A house, a flat. For most people in France, buying a property is often the project of a lifetime. It is almost always financed by taking out a bank loan.. Given the financial stakes involved and the duration of the commitment, the legislator has gradually introduced a set of specific rules designed to protect the borrower.. This complex and evolving legal framework needs to be fully understood before any commitment is made. This article provides an introduction to the essential elements of French mortgage regulations.
The scope of home loans: who and what?
The main source of current regulations on home loans is Ordinance no. 2016-351 of 25 March 2016.which transposed European Directive 2014/17/EU into French law. These provisions have now been incorporated into Articles L.313-1 et seq. of the French Consumer Code..
Which operations are concerned?
The Consumer Code defines the scope of application precisely. It mainly covers loans "granted on a regular basis". to finance:
- The acquisition of ownership (or subscription to shares in companies giving entitlement) of buildings for residential use or for mixed use (professional and residential).
- The acquisition of these same types of properties.
- The construction of these buildings.
- The purchase of land for the construction of these buildings.
- Expenditure on repairing, improving or maintaining these buildings, but a distinction was made before the 2016 reform depending on the amount of the credit and whether or not the work was linked to an acquisition.
Since the Ordinance of 2016, an important alternative criterion has been added: credit agreements, whatever their purpose (even consumer credit), are also subject to the property credit regime if they are secured by a mortgage or other comparable surety on a residential property.. This includes in particular loans for work on an existing dwelling if such a guarantee is taken out..
Unlike consumer credit, the amount of the loan is not generally a criterion for determining whether the protective regime for home credit applies (with some historical exceptions for certain types of work)..
Who is protected?
Protection is aimed primarily at individual borrowers acting for non-business purposes. Article L.311-1 of the French Consumer Code defines the consumer as "any natural person who has a relationship with a lender [...] in connection with a credit transaction carried out or planned for a purpose unrelated to his or her commercial or professional activity"..
Case law has long excluded legal entities, including non-trading property companies (SCI), even family-owned ones, on the grounds that their corporate purpose implies a professional activity.. However, the 2016 Ordinance introduced an important nuance in Article L.313-1, 3°.The rules governing home loans now also apply to loans taken out by private legal entities if the loan is not intended to finance a professional activity.. This provision is probably intended to include certain family-owned non-trading property companies (SCI), but in practice the distinction is difficult to make..
Loans granted to legal entities governed by public law and those intended to finance a professional activity are explicitly excluded from the scheme..
What types of contract?
The notion of "credit" is broadly defined. It covers:
- Conventional loans, whether recorded in a private deed or a notarial deed.
- State-subsidised loans (such as the former Prêt à Taux Zéro, although the latter is excluded if it is interest- and cost-free).
- Loans from home savings schemes (PEL, CEL).
- Bridging loans.
- Payment facilities granted by professionals, if they are similar to credit.
The main exclusion concerns transactions that are completely free of charge, with no interest or other charges other than those linked to the guarantee..
The specific case of credit consolidation
Faced with growing debt, credit consolidation (or credit repurchase) has become increasingly popular. This involves replacing several loans (property, consumer, etc.) with a single loan.. To ensure that this operation does not deprive the borrower of specific protection, the legislator has clarified the applicable rules (articles L.314-10 et seq. of the Consumer Code).:
- If the majority of mortgages are repossessed (more than 60%), or
- If the debt consolidation is secured by a mortgage on a residential property,
- then the entire transaction is subject to the protective rules of mortgage lending.
The 2016 reform and its major impacts
Order no. 2016-351 of 25 March 2016 radically overhauled the legal framework for home loans, coming into force gradually, mainly on 1 July and 1 October 2016.. The main objective was to transpose the European MCD (Mortgage Credit Directive) in order to harmonise practices within the Union and strengthen consumer protection..
More pre-contractual information
The reform has placed the emphasis on the information provided to borrowers before they sign the offer. The central element is the European Standardised Information Sheet (ESIS).. This free compulsory document, the model for which is regulated, must be submitted at the latest with the loan offer.. It contains personalised and standardised information for comparing offers.Loan details, APR, total cost, insurance, charges, indicative repayment schedule, etc. You can also find out more about pre-contractual information and FISE on our website.
New obligations for lenders
The Order has introduced or formalised a number of duties for lenders and intermediaries:
- Rigorous assessment of solvency : The lender must make a detailed assessment of the borrower's ability to repay the loan before granting it, based on sufficient and verified information (income, expenses, assets, etc.). They may not grant the loan if they anticipate repayment difficulties.
- The duty to explain : The professional must provide, free of charge, clear and appropriate explanations of the products on offer, their characteristics and their risks (effects of a change in interest rates, consequences of a default on payment, etc.).
- The duty to warn : The lender must alert the borrower free of charge if the proposed credit presents specific risks in view of the borrower's financial situation.
- Advisory service (optional and potentially chargeable): A distinction is made with a personalised advice service which may be offered, independently or otherwise, and which constitutes an activity distinct from the granting of credit.
Status for intermediaries
The reform also aimed to regulate the activities of intermediaries in banking and payment services (IOBSP), often referred to as brokers, by imposing rules of good conduct, competence and transparency (in particular regarding their possible links with lenders and their method of remuneration)..
These changes are designed to create a more transparent and secure mortgage market for borrowers. For a better understanding mortgage reform and your rightsSee our dedicated article.
Penalties for non-compliance
Failure to comply with the protective rules of the Consumer Code on home loans exposes professionals to penalties.
- Civil penalties : The main penalty is forfeiture of the right to interest by the lender. This may be total or partial, at the discretion of the judge. It applies in particular in the event of an irregular offer (lack of a mandatory statement, incorrect APR) or failure to comply with the obligations to provide information, warnings or assess creditworthiness. The Court of Cassation has confirmed that an error in the APR is punishable by forfeiture of interest (Civ. 1re, 25 February 2016, no. 14-29.838).
- Criminal penalties : Fines can be imposed, sometimes heavily (up to €150,000 or €300,000 for certain offences), particularly in cases of misleading advertising, non-compliant offers or failure to observe the cooling-off period.
The law applicable to cross-border credit
With the opening up of European markets, it is now possible to take out a loan with a bank in another Member State.. Which law then applies? The European "Rome I" Regulation (n°593/2008) on the law applicable to contractual obligations provides some answers.. Although the parties may in principle choose the law applicable to their contract (Article 3)Article 6 protects consumers. If the trader directs his activity to the consumer's country of residence (for example, via a website or advertising targeting France), the consumer benefits from the protection of the mandatory rules of his country of residence (French law in this case) if they are more favourable.. The protective provisions of the French Consumer Code are generally considered to be mandatory rules, which therefore apply even if another law has been chosen, as long as the contract has close links with France..
The legal framework governing home loans is dense and technical. Its main aim is to protect the borrower, who is considered to be the most vulnerable party. Understanding your rights and the lender's obligations is essential before signing a loan offer. If the pre-2016 regime applies to you, see our article on the legal regime for mortgages before the 2016 reform.
If you have any doubts about the conformity of an offer, problems with your bank or any questions about your mortgage, our lawyers advise you on mortgages. Please do not hesitate to contact us for a personalised analysis of your situation.
Sources
- Consumer Code, in particular articles L.311-1, L.313-1 et seq., L.314-10 et seq., L.341-21 et seq.
- Order no. 2016-351 of 25 March 2016 on consumer credit agreements relating to immovable property for residential use.
- Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to immovable property for residential use.
- Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I).
- Court of Cassation case law cited in the article (e.g. Civ. 1re, 8 July 1997, no. 95-11.500; Civ. 1re, 25 February 2016, no. 14-29.838).
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