The MCD is a piece of European legislation which is designed to create a single market for first and second charge mortgages and to protect consumers by stress-testing their ability to repay a mortgage in changing economic circumstances. It will be implemented in the UK through rules drawn up by the Bank of England’s Financial Conduct Authority (FCA) and will take formal effect from March 2016, although a number of changes have already taken place – or are in the process of doing so – as mortgage lenders pre-empt the imposition of the MCD, just as they did in advance of the Mortgage Market Review (MMR) in April 2014. Several have already chosen to apply the new rules for first and second charge lending from 21 September 2015.

Although designed to protect consumers, it seems that the MCD offers little in the way of additional protection over and above the UK’s existing regulatory framework (recently updated by the MMR). It also has the potential to reduce choice for some applicants and to make lending more onerous and therefore less attractive for lenders. We may see a slowdown in activity in the mortgage market, rather like we did at the time of MMR, as the various parties get to grips with the practicalities of the MCD.

The changes to mortgage lending that have become apparent so far are as follows:

  • Some ‘consumer buy-to-let’ mortgages will become regulated by the FCA (which could cause a reduction in the growth of this recently buoyant sector)
  • The lending requirements that relate to foreign currency loans will change, making them relatively unattractive for lenders to offer. As a result, a number of lenders have pulled out from lending to borrowers based overseas or earning in a foreign currency. However, some of the more experienced lenders in this market have not withdrawn as they already factor currency risk into their assessment of the applicant’s total income.
  • Lenders’ sales processes and documentation will need to be reviewed for compliance with the new legislation and FCA rules.
  • There will be a move towards a standardised set of disclosure information to all customers across Europe, via a new document called a European Standardised Information Sheet (ESIS). Just as we saw with the introduction of Initial Disclosure Documents (IDDs) and Key Facts Illustrations (KFIs) this change in processes will take time to function smoothly.

The Intermediary Mortgage Lenders Association (IMLA) published research in September showing that three-quarters (74%) of UK mortgage brokers are worried about the impact of the MCD and nearly as many (71%) of lenders share their concerns. However, there may not be as big an impact as many newspapers and personal finance websites would have us believe. Nationwide has recently set out its approach to the Mortgage Credit Directive (MCD) rules, with plans to implement the requirements ahead of the deadline on 21 March 2016.

In order to identify consumer buy-to-let customers, the lender will add further questions to its mortgage application form and brokers have been notified that they will need to have the appropriate permissions and be fully registered with the Financial Conduct Authority (FCA) to conduct consumer buy-to-let business. There will be no material changes to Nationwide’s existing lending policy, it said, adding that minimal impact on lending activity was expected. Ian Andrew, managing director of group intermediary sales at Nationwide, explained that many of the requirements set out under the MCD had been taken care of as part of the Mortgage Market Review.

In our next blog on this subject, we will look in more detail at the MCD’s effects on buy to let and foreign exchange lending. However, our overall assessment at this stage is that whilst there will be some ‘teething troubles’ with the MCD (for example, because of new affordability checks, a number of borrowers have already found it difficult to get a loan of a similar size but cheaper rate when trying to remortgage), it is unlikely to cause lending activity to stall in 2016. We have a dynamic and innovative mortgage market in the UK and it will adjust to the MCD, just as it has adjusted to new regulatory requirements in the past.

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