeseesthatconsumersneedtobeinformedat an earlystage, ifadviceisofferedor not • Creditorsandtied intermediaries nowonlyhavetorecommend a suitable credit agreement from their own product range

23. Proposed Directive by the Commission Rules on the calculation of the APRC APRC contains all costs of the transaction such as Third party costs, except notary costs Costs for ancillaryservices Costs for the registration of the mortgage in the land register are included, as well as stamp duties, etc. if APRC wrong calculated interest rate will be reduced to the nominal interest rate Aim of the EU = comparison of mortgage credit products

24. Outcome of the ECON vote APRC / FX loans • ECON votedforamendmentstabledbythe Greens • Forvartiable rate loans, creditorhastoinformtheconsumeraboutthemaximum borrowing rate and the minimum borrowing rate for the past 20 years (Art. 18 b III) • Foreigncurrencyloans: consumerhas a righttochangethecurrencyand he needtobeinformedwhat would happen to his obligations if the national currency loses 20 % of value in relation to the currency of the loan (Art. 18a IV)

25. Outcome of the ECON vote Creditworthinessassesment • Proposalofthe COM with a dutytodenycreditifcreditworthinesstestis negative was refusedandchanged • Art. 15 I nowforesees a dutytoassesscreditworthiness • Expensesoftheborrowerhavetobeconsidered, database also canbechecked • Price increaseofthefinanced real estateshouldgenerally not beconsideredwithinthecreditworthinessassesment

26. Outcome of the ECON vote Real estatevaluation • Previousideasabout an externalpropertyvaluationhavebeenweakened • Art. 14a regulatesnowthat Member States shouldensure that sound valuation practices are applied in accordance with international standards and that appraisers are supervised • Real estatevaluationcanbedonebyexternalorinternalappraisers • Real estatevaluationneedtobedocumentedandstoredbylender Idea behind: US Dodd-Frank Act (Art. 1471); but in the US applicable only for „high risk mortgages“

27. Proposed Directive by the Commission Early repayment Art. 18 II Contractual or legal right to repay the loan earlier Right to repay the loan earlier in the so called cases “accidents of life” Member States can restrict the right of early repayment and the early repayment compensation MS shall not make the exercise of the right excessively difficult or onerous for the consumer Howmuchisexcessivelydifficultoronerousfortheconsumer ?

28. Outcome of the ECON vote Early repayment • Consumer nowhas a righttofully or partially pay back the loan earlier (Art. 18 I) • No „penalties“ • But creditorsareentitledto a compensation • Member States mayrestricttherightofearlyrepaymentforfixedinterestagreementsArt. 18 III

29. Outcome of the ECON vote Early repayment • Compensationshall not excedetheeconomicdamage • Consumer needtobeinformedaboutthemethodologyofthecalculationoftheearlyrepaymentfeeortheconcreteamountbeforesigningthecontract • Member States canregulatecaps on the compensation or maximum periods after which compensation may no longer be claimed Institut für Finanzdienstleistungen e.V. „Vergleichende Übersicht zur Vorfälligkeitsentschädigung für die vorzeitige Beendigung von Hypothekarkrediten in acht europäischen Staaten“ (2004)

30. Outcome of the ECON vote Foreclosure • The previouslydiscussedlialibitylimitwithintheforeclosureproceduretothepropertyvaluationdonebythebankdid not geta majority, • Creditornow has to take reasonable steps to obtain the best price for the foreclosed property, • charges to compensate damages for default to be paid by the consumer need to be proportionate to the costs incurred by the creditor (Art. 18 b II) • Exclusionof personal liability(datio in solutum) didnot get a majorityaswell

31. Other revolutionary ideas from the European Parliament Flexibilityofthemortgagecredit Consumer shouldhavethepossibilityto • changethecreditorduringthecontractdurationifthenewofferhas an economicadvantagefortheconsumer (e.g. 100 basispointcheaper) • transfertheloan (debtobligation) toanothercreditor (changeofdebtor) • Exchange thesecurity

32. Other revolutionary ideas from the European Parliament • „use“ theloancontractforanother real estate (cross-border) • changethecurrency in thecaseof a FX loan • changetheamountofinstallment (higher/lower) withoutcompensation, etc. Higher transparency in themortgagemarketbytheintroductionof a national mortgageregisterand a mortgagekeyidentifierwithdetailsoftheloancontractandthesecuritycontract, valuation, etc.

33. Other revolutionary ideas from the European Parliament • Prohibition ofsecuritization • Prohibition ofproducttying/bundling • Variable interestloans (APRC calculationwiththehighestpossibleinterest rate from last 15 years) • National limitsfor variable interestrates • Consumer shouldgettherighttoextendcreditrepaymentdurationof 5 years, ifinterest rate changes

34. Other revolutionary ideas from the European Parliament • 30 (working) daysreflectionperiodbeforecontractconclusion plus withdrawalperiod (2 weeks) • Prohibition of FX loansexceptifsalaryispaid in thiscurrency • Limited debtliabilityoftheconsumerrestrictedto LTV assessmentbythecreditor • Profit sharingfortheconsumer; if after earlyrepaymentinterestenvironmentisbetterthanwithintheagreedcontractandbankcouldmake a profit • LTV limitto 90% or 100%

35. Impact forlendersandconsumers Outlook: • EP plenaryvote • Council approachquitebalanced, no final decisionyet Implementionfor EU creditorswithinthenext 2 - 3 years • Hugeimpactforcreditbusiness, • Much morethan Consumer CreditDirectiveimplementation

36. Impact forlendersandconsumers • Changes in internal procedures • External apraisers and valuation procedures • Educational requirements for staff and intermediaries • Explanation, possible advice standards and new information requirements • Certain product restrictions are possible • Restriction on bundling/tying (Cross selling) • Early repayment right influence product design, price and refinancing structure

37. Tack såmycket ! Christian König, LL.M. Attorney Head of Legal Affairs Association of Private Bausparkassen e.V. Klingelhöferstrasse 4 10785 Berlin Tel: +49 (0) 30/590091-500 Fax: +49 (0) 30/590091-501 Email: koenig@vdpb.de