The Mortgage Credit Directive (MCD) is a European wide framework for rules of conduct within mortgage firms/lenders. This comes into effect from the 21st March 2016. The MCD applies to both First Charge and Second Charge lending, so in effect any secured lending will come under the MCD rules. There are a few areas that will change and below outlines 2 key changes and if there will be a “real life” impact.
• Second Charge Lending – this is lending that is secured against property that already has a first charge/loan secured against it. Currently second charge lending comes under the rules of the Consumer Credit Act, as has been this way since 2004, when the changes to the mortgage market changed in a wholesale review. Second Charge Lending is still regulated through the OFT and runs in accordance with standard “unsecured” lending rules.
The MCD change deems it more appropriate to regulate second charges in the same way as standard mortgages, as they are secured against the consumers property and will make the regulation of secured mortgage lending a lot simpler.
The changes to Second Charge lending were initially planned for 2011 by the UK Government but when the MCD framework was announced by the EU, then this was postponed until now.
The changeover will mean a loss of some consumer protections that are currently in place but the FCA is looking to put planning in place to mitigate this loss.
• Current UK Regulation states that 40% + of the property must be owner occupied or by family for it to be a regulated mortgage product.
The scope for MCD is that all mortgage lending comes under the regulated framework but this does not fit with the UK Regulation, so the UK has been allowed a few amendments to the legislation.
For the majority of BTL landlords, there was a clear objective to own the property as an investment, so will receive an income and be taxed in line with normal business practice. These borrowers should not need to be covered under MCD but under existing UK regulations.
There are instances where the property was not bought for business purposes. An inheritance, previous owner occupier of property, inability to sell so reverted to BTL. The consumer has then become a landlord due to circumstances NOT intention. As this is a small percentage of the market and Buy to Let lenders are looking to prove that the consumer has the correct business intention for the property going forward.
There is no anticipation for either of these areas to be affected by the upcoming changes and Lenders are already looking to implement the changes in anticipation of the 21st March 2016 Deadline.