There will be mandatory rules to ensure home loans are offered responsibly in the European Union, a document showed on Wednesday, as market jitters due to defaults in the U.S. subprime mortgages sector continued.
EU Internal Market Commissioner Charlie McCreevy will unveil his long-awaited proposals on mortgages next month.
After a late change of mind by his officials, he will propose a mandatory shake up -- rather than softer measures envisaged originally -- to protect four aspects of mortgages that are key to consumer protection.
The crisis in the U.S. market for home loans to people with a poor credit history has thrown a spotlight on mortgages.
"The recent developments in sub-prime markets have illustrated the need for transparency in the mortgage funding business, particularly from the end investors' perspective," the document obtained by Reuters said.
"The (European) Commission considers it essential that mortgage lenders lend responsibly, in particular by thoroughly assessing the creditworthiness of the consumer in the context of the transaction envisaged," it said.
Mandatory rules now appear inevitable.
"The Commission believes that a directive is the most effective tool to address the following issues: pre-contractual information, annual percentage rate of charge; responsible lending and early repayment," the document said.
"The Commission therefore intends to prepare, in consultation with all stakeholders and in accordance with its better regulation principles, a proposal for a directive which will be preceded by a rigorous cost-benefit assessment."
EU countries and the European Parliament would have the final say on any mandatory rules.
Lenders immediately criticised the move for failing to focus on key issues that would boost cross-border competition. EU member states, such as Britain, are likely to oppose such a proposal as interfering too much in domestic legislation.
Details could also face a tortuous time as similar issues, such as devising rules on the annual percentage rate of interest, have yet to be resolved in another EU proposal on consumer credit.
The European Federation of Building Societies said the Commission itself agrees there is no demand among consumers for a single market in mortgages and therefore it made no sense to focus on consumer protection issues.
"The Commission says it will be led by industry so why are they only regulating consumers?" asked Christian Koenig, legal adviser to the EFBS.
The focus should be mandatory legal changes to help lenders from one EU state to offer loans in another, Koenig said.