The Financial Times reports today that as part of a large reform package the draft directive declares that all EU loans must be treated as if they are in default when they are 90 days in arrears.
While this is common practice in much of the 27-nation bloc, it would overrule UK rules that give retail mortgage borrowers up to 180 days.
The definition change pushes up the probability that mortgage loans will default, a key metric in determining capital charges, the Financial Times reports. It will boost banks' capital charges on UK mortgages by 15-20%, forcing many institutions to either cut lending or charge more to customers.
The tighter deadline will also give banks less time to work with struggling customers, a process known as forbearance, and could push thousands of extra borrowers into default.
The British Banking Association said the 90-day definition was one of its “top concerns” with the draft because struggling customers needed the extra time to refinance or trade down to a smaller home.
Michael Atkinson, director of the mortgage brokers Summit Capital Mortgages, commented: "Were this European directive to become law, the amount of slack that UK lenders can give struggling borrowers would be halved.
"At a stroke, it would pull the rug from under many thousands of Britons who are currently struggling to keep up with their mortgage repayments.
"While this would be disastrous for any borrowers who are plunged into default as a result, it would also pile extra pressure - and cost - onto lenders.
"They would inevitably put up interest rates to compensate, and further tighten their lending criteria.
"So the current vicious circle of sluggish demand and banks who are reluctant to lend would get worse.
"The threat of eurozone collapse is already eroding both British borrowers' confidence and lenders' access to funds on the wholesale money markets.
"For the EU to weigh in with such a wrongheaded, one-size-fits-all proposal would just rub salt into the wound."
