Pierre Berger, I. Van Biesen, D. Vanderstraeten
Partner, Senior Associate, Associate
New Act transposing Directive 2014/17/EU of 4 February 2014 on credit agreements for consumers relating to residential immovable property will be adopted soon – This Act also contains provisions with regard to consumer credit
The legislative proposal of 26 February 2016 is soon to be adopted by the Parliament. Its provisions will enter into force on 1 December 2016. It will replace the complete title on “Mortgage Credit” in the Economic Law Code and it also contains provisions with regard to consumer credit. This client alert provides an overview of the most significant changes implemented by the new Act. The scope of application is significantly extended: a mortgage credit can have both an immovable or movable purpose. The conduct of business rules have been strengthened and rules on remuneration policies are introduced. Tying practices are prohibited; however, bundling practices are allowed. The rules to calculate the annual percentage rate of charge are harmonized across the EU and may not be deviated from by individual Member States. A standard information document (ESIS) on mortgage credit is introduced, allowing a better comparison between different credits on the market. Finally, a level playing field is created between mortgage credit providers and consumer credit providers, by applying some of the rules on mortgage credit to consumer credit providers.
As soon as the Parliament has voted in favour of the Act amending and introducing provisions on consumer credit and mortgage credit in several different books of the Economic Law Code (hereinafter the Act), the Act will be published in the Belgian Official Gazette. Said Act implements Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property (hereinafter the Mortgage Credit Directive), which Member States had to transpose by 21 March 2016.
The Act’s main purpose is to transpose the provisions of the Mortgage Credit Directive into Belgian law. The rules with regard to credit granting and credit mediation activities have already been transposed into Belgian law by the Act of 19 April 2014 introducing Book VII “Payment and Credit Services” in the Economic Law Code.
Furthermore, while the Mortgage Credit Directive only covers certain aspects relating to mortgage credit (click here for our client alert of 16 February 2015 on the Mortgage Credit Directive), the Act goes beyond the Directive by covering all aspects of mortgage credit. In fact, the Act entirely replaces Chapter 2, Title 4 “Mortgage Credit” of Book VII of the Economic Law Code.
Moreover, the changes to the material scope introduced by the Mortgage Credit Directive imply extensive changes to the current Belgian rules on mortgage credit.
Finally, and contrary to the Mortgage Credit Directive, the Act also covers certain aspects of consumer credit in order to ensure an equal level of protection between borrowers of consumer credit and mortgage credit.
The definition of a mortgage credit has been extended significantly. Under the former rules, a mortgage credit was defined as a credit the purpose of which was the financing of the acquisition or preservation of rights in immovable property, secured by either a mortgage or another comparable security right related to immovable property. Hence, a mortgage credit combined the security right related to immovable property and the purpose of acquiring or preservation of immovable property.
Under the new Act, however, a mortgage credit can have a movable or an immovable purpose.
The new Act defines a mortgage credit with an immovable purpose as a “a credit agreement secured by a mortgage security that is intended for the financing of the acquisition or preservation of immovable property rights or the refinancing of such credit agreements.” A mortgage credit with an immovable purpose can also be a credit agreement not secured by a mortgage security but intended for the financing of the acquisition or preservation of immovable property rights, with the exception of the renovation of immovable property, or a credit agreement with regard to barges.
Furthermore, it defines a mortgage credit with a movable purpose as “a credit agreement secured by a mortgage security that is not intended for financing the acquisition or the preservation of immovable property rights or the refinancing of such credit agreements.”
The Act has also introduced a definition of a mortgage security which does not only cover the mortgage security in se, but also includes the right of substitution of one or more third parties to the rights of a creditor who has a security right on immovable property, or the credit negotiated with the right to request a mortgage guarantee even if this would have been agreed in a separate deed. Finally, a mortgage security could also be a guarantee credit granting a mortgage guarantee to a guarantor.
Conduct of business rules
As a general rule, credit providers and credit intermediaries will have to act honestly, fairly, transparently and professionally, taking into account the rights and interests of the consumers when manufacturing credit products or granting, intermediating, or providing advisory services on credit, and where appropriate, ancillary services to consumers or when executing a credit agreement.
Furthermore, they will need to ensure that, for the credit agreements they are commonly providing or intermediating for, they propose the credit that is the most suitable for the consumer in terms of type and amount, taking into account the financial situation of the consumer at the moment of entering into the credit agreement, as well as the purpose of the credit. The consumer must be given an information request form, which sets out the information the credit provider or credit intermediary requires to determine the most suitable credit for the consumer. Together with this general advisory duty comes a duty of investigation as to creditworthiness of the consumer. This implies an assessment based on necessary, adequate and proportionate information with regard to the income and expenditure of the consumer and other financial and economic circumstances. The credit provider may only enter into the agreement, when he may reasonably assume that the consumer will be able to fulfil the commitments arising from the agreement.
Credit providers will need to ensure that remuneration policies for staff responsible for the assessment of creditworthiness, are compliant with a set of principles in a way and to the extent that is appropriate to their seize, internal organisation and the nature, scope and complexity of their activities:
- The remuneration policy must be consistent with and must promote sound and effective risk management and may not encourage excessive risk-taking; and
- The remuneration policy must be in line with the business strategy, objectives, values and long-term interests of the credit provider, and must incorporate measures to avoid conflicts of interest, in particular by providing that remuneration is not dependent upon the number or percentage of credit applications accepted.
Tying and bundling practices
Tying practices are expressly prohibited under the new Act. They are defined as the offering or selling of a credit agreement in a package with other distinct financial products or services where the credit agreement is not separately made available to the consumer. Credit providers and credit intermediaries cannot force the consumer, in the framework of a credit agreement, to sign another agreement with the credit provider, the credit intermediary or a designated third party, unless as a bundled sale.
Bundling practices are defined as the offering or selling of a credit agreement in a package with other distinct financial products or services where the credit agreement is also made available to the consumer separately but not necessarily on the same terms or conditions as when offered bundled with the ancillary services.
If a credit provider or credit intermediary requires an ancillary service or a an attached contract to be taken out, he must accept the service provider of the consumer's choice, if he is different from the preferred service provider of the credit provider or the credit intermediary, if such service provider provides an equivalent ancillary service or attached contract at a same or lower price. This attached contract may be mortgage protection policy, an insurance contract covering the damage to immovable property or a surety ship insurance.
Calculation of the annual percentage rate of charge (APRC)
The Mortgage Credit Directive introduced a harmonised set of rules as to the calculation of the annual percentage rate of charge. As this part of the directive is maximum harmonisation, the new rules may not be derived from by national legislation.
The new Act provides for a delegation of legislative rules which may be adopted by Royal Decree as to the annual percentage rate of charge for mortgage credit with a movable purpose.
Transposing the Mortgage Credit Directive, the new Act contains a number of provisions on marketing practices for mortgage credit. As a general rule, every advertisement and communication for marketing purposes must be honest, concise and not misleading. Furthermore, these communications may not:
- Encourage consumers, who are not able to take on additional debt, to enter into a credit agreement;
- Emphasize the ease or speed at which the credit may be provided; or
- Urge the regrouping or centralisation of current credits or mention that current credits do not play a role, or merely play a subsidiary role in the assessment of a consumer's creditworthiness.
European Standardised Information Sheet (ESIS)
The Mortgage Credit Directive introduced the ESIS as an instrument providing the consumer with personalised pre-contractual information which is needed to compare the credits available on the market and enabling the consumer to assess their implications and make an informed decision on whether to conclude a credit agreement. A template of such ESIS is provided as Annex II to the Directive.
The Act has literally adopted the ESIS template and it will be added as Annex 3 to book VII of the Economic Law Code. The information in the ESIS is divided into different blocks, including inter alia: details on the credit provider, the main features of the credit, interest rate and other costs, the amount of each instalment, where applicable an illustrative amortization table, details on early repayment and relevant contact info in case of complaints. Furthermore, Annex 3 to Book VII will also provide instructions to credit providers in order to be able to complete the ESIS information sheet.
Changes to consumer credit rules
In order to ensure equal treatment and protection, some of the provisions under the Mortgage Credit Directive have been made applicable to the borrowers of consumer credit.
The credit provider and credit intermediary of consumer credit will inter alia be subject to the rules regarding remuneration policies for staff responsible for the assessment of creditworthiness. The remuneration structure must not prejudice the ability of their staff to act in accordance with the general conduct of business obligation, which will also apply to credit providers and credit intermediaries of consumer credit. This implies that they will also be subject to the general conduct of business obligation to act honestly, fairly, transparently and professionally, taking account of the rights and interests of the consumers. Furthermore, they must ensure that adequate procedures and information on which the creditworthiness is being assessed, will be established, documented and maintained. A credit file must be held regarding every consumer, and as the case may be, regarding the personal guarantor, in which the information on the creditworthiness is being documented. Finally, a variable interest rate will only be allowed under certain conditions.
Entry into force
The Act will be entering into force on 1 December 2016. The new Act will not apply to credit agreements for which an application has been made before 1 December 2016, if the credit agreement is concluded before 1 March 2017. However, the new Act will apply to all new credit applications as of 1 December 2016 and all credit agreements concluded as of 1 March 2017, regardless of the date of the credit application. The date of conclusion of the credit agreement is the date on which the consumer signs the credit offer and ultimately, the date on which the notarial deed is passed if the consumer did not sign a credit offer before. Finally, credit providers will need to make current credit agreements of indefinite duration compliant with the provisions of this Act within 3 years following the publication of this Act.
Contact Baker & McKenzie: Pierre Berger. Tel: + 32 (0)3 213 40 40 Pierre.Berger@bakermckenzie.com