The new mortgage regulations being brought in as part of the UK’s implementation of the European Mortgage Credit Directive (MCD) include changes in the way that mortgage offers are to be issued.
Under the current arrangement, the offer document usually takes the form of a special version of the KFI. Under MCD, this is no longer permitted, as the new ESIS which is replacing the KFI for most types of mortgages is not allowed to be extended in any way beyond the specification laid down in the regulations.
The new regime also requires that a binding offer must be made at least seven days prior to completion of the loan, and only with the borrower’s explicit consent can this ‘reflection period’ be shortened.
The term ‘binding offer’ does not necessarily mean that there can be no conditions attached, but it does require that once any such conditions are fulfilled, the lender cannot then back out of entering into the contract on the terms specified in the offer. Examples of such conditions include specialist surveys on the property and confirmation that essential repairs have been carried out.
If the lender is unable or unwilling to provide this level of commitment at the offer stage, they can issue the client with a non-binding offer. Although this does not commit the lender to lend, the seven day reflection period cannot start until a binding offer is issued (or the lender writes to the borrower confirming that the previously issued offer is now binding).
Because of the specific legal status of the binding offer in terms of the lender’s exposure, and the sometimes subtle distinction between binding and non-binding conditions, it is imperative for loan processing systems to be able to properly identify and manage both types of conditions, and provide relevant warnings and security controls to ensure that, for example, a binding offer cannot be issued with non-binding conditions attached.