The Mortgage Credit Directive (MCD) introduces significant new obligations on firms dealing in foreign-currency mortgages, including disclosure obligations around the potential impact of exchange-rate fluctuation.
Lenders must also take extra steps to protect consumers from exchange-rate risks, such as providing a right to convert the loan into an alternative currency.
The rules do not prevent a firm refusing to enter into contracts for new lending, additional borrowing and contract variations to avoid the consequences of the foreign-currency rules. However, firms should consider any previous statements or contractual commitments made to existing customers about the availability of further lending or contract variations.
Definition of foreign-currency loans
The MCD defines a foreign-currency loan as a credit agreement where the credit is:
- denominated in a currency other than that in which the consumer receives the income or holds the assets from which the credit is to be repaid
- denominated in a currency other than that of the member state in which the consumer is resident.
The MCD does not define residency, so in our view the term retains its natural meaning. It remains for firms to decide where a customer is resident in line with their usual policies and procedures.
We do not view loans denominated in the Gibraltar pound or the Isle of Man pound as foreign-currency loans, given that both currencies are kept at parity with the pound sterling.
Under the MCOB rules, the regulatory status of a mortgage is set at the time the agreement is entered into. So if a customer starts getting paid in a different currency after they take out a mortgage, the firm should only treat the mortgage as a foreign-currency loan if the customer enters into a new mortgage contract.
It may be that an applicant receives their income in more than one currency and affordability can be assessed – and creditworthiness confirmed – solely by having regard to income in the same currency as the denomination of the loan. If so, then the credit agreement need not be considered a foreign-currency loan (MCOB 2A.3.3G), assuming that the borrower’s residency doesn’t make it a foreign-currency loan.
Managing exchange-rate risk
The new rules require firms to ensure that either:
- the customer has the right to convert the foreign-currency mortgage into an alternative currency under specified conditions, or
- there are other arrangements in place to limit the exchange-rate risk to which the customer is exposed (MCOB 2A.3.1R).
These 'other arrangements' may include a cap or a risk warning (where a risk warning would be sufficient to limit any exchange-rate risk to which the consumer is exposed). The firm need not make the warning specific to the individual borrower, but may do so.
Foreign-currency disclosure requirements
The new rules also require firms to regularly update customers who have a foreign-currency loan when exchange-rates vary by 20% or more from the rate that applied at the time the mortgage contract (MCOB 7A.4.1R) was concluded. The firm need not provide a regular update if the variation in exchange rate is less than 20%.