* Mortgage industry sees no business case for draft law
* Mortgage industry says law would hit first time buyers
* Consumer association welcomes move to improve protections
(Updates with mortgage industry reaction)
By Huw Jones
LONDON, March 31 (Reuters) - People looking for a mortgage will have to prove they can repay the loan under a draft European Union law aimed at stamping out the easy lending that fuelled property bubbles in Ireland and elsewhere.
The EU's executive European Commission published its proposal on Thursday, the day a health check of Irish banks, whose woes stem from stoking a housing bubble, was expected to reveal a 25 billion euro ($36 billion) black hole.
EU Internal Market Commissioner Michel Barnier, who authored the measure, said that during boom times in Europe borrowers and lenders assumed the good times could not end.
The home loans industry is equivalent to half the EU's economic activity but is segregated along national lines with little cross-border competition.
Barnier wants to introduce competition while, at the same time, ensuring consumers are protected and do not take out loans they cannot afford.
The European Mortgage Federation, which represents national home loan industry bodies, said it was unconvinced there is a need for the draft law despite eight years in the making.
"For consumers, mortgage markets are purely domestic -- they do not shop around on a cross-border basis," EMF Secretary General Annik Lambert said.
The draft law needs approval from EU states and the European Parliament and covers all loans for buying a home as well as some loans to renovate a property. It also covers all loans guaranteed by a mortgage or comparable security.
Borrowers will have to provide necessary detail about their ability to pay and lenders will be obliged to assess a customer's ability to repay.
"We strongly believe that such provisions will lead to an unbalanced shift of liability to the lender and to even more legal uncertainty and litigation, which in turn will result in a restriction of access to credit for an increased range of prospective borrowers, notably first-time buyers, the self-employed, those with a lower income," EMF's Lambert said.
Britain, whose own housing market turned frothy in recent years, has been holding a public consultation on effectively banning self-certified mortgages, or so-called "liar loans", whereby the borrower has not given proof of income.
The Financial Services Authority said it will conduct an impact assessment on its plans this summer.
European consumer organisation BEUC said Barnier's plans would finally address irresponsible practices.
"Borrowers cannot afford to be sold a bad deal. The next step is to extend these rules to all types of consumer credit," director general Monique Goyens said.
Borrowers will be given a standardised information sheet before signing a contract, giving key price elements such as interest rate charged so they can compare offers easily.
UK BEUC member Which? said in January some lenders in Britain charged 29 different types of fees for a home loan.
All consumers would have the possibility of repaying a home loan early and every intermediary offering mortgages will be directly regulated, Barnier said. (Reporting by Huw Jones; Editing by Dan Lalor and Jon Loades-Carter) ($1 = 0.7035 euro)