Recommendation 2017-R-01 of 26 June 2017 on the free choice of borrower's insurance for mortgage loans

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Recommendation on the free choice of borrower's insurance taken out to cover a mortgage loan 2017-R-01 of 26 June 2017

1. Context
   The principle of free choice of borrower's insurance contract, when subscribing to a mortgage loan, was introduced into legislation by the law on consumer credit reform (known as the Lagarde Law). Since 1 September 2010, borrowers have been free to choose their own insurance contract, provided it offers a level of coverage equivalent to that proposed by the lender. The legislator subsequently strengthened this framework on two occasions1 to enable borrowers to more easily benefit from competition. Borrowers were notably granted the right to change their insurance contract after the issuance of the loan offer and within 12 months of its signature. The implementing texts for these provisions entered into force on 1 October 2015. In January 2015, a common method for analyzing the equivalence of coverage levels was defined by the Financial Sector Consultative Committee (CCSF)2. The French Banking Federation (FBF) adopted, in July 2015, a professional standard incorporating the methodology defined by the CCSF. These professional commitments have been applicable since 1 October 20153. The Prudential Control and Resolution Authority (ACPR) conducted a review of the practices applied by major banking players in implementing these provisions. On-site and documentary inspections identified various obstacles in the implementation of the right to free choice of borrower's insurance. It appears that information provided to customers regarding the conditions for exercising this right was often insufficient, and certain procedures for handling external insurance requests4 could slow down applicants' processes or even limit the exercise of their right.

1 Laws No. 2013-672 of 26 July 2013 and No. 2014-344 of 17 March 2014 entered into force, regarding the mechanism in question, on 26 July 2014.
2 Opinion of the Financial Sector Consultative Committee of 13 January 2015.
3 With the exception of the commitment to use only the criteria defined by the opinion to justify refusals of equivalence, applicable from 1 May 2015.
4 An external insurance contract is any borrower's insurance contract covering a mortgage loan that is not part of the products marketed by the lending institution.

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Certain best practices enabling a fair and smooth application of this right were also identified. It seems important to disseminate them to all actors involved in deciding on external insurance requests. To this end, the ACPR recommends by this document best practices regarding customer information, the procedures for handling external insurance requests, and internal control of compliance with the principle of free choice of borrower's insurance.

2. Principles established by regulation and professional commitments
   Any loan applicant or borrower may propose an external insurance contract to the lender as an alternative to the one proposed by the lender. The latter is required to accept it to cover the loan provided it presents a level of coverage equivalent to its own.
   Legal provisions5 differentiate three possible periods in the implementation of this right:

• Before the issuance of the loan offer: any refusal decision must be motivated by the lender. This phase will be designated in this recommendation by the expression "de-linking" (déliaison);
• Between the issuance of the loan offer and the moment it is signed by the borrower: the lender must, within 10 working days from receipt of the request, notify the borrower of its decision to accept or refuse and, if applicable, send a modified offer;
• Within 12 months following the signature of the loan offer: the lender must notify the borrower of its decision to accept or refuse within a period of ten working days from receipt of another insurance contract. In case of acceptance, the loan contract must be modified by addendum, mentioning notably the new annual effective global rate calculated based on information transmitted by the delegated insurer.
  The issuance of this addendum cannot generate costs borne by the borrower.
  These two latter phases will be designated in this recommendation by the expression "substitution"6.
  Furthermore, it is prohibited for any lender, in exchange for the acceptance of the external contract proposed by the client and regardless of the phase in which this right is exercised by the borrower, to modify the interest rate applicable to the loan, or to require payment of additional fees notably related to the analysis of the external contract. Moreover, in application of the CCSF opinion of 13 January 20157, lenders must select, from a list of standard criteria, those they deem necessary for granting a mortgage loan. These criteria, which constitute their minimum requirements in terms of insurance, must be communicated on their website and on standardized information sheets (FSI) provided to the loan applicant8, depending on the type of operation, the type of loan, and the professional status of the borrower. They have also committed to providing the applicant, as early as possible, with a personalized sheet specifying the detailed and fully valued list of required criteria, taking into account their personal situation. If the proposed external contract meets the criteria listed on this personalized sheet, it is deemed to have an equivalent level of coverage and must be accepted by the lender. Contracts proposed by the lender must also respect the criteria listed on this sheet. A new CCSF opinion adopted on 18 April 2017 provided clarifications on the implementation procedures for the equivalence analysis mechanism and customer information.

5 Cf. Articles L.313-28, L.313-30, L.313-31 and L.313-32 of the Consumer Code.
6 Points of the recommendation aiming solely at substitution requests formulated within the 12-month period following the signature of the loan offer will be signaled as such.
7 Reprinted in the FBF professional standard of July 2015 "Borrower's insurance for mortgage loans to individuals – Equivalence of coverage level".

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(FSI) handed to the loan applicant8, depending on the type of operation, the type of loan, and the professional status of the borrower.
They have also committed to providing the applicant, as early as possible, with a personalized sheet specifying the detailed and fully valued list of required criteria, taking into account their personal situation.
If the proposed external contract meets the criteria listed on this personalized sheet, it is deemed to have an equivalent level of coverage and must be accepted by the lender. Contracts proposed by the lender must also respect the criteria listed on this sheet.
A new CCSF opinion adopted on 18 April 2017 provided clarifications on the implementation procedures for the equivalence analysis mechanism and customer information.

3. Scope
   This recommendation is intended to apply to any credit institution or financing company that, in the context of mortgage loans governed by Articles L. 313-1 and following of the Consumer Code that it distributes, imposes, as a condition for granting the loan, the subscription of an insurance contract intended to guarantee, in the event of occurrence of one of the risks defined by this contract, either the total or partial repayment of the outstanding loan amount, or the payment of all or part of the installments of said loan. It also applies to credit institutions and financing companies operating in France under the freedom to provide services or freedom of establishment.

4. Recommendation
   With the aim of greater transparency in the management of de-linking and substitution requests defined above and their fair treatment, the ACPR recommends, in accordance with the provisions of Articles L. 612-1 II 3° and L. 612-29-1 of the Monetary and Financial Code, to the entities concerned the following best practices:

4.1 Means and procedures
4.1.1 To put in place the means and procedures enabling the entities covered by this recommendation to respect the terms of the opinion of 13 January 2015 of the Financial Sector Consultative Committee (CCSF).
4.1.2 To provide training, adapted to their functions, to personnel who may, in the exercise of their duties, receive or process an external insurance request, regarding the implementation procedures of the right to free choice of borrower's insurance as defined in internal procedures.

4.2 Prior information of customers

8 Under the conditions of Articles L.313-8 and following of the Consumer Code.

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4.2.1 To make known to the public on the lender's website, along with the list of CCSF criteria retained by the latter, via a simple and visible access path, the exhaustive list of documents necessary for processing the de-linking or substitution file, as well as all other practical modalities for exercising the right to free choice of borrower's insurance (and notably, the contact details of the interlocutor or point of contact able to answer questions from the loan applicant or borrower, precise contact details for submitting the de-linking or substitution request file).
4.2.2 To systematically provide a personalized sheet specifying the detailed list of valued criteria required by the lender as early as possible prior to the issuance of the loan offer, and in any case as soon as the borrower's data, notably regarding the credit, impacting insurance requirements are known to the lender9.
4.2.3 To adapt its requirements according to the borrower's profile, assessed in concreto, and to show the valuation of criteria resulting from this analysis on the personalized sheet (for example, when the coverage of amateur sports is one of the lender's requirements, question the loan applicant about their sports practices and adapt the personalized sheet according to the answers provided by the latter).

4.3 Processing of external insurance requests
4.3.1 Admissibility of the file
4.3.1.1 To consider the external insurance request admissible provided that the submitted documents contain the information necessary for its processing, even if their presentation or titles differ from those mentioned in the institution's procedures.
4.3.1.2 In the de-linking phase, to proceed with the analysis of coverage equivalence based on a simple quote, even before medical selection, understanding that the loan offer can only be issued upon receipt of documents (i) confirming the firm subscription of the proposed contract and (ii) presenting guarantees identical to those on which the lender based the equivalence analysis regarding the valued criteria communicated to the applicant.
4.3.1.3 To consider, for substitution requests formulated within the 12-month period following the signature of the loan offer, that this deadline is no longer enforceable against the borrower once they have formalized their request, even if the file is incomplete.
4.3.1.4 Not to subordinate the submission and processing of the request to a branch visit.
4.3.1.5 Upon receipt of a request deemed incomplete, to indicate in writing to the applicant, within a period of approximately 2 to 3 working days, the missing documents or information to be able to consider the request admissible.
4.3.1.6 To process de-linking or substitution requests formulated by insured persons or candidates for insurance who are natural persons associated with a real estate civil partnership contracting or having contracted a mortgage loan, provided that the latter is subject to Articles L. 313-1 and following of the Consumer Code.

9 Insurance requirements are determined based on the object of the financing (primary residence, secondary residence, rental investment, works), the borrower's professional situation (employee, civil servant, self-employed, inactive, etc.), their tax residence, their age, the nature of the loan (amortizing loan, bridge loan, bullet loan) and, if applicable, its duration if it influences the extent of coverages at the end of the loan.

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4.3.2 Analysis of requests
4.3.2.1 To take into account all guarantees granted by the external insurer, even when they are formalized on supports other than the general conditions of the insurance contract (e.g., those mentioned in special conditions).
4.3.2.2 To examine the equivalence of the coverage level of the external contract based on the loan amortization period, without taking into account possible extensions of duration resulting from modulation options opened by the loan contracts, provided they have not been requested by the borrower at the time of this analysis.
4.3.2.3 Not to subordinate the acceptance of the external insurance request to the prior agreement of guarantee bodies, provided the external contract is judged to have an equivalent level of coverage by the lender and the loan remains insured at the minimum quota required by the lender at the time of granting the loan.
4.3.2.4 To perform the analysis of substitution requests formulated within 12 months of the signature of the loan offer, solely based on the criteria mentioned on the personalized sheet provided to the loan applicant as referred to in point 4.2.2.

4.3.3 Communication of the analysis result
4.3.3.1 To systematically communicate in writing to the person who formulated an external insurance request (the loan applicant, the borrower, or if applicable, their representative) the result of the equivalence analysis of the coverage level, clearly indicating whether the proposed external contract is deemed admissible or not regarding the CCSF criteria retained by the institution.
4.3.3.2 To respond to de-linking requests from loan applicants within timeframes compatible with the envisaged real estate operation and in any case within a maximum period of 10 working days.
4.3.3.3 In case of an external insurance request and at any time during the processing of this request, to refrain from presenting the choice of external insurance as being likely to put the borrower in difficulty in the event of a claim and to avoid using general formulas likely to dissuade them from using it.
4.3.3.4 When the loan contract opens possibilities for extending the amortization period, to inform the client that exercising this option will require the prior agreement of the insurer on the extension of the coverage period, unless the insurance contract explicitly covers the resulting extension.
4.3.3.5 In case of refusal of external insurance, to mention precisely in the information letter the defects of equivalence justifying it, ensuring they are clearly dissociated from any other information possibly communicated.

4.3.4 Follow-up to the acceptance of the external contract
4.3.4.1 For accepted substitution requests formulated within the 12-month period following the signature of the loan offer, to issue an addendum concomitantly with the information letter on the acceptance of the presented external contract and to take any measure intended to limit the risk of paying a double insurance premium for the borrower (for example, informing in acceptance letters of the need for a rapid return of the addendum after the legal reflection period, taking into account the signed addendum as soon as possible...).

6 / 6 d’acceptation sur la nécessité d’un retour rapide de l’avenant après le délai de réflexion légal, prise en compte de l’avenant signé dans les meilleurs délais…).
4.3.4.2 In the case where the substitution request has been accepted by the lender based on an insurance proposal engaging only the external insurer, to issue the addendum upon receipt of documents confirming the firm subscription of the proposed contract.

4.4 Control of compliance with the free choice principle
4.4.1 For the purposes of internal control and handling complaints, to adapt the means to control the conformity of their commercial practices with the principle of free choice of borrower's insurance, notably with Article L.313-32 of the Consumer Code, even when no loan offer is issued, for example by retaining, within timeframes compatible with obligations arising from the "Data Processing and Civil Liberties" law, versions of pre-contractual documents communicated to the loan applicant, including simulations.
4.4.2 To mention on documents transmitted by the applicant the date of receipt by the lender, even when they are received by a service not in charge of processing the request (e.g., date of receipt by the lender's mail service).
This recommendation will be effective as of 1 January 2018.