Following the entry into force of the Mortgage Credit Directive (“MCD”)1 on 21 March 20142, bill 7025 transposing the MCD and amending the Luxembourg Consumer Code was submitted to the Luxembourg Parliament on 29 July 2016 by Luxembourg’s Minister of Finance Pierre Gramegna.
Bill 7025 is composed of a single article that amends the Luxembourg Consumer Code by adding a new Chapter 6 named Mortgage Credit Agreements (new articles L.226-1 toL.226-45 of the Consumer Code).
After having outlined the rather considerable number of discretionary matters contained in the MCD according to which Member States retain discretion as to whether or not and how to apply certain of its provisions3, the present publication aims at summarizing the transposition into Luxembourg law of the main provisions of the MCD. Overall, it can be noted that Luxembourg has chosen a rather pragmatic way to implement the MCD into national legislation, by not retaining a number of options provided for in the MCD.
PRE-CONTRACTUAL REQUIREMENTS AND REFLECTION PERIOD:
Consumers must be given personalized information without undue delay (after having supplied information on their needs, financial situation and preferences) and in good time before they are bound by any credit agreement or offer. Such information must be given through the European Standardized Information Sheet (ESIS), which will be introduced in Luxembourg by means of a Grand-Ducal Regulation on the basis of Annex II of the MCD.
In this regard, the MCD has given flexibility to Member States to provide a period of at least seven days to the consumer either in the form of a reflection period beforehand, or in the form of a withdrawal period after its commitment, or a combination of the two.
According to the new article L.226-8 of the Luxembourg Consumer Code, consumers will be allowed a reflection period of 14 calendar days to compare offers available on the markets, assess their implications and make an informed decision. In fact, it appears from the commentaries on bill 7025 that “taking into account the importance of the formalities surrounding the conclusion of a mortgage credit agreement, notably the notarial procedure related to such an agreement, it is impracticable to provide a withdrawal right after the conclusion of the agreement”.
CONSUMER’S CREDITWORTHINESS ASSESSMENTS:
Before concluding credit agreements, creditors will need to conduct a thorough, documented creditworthiness assessment and shall only make the credit available to the consumer where the result of the creditworthiness assessment indicates that its obligations regarding the credit are likely to be met. In this regard, Luxembourg-based creditors may not rely on the database of credit registers, because there are none in the Grand-Duchy.
Moreover, the question recently arose (notably in Germany) regarding whether or not such new creditworthiness assessments’ rules would impede access to mortgage credits (e.g. for older people). The European Commission’s answer was as follows: ”Responsible lending practices […] and in particular the obligation to assess the borrower's creditworthiness, may result in reduced access to credit for certain groups of borrowers, such as those with an impaired credit history. The extent of this impact would depend on how Member States translate this rule into national law”4.
At first sight, the Luxembourg legislator does not appear to apply a restrictive interpretation of the said rule. Like the MCD, bill 7025 outlines the fact that the loan to value ratio, although useful, may not be considered as sufficient for the purposes of a consumer’s creditworthiness assessment and refers to the contractual freedom of the creditor and the consumer as parties to the mortgage credit agreement.
CALCULATION OF THE ANNUAL PERCENTAGE RATE OF CHARGE (APRC):
The new article L.226-19 of the Luxembourg Consumer Code literally transposes the provisions of the MCD related to the calculation of the APRC, for which the MCD has taken an approach of maximum harmonization in view of creating “a genuine internal market with a high and equivalent level of consumer protection”5.
The aim of the APRC is to allow customers to oversee the overall costs of the mortgage contract and to better compare between different offers. Thus, the MCD includes a standard formula to be used by creditors when presenting the APRC to consumers. In Luxembourg, said formula as well as any ancillary provisions will be laid down in a Grand-Ducal Regulation.
EARLY REPAYMENT OF MORTGAGE CREDIT AGREEMENT:
In line with the provisions of the MCD, bill 7025 provides a right for consumers to fully or partially discharge their obligations under a mortgage credit agreement prior to the expiry of that agreement. In such cases, the consumer shall be entitled to a reduction in the total cost of the credit to the consumer, with said reduction consisting of the interest and the costs for the remaining duration of the contract.
In this regard, it can be noted that the Luxembourg legislator opted for the entitlement of the creditor to fair and objective compensation, where justified, for possible costs directly linked to early repayment without imposing a sanction (pénalités) on the consumer.
Because the compensation shall not exceed the financial loss of the creditor and as according to the MCD, Member States may provide that the compensation may not exceed a certain level or be allowed only for a certain period of time. Bill 7025 follows in fact French legislation by setting a limit for the compensation corresponding to six months of interest on the capital that the consumer wishes to reimburse up front. This limit only applies to early repayments relevant to mortgage credit agreements concluded for the purpose of acquiring an immovable property that served as the effective and principal residence of the consumer for an uninterrupted period of at least two years and where the accumulated amount does not exceed EUR 450,000.
According to article 19 of the MCD, Member States shall ensure that reliable standards for the valuation of residential immovable property for mortgage lending purposes are developed within their territory. In the absence of harmonized rules in that respect in Luxembourg, bill 7025 provides for the creation of an inter-ministerial committee with the mission to prepare rules for the valuation of residential immovable property for mortgage lending.
Such rules for the valuation of residential immovable property for mortgage lending will be set out in a Grand-Ducal Regulation, and the work of the committee should be based on the principles set out in Recital 26 of the MCD6.
While assessing valuation of a property, creditors shall use the property valuation methods to be set out in the Grand-Ducal Regulation.
Thus, these provisions of the MCD, such as the introduction of the APRC calculation, will require further implementation steps before being fully practicable in Luxembourg.
INTRODUCTION AND SUPERVISION OF CREDIT INTERMEDIARIES:
Another innovation of the MCD constitutes the creation of new professional actors in the lending market, i.e. the credit intermediaries.
According to article 29 of the MCD, credit intermediaries shall be duly admitted to carry out all or part of the credit intermediation activities or to provide advisory services by a competent authority in their home Member State. Thus, bill 7025 applies an authorization procedure to credit intermediaries comparable to the one existing for professionals of the financial sector within the meaning of the law of 5 April 1993 on the financial sector, as amended. In this context, the Luxembourg Supervisory Authority of the Financial Sector (CSSF) will be in charge of the authorization process as well as the application of the European Passport Regime.
It can finally be pointed out that in the interest of consumer protection, the Luxembourg legislator has not opted for the possibility to allow to credit intermediaries to appoint representatives within the meaning of article 31 of the MCD.
According to the new article L.226-45 of the Luxembourg Consumer Code, the provisions that transpose the MCD do not apply to mortgage credit agreements already in force on 21 March 20167.
1. Directive 2014/17/EU on credit agreements for consumers relating to residential immovable property
2. For more information, please click here (http://www.wildgen.lu/publications/articles/mortgage-credit-directive-luxembourgs-retail-bankers)
3. For more information, please click here (http://www.wildgen.lu/publications/articles/mortgage-credit-directive-luxembourgs-retail-bankers)
4. European Commission, Creating a fair single market for mortgage credit – FAQ, Memo/13/1127
5. Recital 7 of the MCD
6. Bill 7025, commentaries page 49
7. Such date corresponding to the transposition date as provided for by article 41 of the MCD