What's new in the Dutch mortgage credit market?
The current low yield environment combined with the strong performance of the Dutch mortgage market has spiked interest from institutional investors for prime residential mortgage loans. The interest rates offered by banks are still relatively high compared to the swap rates. This is mainly due to regulatory requirements. The required capital for banks – and therefore the costs for Dutch consumers – may increase if the proposals by the Basel Committee on Banking Supervision, inter alia, to revise the risk weightings for banks under the Standardised Approach are passed. Institutional investors who wish to become involved in direct lending and who are not subject to similar onerous capital treatments thus may have a competitive advantage.
The increasing appetite of investors in their search for yield has led to several new entrants in the Dutch market and a decrease in market share of the traditional Dutch banks. In addition to the traditional RMBS, other means to transfer exposure are being widely used (partly driven by regulatory considerations). Investors invest heavily through mortgage funds set up by originators or by independent parties. Other investors have entered the market using existing platforms by setting up warehousing or similar structures.
Changed procedure for mortgage offers: the Mortgage Credit Directive
Proposal to amend Dutch laws1 in order to implement the EU Mortgage Credit Directive2 (the Directive) is currently with the Dutch Parliament for approval. The Directive aims to create an efficient and competitive internal market for mortgage credit with a high level of consumer protection. It includes rules relating to, inter alia, information to be provided to the consumer, assessment of creditworthiness of the consumer, knowledge and competence requirements for staff, method for calculation of annual percentage rate of charge and duty of care provisions for the mortgage credit provider in relation to defaults and foreclosures. The deadline for implementation is 21 March 2016. Many of the requirements from the Directive are already to some extent included in current Dutch law. However, new provisions regarding offers is likely to require a change in practice for mortgage credit providers and intermediaries in the Netherlands.
European Standard Information Sheet
Under the Directive, a mortgage credit provider and/or intermediary is required to provide a consumer with personalised information sufficient to compare mortgage credits available in the market. This information should be provided using the European Standard Information Sheet (the ESIS) which must be provided to the consumer "without undue delay" after the consumer has given the mortgage credit provider or intermediary all the necessary information for the creditworthiness checks and in good time before the consumer is bound by any credit agreement.
The Directive requires that the mortgage credit provider makes an offer which is binding on the creditor for the duration of a specific period. The Dutch legislator has chosen a period of 14 days. The binding offer must be accompanied with a copy of the draft credit agreement and the ESIS, unless the ESIS has been provided to the customer at an earlier stage.
The standard practice currently in the Netherlands is that the mortgage credit provider, based on initial information received from the client, prepares an offer for the consumer which is conditional on, amongst others, a credit check. Such an offer constitutes a binding offer under Dutch law. The Directive, however, requires that the credit checks are done before a binding offer is made. During the consultation on the implementation legislation, concerns were raised by market participants that the way the requirements had been implemented in the draft legislation would require major changes to the procedures and systems of mortgage credit providers and intermediaries.
In the explanatory memorandum to the implementation legislation, the Minister of Finance clarified that a credit provider/intermediary can under the new requirements still provide the consumer with an indicative offer together with the ESIS. The consumer can use this offer, which does not qualify as a binding offer, to compare mortgage credits available in the market. Once the mortgage credit provider has performed the credit checks and any other conditions in the indicative (non-binding) offer have been complied with, the mortgage credit provider is required to inform the consumer that the indicative offer has become binding. The implementation will therefore unavoidably lead to mortgage credit providers and intermediaries needing to make changes to their systems and procedures and for the credit application procedure taking a longer time.
We now await the approval of the implementation legislation by the Dutch Parliament, after which it will need to be approved by the Senate before entry into force. The expected date of entry into force is 21 March 2016.
1. Dutch Financial Supervision Act and the Dutch Civil Code.
2. 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 and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010.