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March 3, 2016

What is MCD and why did it come into being?

Financial enterprises the world over are relentlessly working toward strengthening consumer protection mechanisms in order to reinforce brand credibility and ensure regulatory compliance. The European Commissions Mortgage Credit Directive(MCD)is one of the many reforms that have been instituted in this regard. Formerly known as Directive 2014/17/EU, it was originally intended to oversee credit agreements for consumers relating to residential immovable property. The proposal to create a region-wide market for mortgage credit emerged as a consequence of the 2008-09 financial crisis, which had stemmed from the decline of the US mortgage market. The final MCD draft was published in February 2014.

To establish a unified, efficient, and competitive mortgage market across the Europe  an Union (EU), the MCD has set out some specific goals for member countries. This legislation however does not prohibit member countries to enact additional consumer protection laws, over and above the requirements it sets forth.

To ensure the lending practices and principles that the MCD intends to promote are in line with international standards, the directives provisions bear close resemblance to the US Dodd-Frank Act (2010), which was implemented by the Consumer Financial and Protection Bureau (CFPB) of the United States, the Canadian mortgage regulation covered in B20 Guidelines (2012), and the FSB Principles for Sound Residential Mortgage Underwriting Practices (2008-2012). EUs member countries are required to accommodate MCD provisions in their respective regulatory frameworks at the earliest possible, to safeguard customers looking to purchase mortgages.

What changes does MCD intend to bring?

With provisions around consumer protection, fair conduct of business, and responsible lending, the MCD aims to empower consumers by promoting education and providing them with pre-contractual information, through the European Standardised Information Sheet (ESIS), which has details on the Annual Percentage Rate of Charge (APRC) and borrowing rates. In addition, the directive bans bundling of credit with other financial products and services, and allows consumers to change their mortgage purchase decisions, if required, thus offering maximum flexibility and protection.

For fair conduct of business, the MCD requires credit intermediaries to have requisite qualifications and competence to sell credit products and related services. More importantly, they should act fairly, professionally, and in the best interest of the customer. Fair advertising and advice standards should be followed, and the remuneration policy for staff and intermediaries must be such that there is no conflict of interest. This means that a loan officer should be sufficiently remunerated so that (s)he doesnt resort to selling risky loan products to make hefty commissions.

Responsible lending a crucial provision of the directive requires lenders to ensure that consumers provide complete and accurate information, and furnish requisite supporting documents, about their financial status. They must carry out comprehensive creditworthiness assessment by evaluating the borrowers income, savings, debts, and other financial commitments before granting credit.

Why is MCD compliance particularly problematic for the UK?

As an EU member state, the UK is required to implement the MCD by March 2016. What is specifically challenging for the UK is the fact that it was already working to refine the Mortgage Market Review (MMR) (a discussion paper on MMR has been published in 2009). In fact, the country had nearly finalized the MMR regulatory framework under its Financial Conduct Authority (FCA) by October 2012; it was even implemented in April 2014.

MMR and MCD regulations overlap to a large extent, however, MMRs scope is a lot broader than that of the MCD with respect to the UK market. Hence, the UK decided to adopt MMR and incorporate MCDs provisions into its mortgage law. Both HM treasury and the FCA have been working on a twin-track basis on different aspects of the MCD, in order to implement the required changes.

Though most of the MCD related requirements are already covered in the MMR regulation, UK lenders and firms will feel the strain due to this new mandate as it comes on top of the recently implemented MMR rules. Even though the MMR has covered good ground, the requirements of the MCD are such that they do not permit all changes to be transferred and implemented under the new directive easily. Aspects such as fair conduct of business and scope of mortgages to be considered under MCD will be recognized and addressed differently.

While UK firms need to deploy a robust compliance framework, institute strong data management capabilities, and establish a traceable audit trail to meet the twin mandates of the MCD and the MMR, the UK government will need to keep sight of the overarching goals, and facilitate smooth implementation across the board. For all this to happen, UKs lending institutions will have to bring about sweeping changes in their existing policies and procedures. This calls for a major overhaul of existing IT systems and processes that support them.

Lakshmi Priya Das is a Functional Consultant with the Banking and Financial Services (BFS) business unit at Tata Consultancy Services (TCS). A subject matter expert on mortgage business, she worked with a leading mortgage servicing organization before joining TCS. With over four years of experience in TCS, Lakshmi has built significant expertise in the US retail mortgage market and has worked on strategic consulting assignments for TCS leading clients.


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