Home loans in France: legal framework and borrower protection (post-reform 2016)

Buying a property is often the investment of a lifetime. Credit is used almost systematically to bring this project to fruition. Aware of the stakes involved and the risks for individuals, French lawmakers, spurred on by European law, have considerably strengthened the protection of borrowers, notably via the Order of 25 March 2016 transposing the European directive on mortgage credit (MCD). This reform has profoundly altered the legal landscape, introducing new obligations for lenders and increased guarantees for consumers. Understanding this legal framework is essential before committing yourself.

Scope of the post-2016 protection regime

The protective regime introduced by the 2016 reform applies to home loans as defined by the Consumer Code. It mainly concerns loans granted by professionals (banks, credit institutions) to individuals acting for non-business purposes.

The transactions financed are mainly (article L. 313-1 of the French Consumer Code) :

• The acquisition of buildings for residential use or for mixed use (business and residential), as well as the works associated with these acquisitions.
• The purchase of land for the construction of these buildings.
• The construction of these buildings.

An important new feature of the reform is the extension of the protective regime to certain loans which do not directly finance a property purchase, but which are secured by a mortgage or comparable surety on a residential property (article L. 313-1, 2°). This includes in particular loans to finance repairs, improvements or maintenance work on an existing dwelling, even if they exceed the consumer credit threshold, as long as they are secured by a mortgage.

Finally, in a rather surprising departure from the general principle of consumer law, certain private legal entities may benefit from this system if the credit is not intended to finance a professional activity (Article L. 313-1, 3°).

However, loans to finance a professional activity and those granted to legal entities governed by public law are excluded. Understanding the legal framework for home loans as a whole is a necessary first step.

Enhanced pre-contractual information: FISE and duty to warn

The 2016 reform placed particular emphasis on transparency and information for borrowers before they sign the contract. The aim is to enable consumers to make a fully informed commitment.

The European Standardised Information Sheet (ESIS)

The central document in this pre-contractual information is the European Standardised Information Sheet (ESIS). Given free of charge to the borrower at the latest when the loan offer is issued (article L. 313-7 of the French Consumer Code), it sets out the essential features of the proposed credit in a clear, standardised manner. Its format, harmonised at European level, makes it easier to compare the various offers on the market.

The FISE contains crucial personalised information: identity of the lender, main features of the loan (amount, term, type of rate), annual percentage rate of charge (APR), total cost of credit, amount and frequency of instalments, projected amortisation schedule (if applicable), guarantees required, early repayment terms, etc. To find out more, read our article on pre-contractual information and FISE.

The lender's duty to explain and warn

In addition to the FISE, the lender (or intermediary) has an obligation to provide the borrower with appropriate, personalised explanations (article L. 313-11). They must ensure that the borrower fully understands the characteristics of the proposed credit, its implications and the potential risks, particularly in the event of default.

Furthermore, article L. 313-12 introduces a specific duty to warn. If the creditor identifies, in the light of the borrower's financial situation, that the proposed credit agreement presents particular risks for the borrower, the creditor must warn the borrower free of charge. The purpose of this duty is to prevent over-indebtedness by alerting the borrower to a potentially unsuitable commitment.

Rigorous assessment of the borrower's creditworthiness

To ensure that the borrower will be able to meet his or her commitments, the law requires the lender to carry out a thorough assessment of the borrower's creditworthiness before granting credit (article L. 313-16). This obligation, which already existed in practice, is now explicitly codified and reinforced.

The lender must verify the borrower's ability to repay the loan on the basis of sufficient information, including income, savings, assets, regular expenditure and other financial commitments. It is the borrower's duty to provide accurate and complete information; refusal to do so may result in rejection of the credit application. The lender must consult the Fichier national des Incidents de remboursement des Crédits aux Particuliers (FICP).

This analysis should not be based primarily on the value of the property being financed or on the assumption that this value will increase in the future (except in specific cases such as construction or renovation). The aim is to avoid the abuses seen during the subprime crisis. Failure to comply with this obligation exposes the lender to penalties, including forfeiture of the right to interest. To understand the details of this obligation, read our article on the lender's assessment of creditworthiness.

Formation of the credit agreement: loan offer and cooling-off period

The conclusion of a home loan contract is subject to precise formalities designed to protect the borrower.

The loan offer

The lender must make a written offer, sent free of charge to the borrower (and any guarantors who are natural persons) on paper or in a durable medium (article L. 313-24). This offer must contain the mandatory information detailed in article L. 313-25: identity of the parties, nature and terms of the loan, amortisation schedule (for fixed rates) or explanatory note and simulation (for variable rates), amount, total cost, APR, insurance and guarantees required, transfer terms, etc. (article L. 313-24).

The lender is obliged to maintain the terms of its offer for a minimum period of 30 days from receipt by the borrower (article L. 313-34).

The incompressible cooling-off period

Unlike consumer credit, where there is a cooling-off period, there is a mandatory cooling-off period for home loans. The borrower (and guarantors) may not accept the offer until 10 clear days have elapsed following receipt (article L. 313-34). Any acceptance given before the end of this period is null and void. This public policy rule is designed to ensure that the decision is well considered and to avoid commitments being made under pressure. Acceptance must be given by post or any other agreed means that provides a date certain.

Annual Percentage Rate (APR): calculation, disclosure and penalties

The APR is the key indicator of the total cost of credit. It makes it possible to compare offers by including, in addition to interest, all the compulsory charges that are a condition of granting the loan (application fees, costs of insurance and compulsory guarantees, account-keeping fees if necessary, cost of valuing the property, etc.). Its calculation is defined by articles L. 314-1 to L. 314-4 and specified by regulation.

The APR must be stated in the loan offer. Any error or omission in calculating or stating the APR may result in severe penalties for the lender, principally forfeiture (in whole or in part, as determined by the court) of the right to contractual interest (article L. 341-48-1). The borrower would then only be required to repay the capital. Disputes concerning APR and how to check it are frequent and require careful analysis.

The borrower's rights during the term of the contract

Even after signing, the borrower retains certain rights:

• Early redemption : The borrower always has the right to repay all or part of the loan early (article L. 313-47). The contract may provide for an indemnity (IRA), but this is legally capped (it may not exceed 6 months' interest on the capital repaid at the average rate for the loan, nor 3% of the capital outstanding before repayment). The IRA is even prohibited in certain cases (sale of the property following a transfer, death, etc.).
• Modular deadlines : Many contracts allow you to adjust your repayments (increase, decrease, one-off deferment). The terms and conditions of this modularity must be clearly defined in the loan offer.
• Renegotiation : Borrowers can always try to renegotiate the terms of their loan (rate, term) with their lender. If renegotiation is successful, it must be set out in a rider that complies with specific formalities (article L. 313-39), including in particular a new repayment schedule and the recalculated APR. A 10-day cooling-off period also applies to this amendment.

Specific features of certain types of home loan

While fixed-rate loans are still in the majority, there are other forms of loan:

• Variable or adjustable rate loans : The offer must be accompanied by a notice explaining the terms of variation and a simulation of the impact (article L. 313-25, 4°). The lender is required to provide annual information on the outstanding capital and must give written notice of any change in the borrowing rate (article L. 313-46).
• Foreign currency loans : Since the reform, these arrangements have been tightly controlled to limit the exchange rate risk for borrowers. They are only possible if the borrower's income or assets are denominated in the currency concerned (article L. 313-64). Specific information on the exchange rate risk and a warning mechanism are provided for if the variation exceeds 20%.

Managing payment difficulties and protection mechanisms

In the event of temporary or long-term financial difficulties, a number of mechanisms exist to protect borrowers and avoid the spiral of excessive debt.

• Grace periods : The judge may grant payment terms (deferment or rescheduling) of up to two years (article 1343-5 of the Civil Code, applicable via article L. 314-20 of the Consumer Code).
• Over-indebtedness procedure : If it is clearly impossible for the borrower to meet all of his or her non-business debts that are due and payable, he or she may refer the matter to the over-indebtedness commission. This procedure may result in a conventional recovery plan (with rescheduling, deferment or even partial cancellation of debts) or, in the most serious cases, a personal recovery procedure with cancellation of debts. The fact that you own your principal residence does not prevent you from being classified as over-indebted. Support from a professional is often useful in navigating through the debt process. dealing with repayment difficulties.

Protection for home borrowers since 2016

The 2016 reform undeniably strengthened the protection of property borrowers in France, bringing national law largely into line with European standards. The emphasis placed on pre-contractual information (FISE), the duty to warn and the rigorous assessment of creditworthiness are designed to promote more responsible lending and prevent over-indebtedness. The formalism of the offer and the mandatory cooling-off period remain pillars of this protection. The penalties incurred by lenders in the event of non-compliance (particularly with regard to the APR) offer leverage to aggrieved consumers.

However, the complexity of the subject and the technical nature of the contracts sometimes make it difficult for borrowers to fully assert their rights. The assistance of a lawyer specialising in banking and mortgage law can prove invaluable in analysing an offer, checking the compliance of a contract or managing a dispute with the lending institution.

Navigating the complex landscape of mortgage lending requires a clear understanding of your rights and the lender's obligations. If you are considering a property project or experiencing difficulties with an existing loan, our firm can provide you with the expertise you need to secure your interests.

Frequently asked questions