Mortgage Credit Directive: EBA peer review on creditors’ treatment of mortgage borrowers in arrears

This is the first EBA’s peer review focussing on conduct and consumer protection issues. The review assessed conduct supervision of seven competent authorities and examined whether the steps they have taken effectively ensure that consumers in payment difficulties benefit from reasonable forbearance by creditors, taking into account the EBA Guidelines on arrears and foreclosures (EBA/GL/2015/12) and its Opinion on good practices for mortgage creditworthiness assessments and arrears and foreclosure. Peer reviews aim to strengthen consistency and effectiveness in supervisory outcomes across the EU and so do not look at the level of compliance by financial institutions, such as MCD creditors. National supervision of credit servicers was also outside the scope of this peer review. The latter are not subject to MCD requirements but will have to comply with  the Credit Servicers Directive from 30 December 2023.

Overall, the EBA found that the competent authorities under review have implemented the Guidelines in their entirety. However, the review identified some differences, including with regard to:

• the organisational set-up for the supervision of this area, with some competent authorities allocating significant resources exclusively to conduct, while others focus primarily on prudential supervision;
• the level of engagement with supervised MCD creditors to ensure their reasonable exercise of forbearance measures, with some competent authorities implementing different conduct supervisory tools and regular and/or ad-hoc communication channels, while others having a more limited intrusiveness;
• the effectiveness of procedures and/or policies to ensure preparedness from a conduct perspective for dealing with an increase in arrears or foreclosures as a result of changing economic conditions and/or market developments, with some competent authorities adopting a close engagement with MCD creditors, while others implementing a different level of supervisory intensity.

The EBA set out follow-up measures which are applicable to all competent authorities and not just those that were reviewed (unless stated otherwise), and which it will review in two years’ time. While maintaining effective prudential supervision such as in the area of management of non-performing exposures, such improvements in conduct supervision can and should be implemented. The report also sets out some follow-up measures, which might benefit all competent authorities, in particular:

• the adoption of policies clearly indicating internal unit responsibilities, so to facilitate the cooperation and information sharing among different teams involved in the supervision of creditors’ treatment of mortgage borrowers in arrears;
• the establishment of formal written procedures as regards the supervision of this area, including in relation to competent authorities’ engagement with MCD creditors, that foresee a margin of flexibility to adapt to changing circumstances;
•  the enhancing supervision of MCD creditors’ preparedness for dealing with potential arrears related to market conditions by further engaging with them and providing guidance in what supervisory expectations are from Article 28 of the MCD.

Legal basis and background

Article 30 of the EBA Regulation requires the EBA to periodically conduct peer reviews of some or all of the activities of competent authorities within its remit, to further strengthen consistency and effectiveness in supervisory outcomes. Peer reviews identify follow-up measures to achieve this, together with best practices seen in competent authorities. After two years, the EBA is required to assess the adequacy and effectiveness of actions taken by competent authorities in response to the follow-up measures.

The peer review has been performed by an ad hoc Peer Review Committee made up of EBA and competent authorities’ staff in accordance with the EBA peer review work plan for 2023-2024 and following the process in Article 30 of the EBA Regulation and EBA peer review methodology.

The exercise covered the competent authorities from seven EU Member States (Cyprus, Greece, Hungary, Lithuania, the Netherlands, Portugal and Slovakia). Six competent authorities were selected on the basis of objective criteria that indicate the relevance of the requirements in Article 28 of the MCD and the EBA Guidelines on arrears and foreclosure in a given Member State. These criteria were supplemented by considerations aimed at ensuring a fair representation of different types of real estate markets, geographies, jurisdiction sizes, cultures, and socio-economic policies, all of which shape and have shaped each national mortgage market. Two of the CAs under review volunteered to participate in the peer review, with one being already under the scope for application of the objective criteria.

The peer review assessed the seven competent authorities’ supervisory practices in the supervision of creditors’ treatment of mortgage borrowers in arrears and initiating of foreclosure proceedings over a maximum of six-year period from 21 March 2016.