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Cross-border mortgage lending will soon be possible - but will banks release products? Back  
The European Commission is considering the recommendations of its Forum Group on Mortgage Credit and will issue its own Green Paper this summer. It established the Forum Group in March 2003 and tasked the Group with examining the level of integration in Europe’s mortgage markets and potential barriers to such integration. It was also asked to make recommendations to address any such barriers to the integration of mortgage markets. The Forum Group finalised its deliberations in autumn 2004 and drew up 48 recommendations towards the integration of Europe’s mortgage markets. These recommendations were contained in the final report of the Forum Group on Mortgage Credit, published in December 2004.

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Pat Farrell, chief executive of the Irish Bankers Federation, speaking on developments in the banking sector at the Finance Dublin Conference.

The Commission will be hoping to make it attractive to European consumers to look across borders for their mortgage providers and for mortgage lenders to consider doing business across borders. The Forum Group’s recommendations focus on the issues which currently dissuade consumers and lenders from doing so. As such, they address issues ranging from the harmonisation of consumer protection rules to increasing the transparency of individual market structures.

However, the willingness of banks and other mortgage lenders to offer mortgage finance in other European countries will depend as much on their ability to do so as the financial attractiveness of doing so. As such, the harmonisation of rules and market structures will not, of itself, generate widespread cross-border mortgage supply.

In the Irish context, it should be noted that a good deal of ‘cross-border’ mortgage lending already exists. Ulster Bank/First Active and Bank of Scotland (Ireland) are owned by the UK banking groups The Royal Bank of Scotland and HBOS, respectively. IIB Homeloans is a subsidiary of the Belgium-based KBC Group, National Irish Bank was recently acquired by Denmark’s Danske Bank and ACC Bank is owned by Rabobank of the Netherlands. In addition to these multinational operations, AIB and Bank of Ireland both own subsidiaries which offer mortgages in the UK. And while merger/acquisition activity has proven itself as one means of access to mortgage markets in other member states, the Bank of Scotland demonstrated the potential for direct cross-border mortgage lending into Ireland when it commenced lending in Ireland directly from its Edinburgh base in 1999, although it moved its Irish mortgage lending operation to Dublin in 2004.

Notwithstanding the level of harmonisation that could be achieved through the implementation of the Forum Group’s recommendations, mortgage lenders will only offer mortgages across borders where they can offer something new, different or more competitively-priced than the products already offered in that market.

Otherwise it would be difficult to perceive a business case for doing so. This will apply equally to foreign lenders considering offering finance in Ireland and to Irish lenders considering offering mortgages abroad.

Furthermore, consumers’ willingness to deal with a foreign lender will be determined not only by the competitiveness of the product offerings but also by the extent to which that lender is bound by a set of consumer protection rules that are familiar to the consumer. Pending the harmonisation of consumer protection rules across Europe, the question of whether the local rules for the consumer, the lender or the property would apply is just one of the questions that the European Commission will have to consider in arriving at its position with respect to the Forum Group’s recommendations.

The Forum Group established five subgroups focusing on the areas of consumer confidence, legal issues, collateral issues, distribution issues and finance. Each subgroup comprised representatives of relevant stakeholder groups including consumer groups and mortgage lenders. The recommendations of the respective subgroups are summarised below.

Consumer confidence
In contrast to the other working groups, the working group on consumer confidence issues did not produce a set of consolidated recommendations since views were divided between the industry and consumer groupings as to how best to approach the subject. The various recommendations are viewed differently from state to state across the EU depending on existing levels of consumer protection and market structures. Ultimately, however, the Commission will take its own view regarding the specific recommendations which include:
• Harmonise certain consumer protection issues, such as the calculation of annual percentage rates of interest (APR), the provision of pre-contractual information and early repayment fees;
• The European Commission should fund research on value of pre-contractual information, on costs and benefits of further integration;
• Create an online guide to main legal and other issues on cross-border mortgage lending;
• Maintain of the existing voluntary European Code of Conduct on Homeloans.

The legal working group focused on various legislative matters which would need to be addressed to facilitate greater cross-border lending. Its recommendations include:
• Establish applicable law vis-?-vis a particular mortgage contract.
There is some variation in the views of the consumer and industry representatives expressed in the recommendations. The ability of and necessity for member states to be able to impose additional national consumer protection rules to cross-border mortgage loan contracts should also be addressed;
• Ensure lenders have access to national credit databases (such as the Irish Credit Bureau) on a cross-border basis;
• Address the varying approaches to the valuation of property;
• The Commission should evaluate forced sales procedures and promote measures to ensure shorter duration of procedures.

The recommendations of the working group on collateral issues relate, in the Irish context, to a number of ongoing initiatives including the Law Reform Commission’s modernisation and streamlining of Irish land law and registration processes and its e-Conveyancing project. Additionally, the Land Registry has, of late, made significant advances in terms of the automation and computerisation of its processes. In the context of these initiatives and ultimately in the application of the recommendations of the Forum Group, it will remain vital that the interests of property owners and of others with interests in property, including lenders, continue to be considered. The working group on collateral issues recommends, inter alia, that:
• Include all charges affecting real estate in a public register;
• Make such registers easily accessible and specify order of priority, etc;
• The Commission should provide financial support for the EULIS (land registration project) initiative;
• Make more flexible the links between mortgage debt and collateral security;
• Explore in greater detail the concept of the Euromortgage.

The recommendations of the distribution working group are aimed primarily at ensuring equal access to individual markets for lenders:
• Ensure equal treatment of local and foreign banks on basis of same business/same rules;
• Advocate a standard supervisory system for independent intermediaries;
• Address existing legal barriers to distribution via the internet;
• The Commission should ensure consistency between requirements in different Directives (such as those relating to information provision requirements).

The recommendations include:
• Identify and address any tax distortions in the treatment of local and foreign lenders;
• Harmonise legislation regarding segregation of assets;
The European Commission has yet to give an indication as to which recommendations it perceives as being key to further integration. As such, it is only when the Commission’s position becomes clearer over the remainder of 2005 that the likely impact of the Forum Group’s recommendations will begin to take shape.

What is clear, however, is that the Forum Group’s work will have substantive implications for European mortgage markets in the medium to long term. The Irish Mortgage Council will be closely monitoring developments regarding the recommendations with a view to ensuring the readiness of Irish mortgage lenders to meet opportunities and challenges brought about when the Commission adopts its chosen course of action following its consideration of the recommendations.

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