Preamble

EPPARG wishes to define the main characteristics of sound equity release products, suitable for consumers and business providers in all countries. Governments and regulators should be encouraged to reflect the EPPARG standards in relevant laws and regulations applicable to equity release, or at least ensure that such laws and regulations do not impede any of the consumer protections enshrined in the EPPARG standards. Adherence to the EPPARG standards should foster the creation of a common cross border market for equity release products, including their funding.

In Europe, equity release is defined at an EU-level in the Mortgage Credit Directive 2014/17/EU and to a varying degree in local legislation and regulations in some countries. Currently the longest established non-governmental business code is the UK Equity Release Council rules regarding product characteristics and market behaviour.

The Equity Release Council´s rules are an example of positively experienced standards in a mature market in which life insurance companies (annuities providers) are playing a key role as lenders and funders. These rules cannot be directly applied in maturing markets or markets with other characteristics and other legal systems. But they can serve as a proven good “raw model”.

Hence, the standards recommended by EPPARG are deliberately of a more profound nature, to leave room for a certain flexibility, and split into recommendations for Roll-up Scheme products and Reversion Scheme products. Initially standards for roll up schemes only are prepared.

EPPARG recommends the following minimum standards for Roll-up Scheme products:

1. Product characteristics
   Equity release mortgages shall be lifetime products. They can be provided as a lump-sum payment, regular payments or through other forms of payment or credit facilities in exchange for a right to receive repayment of the mortgage and any subsequent credit costs (including rolled up – compounded interest) through equity ordinarily deriving from the sale of the borrower’s pledged real property, leasehold or similar owner’s rights in real property (see Comment 1)

   Such mortgages should:

   • be associated with first-ranking liens or equivalent rights in such properties or rights stipulated in the first paragraph;
   • only be provided to borrowers over a certain age (see Comment 2);
   • as regards the creditor be possible to terminate only in the event of
     • death,
     • a permanent move to care
     • the sale or other transfer of ownership of the mortgaged property or right, and
     • breaches of contractual obligations which allow the creditor to terminate the credit agreement (see Comment 3); and
   • include a debt limitation facility, such that any claim for repayment of the loan and accrued credit costs shall not exceed the amount received by the borrower or the borrower’s estate from the sale of the mortgaged property or right, provided that such sale is done under market conditions and that the borrower has not significantly impaired the value of the collateral through any contractual breach (see Comment 4).

   Comments:

   1. This paragraph contains the very essence of equity release, namely that the repayments are supposed to be “granted by the property” rather than by the owner. It is important that this be stated clearly, so that lawmakers and regulators have a basis for allowing lenders to grant credits without performing the same comprehensive creditworthiness test of the applicant, or ”loan to income” limits etc. as would have been required for a regular mortgage loan.

      This concept of repaying with the equity derived from the sale of the property does not preclude the borrower or the borrower’s estate from repaying the credit with other funds and keeping the property. Furthermore, the concept does not preclude the borrower from, for example, repaying interest or part of the credit amount during certain periods of time or during the lifetime of the credit. Such latter questions are product design matters.

   2. The minimum age must be decided locally by the regulator or by the respective business provider. This ties into the loan-to-value (LTV) scale applicable for maximum lending in the respective ages. Each provider decides the level of risk, in terms of exposure to negative home equity, that the provider is prepared to take, also considering any possible national regulations on which risk exposure lenders are allowed to assume. The minimum age used by lenders in Europe ranges between 55-65.
   3. The EU Directive states that lenders should not seek repayment of the credit until the occurrence of one or more specified life events of the consumer, as defined by Member States. EPPARG strongly advises rule makers and, in lieu of rules, business providers to define these life events as shown in this paragraph, in order to uphold high standards of consumer protection and the goodwill of the business concept. For example, time limited equity release products, i.e. not lifelong, have in the past given rise to serious reputational damage when products of inferior consumer protection value have put consumers in a critical position.

      In addition, it should be clear that any form of transfer of ownership, not only sale, should give the lender the right to terminate the credit.

      Breaches of contractual obligations obviously primarily refer to non-contractual acts and omissions by the customer leading to the deterioration in value of the collateral, for reasons other than a general price decline in the market. Typically, a breach against a provision that the customer must reside in the property (which is a standard contractual requirement) would fall within these criteria. Vacancy is always a risk, impairing the value of the collateral for the creditor. In such cases the loan should end and be repaid.

      Of course, fraud and other misrepresentations, etc. are also covered.

   4. EPPARG strongly recommends that equity release products should be provided with a debt limitation facility.. This is the ultimate safeguard for borrowers or the borrowers’ estates in the event of falling house prices, galloping interest rates and/or a longer than expected lifetime. In the event of variable interest without a cap in the lending, the debt limitation undertaking is of particular importance as a cover for the interest risk. (In at least France, Italy and Norway this facility is mandatory.)

      It means, in essence, that all assets of the borrower or the borrower’s estate, other than the pledged property, are protected when the debt is repaid through the sale of the pledged property. In some countries the business practice is that this debt limitation only applies upon the borrower’s death or move to care. In other counties the business practice and the conceptional view is that the provision applies irrespective of the cause or time for the sale of the property. Unless the property is sold at a public auction, a general prerequisite for this debt limitation facility is however, that the sale of the property is done in a way which gives the lender a possibility to control and ensure that the sale is done on market conditions. The techniques for achieving this control vary, as set forth in the contract conditions of the respective lender.

2. Marketing and customer acquisition

   A proper market behaviour in respect to marketing and the customer acquisition process is important in the equity release business. The very fact that the product is offered to elderly people includes a reputational risk. Experience shows that a single mis-selling to this consumer group could, through media coverage, seriously damage the reputation of a product and hamper the development of the market in question, for many years to come.

   Most countries have local laws and regulations covering mandatory consumer protection measures in connection with providing consumer credits, including mortgages and in some cases also specifically equity release products. It is the opinion of EPPARG that equity release providers cannot be content with only following these rules. In many cases additional self-imposed standards should be added. The most elaborated set of market behavioural rules, especially designed for equity release, can be found in the UK, namely the mandatory rules of the Financial Conduct Authority (FCA) governing the sale of equity release products, and the additional voluntary Rules & Guidance of the Equity Release Council (which are available on the website www.equityreleasecouncil.com/standards/rules-and-guidance/). Although these rules reflect legal and market conditions which are particular to the UK, EPPARG recommends that providers in all markets familiarise themselves with the consumer protection essence of these rules and adopt them, as suitable, in the respective market on a mutatis mutandis basis.

   EPPARG places special emphasis on the following matters which should be followed as an EPPARG standard:

• Lenders shall take full responsibility towards each borrower, irrespective of whether the customer acquisition process (through contract signing) has been carried out through the providers’ own actions and personnel or with the contracted help, totally or partly, of intermediaries and external economic or legal advisors.
• Lenders shall only use personnel, intermediaries and advisors with the required qualifications and competence.
• Lenders shall not accept business unless they have taken reasonable steps to ensure that:
  • There has been a full discussion with the borrowers as to the implications of the loan for the customer(s) and for their family and that the customer(s) was (were) made fully aware of such implications.

    This typically includes the following:

    • Ensuring that the borrower has accepted the fact that the presumption is that the property is eventually going to be sold for the repayment of the debt, unless other funds are available for that purpose.
    • Ensuring that the borrower has carefully considered involving the family in the decision process
    • How is the heirs’ potential inheritance affected?
    • What happens when one spouse in a couple dies?
    • What happens if the property is sold, given away or vacated by the borrower during the term of the loan?
    • What happens if the borrower becomes insolvent or goes into bankruptcy due to other debts and obligations?
    • What difference does it make whether a couple is married or just co-habitants?
    • What difference does it make whether the property is owned by one of the spouses or by both?
    • What happens if one spouse or both permanently move to care?
    • What happens if the borrower wishes to move to another property, how can the loan be moved?
    • Is it allowed to rent out the property partly or in whole?
• The customer(s) has/have been advised of the risks, features and benefits of the relevant product.

  This typically includes a need for an explicit:

  • explanation of how interest on interest (compound interest) works
  • calculation showing the development of the total debt during a theoretical lifetime of the loan (not less than 15 years). In the case of variable interest rates, different scenarios shall be presented. It is recommended to show also calculations on how much is left of the property´s theoretical future value, in relation to when the total debt is paid back, based on different HPI scenarios.
  • Information about any debt limitation, when it is applicable and the conditions to be upheld by the borrower in order for such limitation to apply
  • Information about the requirement of the borrower to pay all taxes and dues on the property and to take proper care of the property including repairs, and the effects of failure to do so
  • Information about the requirement of the borrower regarding insurance cover and the effects of failure to meet this requirement
  • Information about the effects of early repayment of interest and capital
  • Information about all costs involved in taking and maintaining the loan (total transparency)
  • Information about whether the property may or may not be used as collateral for other debts.
  • Information about the possibilities of being granted future “top up” loans on the property
  • Information on the special features of the respective offered products
• The customer(s) has/have been advised to also consider alternative courses of action. This typically includes:
  • Selling the property
  • Taking a regular mortgage loan
  • Receiving financial support from friends or family
  • Renting out part of the property
  • Using a Reverse Scheme
• The customer’s (customers’) understanding of the loan and its suitability has been considered and the customers identity confirmed.

  This includes:

  • Taking adequate steps to ensure that the borrower is applying for a loan under his/her own free will, and not under the improper influence of others, and that the borrower understands the implications of this and the terms and conditions for the loan.
  • If needed contacts with a duly appointed legal trustee (not any proxy-holder)
  • A strict ID-control in personal attendance of the applicant *
  • A statement as to what the loan amount is intended to be used for*
  • A discussion on whether the loan amount is right and not unnecessarily large for the given purpose

    *required for inter alia anti-money laundering and anti-terror financing purposes

• Any impact on the customer’s personal tax situation and/or eligibility for welfare benefits has been addressed.  If the providers do not have the expertise to advise on this, they should encourage the customer to contact suitably qualified sources of advice before deciding to sign the credit.
• In the case of a joint application, all customers have received all the information listed above.
  • EPPARG recommends that all borrowers testify to having received the necessary and complete information by signing a checklist covering all crucial items, which also should be signed by the providers’ respective representative, testifying to having given this information.