Defaults by mortgage lenders (Post-2016): what penalties?

Buying a property is often the investment of a lifetime. In most cases, taking out a mortgage is an essential step in the process. Given the importance of this commitment, the French legislator, particularly since Ordinance no. 2016-351 of 25 March 2016 transposing a European directive, has strengthened the protection of borrowers. The aim of this reform was to establish a more transparent and secure framework for home loan contracts entered into after 1 October 2016. However, lending institutions do not always scrupulously comply with their obligations. What are the most common failings and, above all, what penalties do banks and credit institutions incur in the event of misconduct? Understanding these mechanisms is essential for any borrower wishing to assert their rights. For an overview of the changes brought about by the reform, you can consult our complete guide to mortgages post-reform 2016.

Penalties for non-compliance with pre-contractual information obligations (FISE, duty to warn)

Even before the loan offer is signed, the lender is bound by precise information obligations to enable the prospective borrower to make a commitment in full knowledge of the facts.

The European Standardised Information Sheet (ESIS)

One of the major contributions of the 2016 reform is the introduction of the European Standardised Information Sheet (ESIS). This document, the model for which is set out in the regulations (articles L. 313-7 and R. 313-4 of the French Consumer Code), must be given to the borrower no later than when the offer of credit is issued. It contains personalised and standardised information that enables the different offers on the market to be compared effectively.

Failure to provide the FISE or the provision of an incomplete or incorrect FISE exposes the lender to civil penalties. The main penalty is forfeiture of the right to interest (article L. 341-26 of the French Consumer Code). If the FISE is not provided, interest may be forfeited in full. If it is incomplete or incorrect on points other than the APR, the forfeiture is partial, set by the judge within the limit of 30% of interest and capped at 30,000 euros (article L. 341-25). Recent case law confirms that simply signing the loan offer by the borrower, even if it contains a clause attesting to receipt of the FISE, is not enough to prove that the lender has fulfilled its obligation; it must provide evidence to corroborate this actual delivery (Cass. 1re civ., 7 June 2023, no. 22-15.552). For more information on this subject, see our article on pre-contractual information and FISE.

The duty to warn

In addition to simply providing information, the lender (or credit intermediary) has a duty to warn the borrower. Article L. 313-12 of the French Consumer Code formalises this duty: the professional must warn the borrower free of charge if, given the borrower's financial situation, the proposed credit agreement could present specific risks for the borrower. This duty involves an analysis of the borrower's situation and the characteristics of the loan.

Failure to comply with this duty to warn gives rise to civil liability on the part of the lender. The penalty is not automatically forfeiture of interest, but may entitle the borrower to damages, generally corresponding to the loss of opportunity to avoid contracting or to contract on more advantageous terms. The Court of Cassation has specified that this duty applies in particular to complex loans or loans presenting particular risks, such as those involving large repayment instalments or a risk of negative amortisation (Cass. 1re civ., 25 May 2022, no. 21-10.635). The starting point for the limitation period for bringing an action on this basis is the date on which the unpaid sums fall due, and not the date on which the loan was taken out (Cass. Com., 25 January 2023, no. 20-12.811).

Penalties for incorrect or inadequate assessment of the borrower's creditworthiness

The 2016 reform strengthened the lender's obligation to rigorously assess the borrower's creditworthiness before granting credit (article L. 313-16 of the French Consumer Code). This assessment must be based on sufficient, relevant and verified information about the borrower's income, savings, assets, regular expenditure and financial commitments. The lender must consult the Fichier national des Incidents de remboursement des Crédits aux Particuliers (FICP).

The granting of credit without a prior assessment of creditworthiness or on the basis of a manifestly inadequate or erroneous assessment constitutes a serious breach of contract.

The civil penalty provided for in article L. 341-28 of the Consumer Code is forfeiture of the right to interest, which may be total or partial, at the judge's discretion. If the lender has simply failed to meet certain legal conditions for assessment (for example, not having verified certain information), the forfeiture will be partial, capped as for failures to provide information (article L. 341-27, 3°).

It is important to note that the lender cannot avoid liability by relying on incomplete information provided by the borrower, unless the borrower has knowingly concealed or falsified essential information (article L. 313-17). Conversely, inaccurate information provided by the borrower may justify registration on the FICP in the event of a subsequent payment incident (Cass. 1re civ., 25 May 2022, no. 21-14.713). Our dedicated article details the lender's assessment of creditworthiness.

Penalties relating to the loan offer (failure to comply with formalities and deadlines)

The formation of a home loan contract is governed by strict formalities designed to protect the borrower. The loan offer, governed by articles L. 313-24 et seq. of the French Consumer Code, must comply with precise conditions in terms of form and content.

Formalism of the offer

The offer must be made in writing (or on a durable medium) and sent free of charge to the borrower (and to guarantors who are natural persons). It must contain a series of mandatory details listed in article L. 313-25 (identity of the parties, nature, purpose, terms and conditions of the loan, schedule for fixed rates, notice and simulation for variable rates, total cost, APR, insurance and guarantees required, transfer terms, reminder of deadlines, etc.).

Failure to comply with these compulsory details is punishable by forfeiture of the right to interest (article L. 341-34). Previous case law, which held that the only penalty was forfeiture and not annulment of the loan, remains applicable (Cass. 1re civ., 23 Nov. 1999, no. 97-11.472). Forfeiture may be total or partial, depending on the judge's assessment of the seriousness of the breach and the harm suffered by the borrower.

Deadlines

The offer is subject to two key deadlines:

1. Time limit for maintaining the offer : The lender must maintain the terms of its offer for a minimum of 30 days from receipt by the borrower (article L. 313-34, paragraph 1).
2. Borrower's cooling-off period : The borrower (and guarantors) may only accept the offer after an unconditional cooling-off period of 10 clear days following receipt (article L. 313-34, para. 2). Acceptance must be given by letter (as evidenced by the postmark) or by any other agreed means that provides a date certain.

Failure by the lender to comply with the 10-day cooling-off period (for example, by backdating the acceptance or putting pressure on the borrower to accept prematurely) is a serious irregularity. The sanction traditionally accepted by the Court of Cassation is the nullity of the acceptance, and consequently of the loan contract itself (Cass. 1re civ., 25 Nov. 2010, no. 09-14.336). This nullity is relative and is time-barred after 5 years from the date of the irregular acceptance. However, there is still some confusion, as article L. 341-40 makes it a criminal offence to obtain a backdated acceptance, and some older rulings also mention forfeiture of interest for failure to comply with this time limit. However, nullity remains the penalty most consistent with the public policy nature of the protection afforded by this time limit.

Penalties for incorrect APR or failure to state APR

The Annual Percentage Rate of Charge (APR) is an essential part of the information provided to borrowers. It represents the total cost of the credit, including interest, administration fees, compulsory insurance costs, property valuation costs, etc. (articles L. 314-1 to L. 314-3). It must be included in the loan offer (article L. 313-25, 5°).

Failure to state the APR, or stating an incorrect APR, is a frequent and heavily penalised offence. Ordinance no. 2019-740 of 17 July 2019 clarified and harmonised the civil penalties applicable in this area, including for contracts concluded after the 2016 reform but before this ordinance.

Article L. 341-48-1 of the Consumer Code now provides that where the APR is omitted or incorrectly stated, the lender is liable to forfeit the right to interest "in the proportion determined by the court, having regard in particular to the loss suffered by the borrower". The penalty is therefore no longer the nullity of the interest stipulation (which led to the substitution of the legal interest rate for the contractual rate), but a forfeiture that can be adjusted by the judge.

For an error in the APR to be penalised, it must exceed a certain margin. The appendix to article R. 314-3 specifies that the calculation must be accurate to at least one decimal place. A minor error of less than this prescribed decimal point does not result in forfeiture (Cass. 1re civ., 13 March 2024, no. 22-23.873). There is still a great deal of litigation surrounding the APR, particularly on the costs that must be included (guarantee costs, company shares, etc.). For more details, see our page on APR and its disputes.

Other breaches by the lender and associated penalties

In addition to breaches relating to information, solvency and the offer, the lender has other obligations during the life of the contract, failure to comply with which may result in penalties.

Failure to comply with early repayment rules

The borrower has the right to repay all or part of the loan early (article L. 313-47). The lender may demand compensation (Indemnité de Remboursement Anticipé - IRA), but this is strictly limited by article R. 313-25 (cannot exceed 6 months' interest on the capital repaid at the average rate for the loan, nor 3% of the capital outstanding before repayment). In addition, no IRA is payable in certain cases (sale of the property following a transfer, death, etc.).

A lender who demands an IRA that is not due, or an IRA that exceeds the legal limits, would be committing a breach of contract. The penalty would be restitution of the sums wrongly received, potentially accompanied by damages if the borrower demonstrates a distinct prejudice. In addition, article L. 341-46 provides for a criminal penalty (€150,000 fine) for a lender who collects or claims unlawful compensation.

Non-compliance with obligations in the case of variable-rate loans

For variable-rate loans, the lender has specific information obligations during the term of the contract (article L. 313-46). The lender must inform the borrower at least once a year of the outstanding capital. Above all, the lender must inform the borrower in writing (or on a durable medium) of any change in the borrowing rate. before its entry into force, specifying the new amount of the instalments and any change in the number or frequency of instalments.

Failure to comply with this obligation to provide annual information or information prior to a change in interest rate is punishable by forfeiture of the right to interest, in whole or in part, at the discretion of the court (article L. 341-45).

Various abusive practices

Other clauses or practices may be penalised, in particular through legislation on unfair terms (articles L. 212-1 et seq.). For example, a clause imposing an excessive direct debit that is not justified by a real individual advantage could be deemed unfair. Similarly, an excessively stringent acceleration clause, applying to a minor breach by the borrower without reasonable notice, may be deemed to create a significant imbalance (Cass. 1re civ., 22 March 2023, no. 21-16.044).

How can borrowers assert their rights and obtain compensation?

If the lender defaults, the borrower has several options for taking action.

The amicable approach

Initially, an amicable approach to the lending institution is often recommended. This involves submitting a written complaint, stating the reasons for the complaint, pinpointing the fault found (lack of FISE, incorrect APR, inadequate assessment of creditworthiness, etc.) and requesting redress (recalculation of interest, removal of charges, compensation, etc.). If the bank has a customer service or complaints department, this is the first point of contact.

If this fails, or if there is no satisfactory response within a reasonable period (usually two months), the borrower may refer the matter free of charge to the banking ombudsman responsible for his or her bank. The mediator will issue an opinion, which the parties are free to follow or not.

Legal action

If the amicable settlement is unsuccessful, the borrower may take the matter to court. The action must be brought before the court in the place where the defendant (the bank) lives or where the contract was performed (often the borrower's place of residence).

The assistance of a lawyer is strongly recommended, or even compulsory depending on the amounts involved, to analyse the situation, give a legal description of the breaches, quantify the loss and build a solid case. The lawyer can initiate proceedings to ask the judge to impose the penalties provided for by law:

• Forfeiture of the right to interest (in whole or in part).
• Cancellation of clauses (interest clause in the event of an incorrect APR before the 2019 Order, unfair term, etc.).
• An award of damages to compensate for the loss suffered (for example, for loss of opportunity due to a failure to warn).

The prescription

Beware of time limits. A borrower's claim against a lender for breach of contractual or legal obligations (failure to provide information, incorrect APR, duty to warn, etc.) is time-barred after 5 years (article 2224 of the Civil Code). The starting point for this period is the day on which the borrower knew or should have known of the facts giving rise to the action. In the case of an erroneous APR, case law often considers that the starting point is the date on which the contract was entered into if the error was detectable on reading the offer, or the date on which the error was revealed if it required further analysis (Cass. 1re civ., 24 March 2021, no. 19-21.944). For a failure to warn, the starting point is often set at the first unpaid payment incident revealing the risk of excessive indebtedness (Cass. Com., 25 January 2023, no. 20-12.811).

It is therefore essential to act quickly as soon as a breach is suspected or discovered.

The sanctions provided for in the French Consumer Code are an important arsenal for protecting property borrowers. Whether it's a failure to provide information, a negligent assessment of creditworthiness or an incorrect calculation of the APR, the consequences for the lender can be significant, up to and including the total loss of the right to interest. Knowing your rights and the penalties that apply will help you to defend yourself against any breaches. If you think that your lender may have been at fault in connection with a home loan taken out after October 2016, it is advisable to analyse your contract and the documents provided in detail.

For an in-depth analysis of your situation and tailored advice, please contact contact our law firm.

Sources

• French Consumer Code, in particular articles L. 313-1 et seq. (General provisions on home loans), L. 314-1 et seq. (APR), L. 341-1 et seq. (Civil and criminal penalties).
• Order no. 2016-351 of 25 March 2016 on consumer credit agreements relating to immovable property for residential use.
• Act No. 2017-203 of 21 February 2017 ratifying Order No. 2016-351.
• Order no. 2019-740 of 17 July 2019 on the civil penalties applicable in the event of failure or error in the overall effective rate.
• Civil Code (general principles of contract and liability).
• Case law of the Court of Cassation (Civil Division 1 and Commercial Division).