Mortgage sector to unveil new code of conduct

Date: 08/01/1998

By Chris Johnstone

AN EU-wide code of conduct for mortgage lenders should be unveiled by the industry in March in a move aimed at heading off European Commission threats to impose a set of rules on the sector.

A draft of the new code has already been drawn up by the European Mortgage Federation, which represents lenders responsible for around 85% of outstanding mortgages in the EU and was given the task of drawing up the industry's alternative to a directive last June.

However, it is still unclear whether this formula will win the support of the entire industry - a demand which must be met in order for Financial Affairs Commissioner Mario Monti to withdraw the threat of a directive.

"Either it is ready by that time or we will have to call a stop to the process," said federation secretary-general Judith Hardt.

European savings banks will decide where they stand on the draft code next Tuesday (13 January) at a meeting of national representatives. But they have already warned that the March target date for finalising the draft might be too ambitious. Savings banks have a large slice of the mortgage market in Germany Greece, Spain and Luxembourg.

Mainstream banks, which are the biggest mortgage lenders in Belgium, Italy, the Netherlands and Portugal, have still to give their verdict.

Industry sources say German mortgage lenders are among the most reticent about the proposal. "Germans always have problems with codes of conduct. Their competition authorities are very severe on coordination clauses between companies, even for such issues as codes of conduct," said one source.

The proposed measure is heavily based on that recently adopted by the UK industry, which only came into effect last year and are described by the federation as the most demanding of the handful of existing national codes in terms of the information which must be given about the mortgage being offered to would-be buyers.

Codes of conduct on mortgages also exist in the Netherlands and Denmark. The Dutch code is binding on mortgage intermediaries, who sell loans to home-buyers on behalf of companies in return for commission. The Danish rules cover intermediaries, but the main aim of its code is to allow an easy comparison between the mortgage packages on offer. It requires lenders to compare their different products and provide information in such a way that would-be clients can easily make comparisons between lenders.

The code is unlikely to give more than the most general guidelines on the role of intermediaries. "This is one issue that still needs to be discussed," said Hardt.

The federation warned in an end-of-year report that although the introduction of the single currency should allow borrowers to make cross-border comparisons between mortgage lenders, many of the barriers to shopping around Europe for the best offer would remain.

It says the inability of citizens in one country to claim tax relief on mortgages contracted in another will still be the biggest obstacle to the creation of a single market, and argues that this will not change unless there is a radical overhaul of national tax rules.

On a more positive note, the federation expects mortgage institutions to make greater use of bond markets to raise cash after recognition by the European Central Bank of mortgage bonds as financial instruments with a Europe-wide significance, giving them the equivalent of a triple 'A' credit rating.