UK Implementation Of The Mortgage Credit Directive

HM Treasury and the Financial Conduct Authority ("FCA") have in recent months published documents to implement the EU Mortgage Credit Directive ("MCD") in the UK. These are (i) HM Treasury's Mortgage Credit Directive Order (SI 2015/910) (the "MCD Order") and (ii) the FCA's Policy Statement 15/9 ("PS 15/9"). In this article we summarise the main changes from the existing regime on mortgage contracts.

The MCD Order

The MCD Order makes the following changes to the existing regime on mortgage contracts:

1. The MCD Order establishes a new regime for consumer buy to let mortgages

A new regime for the regulation of consumer buy-to-let (CBTL) mortgages will apply to "CBTL firms", including those administering CBTL mortgages, credit intermediaries and advisory service providers. These firms will be subject to a number of requirements, such as the need to register with the FCA (even where they are already FCA authorised) and will be subject to new conduct of business and information disclosure requirements (as set out in Schedule 2 to the MCD Order). However, buy-to-let mortgages where the borrower is not a consumer (i.e. the borrower is acting by way of business) will not be caught. The applicable conditions for this are that the borrower intends to use the mortgage to purchase property with the intention of letting it out, has previously purchased the property with the intention of letting it out and neither the customer nor a relative have inhabited it, and the borrower already owns another property. 2. The MCD Order expands the definition of regulated mortgage contracts to include second mortgage charges

A second mortgage loan is a type of loan which uses the borrower's home as security. Second charge mortgages take secondary priority behind the borrower's first charge mortgage. This means that if the borrower is unable to make their mortgage payments and the property is repossessed, the first charge mortgage lender is repaid from the proceeds of the sale before the second charge lender or lenders. The revised definition of regulated mortgage contract does not expand to cover assets other than land e.g. shares. However such assets can be used as security as part of a MCD credit agreement to acquire or retain property rights in land or in a building. These MCD credit agreements are covered by the MCD rules even if they do not involve mortgages over land. 3. The MCD Order shifts regulation of second charge mortgages from the consumer credit regime...