GREEN PAPER ON MORTGAGE CREDIT IN THE EU

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1 GREEN PAPER ON MORTGAGE CREDIT IN THE EU Crédit Agricole is among the top three largest banking groups in Europe in terms of total assets and total equity (source: The Banker, July 2005). The Crédit Agricole Group consists of : 41 Regional Banks, which are ultimately owned by 5.7 million members of local credit cooperatives ; Crédit Agricole SA, which is a listed company and acts as the central body of the Group and the holding company of national and international subsidiaries ; A full array of companies specialised in banking and insurance business lines, including LCL (formerly Crédit Lyonnais), Sofinco (consumer finance), Predica (life insurance), Pacifica (non-life insurance), Crédit Agricole Asset Management, Crédit Agricole Investor Services (custody), and Calyon (corporate and investment banking) ; Fédération Nationale du Credit Agricole (FNCA), which acts as a representative body of Crédit Agricole Regional Banks. In France, with over 20 million clients, Crédit Agricole is the leading bank in terms of deposit taking and lending, and the second largest life insurance company. It has over 30% of the home loans market. In addition, the Group has built a genuinely pan-european business out of its main subsidiaries, mainly in consumer finance, asset management and private banking, and a network of strategic alliances and partnerships with other major European banks. In corporate and investment banking, Crédit Agricole is active in 60 countries through Calyon, its wholesale banking arm. The Crédit Agricole Group (hereinafter CA ) welcomes the consultative approach taken by the Commission in assessing the merits of Commission intervention in the mortgage credit market. A CA expert took part in the work conducted by the Forum group and CA is happy to continue contributing to the various studies and assessments, particularly in the fields of refinancing and securitisation.

2 General comments on the approach Scope of integration We are broadly in favour of the greatest possible integration of the banking and financial markets. As far as lending is concerned, we believe that integration should be based on the nature of the financing requirement regardless of the type of collateral provided, which is a secondary issue. In France at least, as described at the end of this memorandum, a large if not dominant proportion of all home loans are not secured by a mortgage over the property but by a guarantee provided by a specialised guarantee organisation. This has benefits for both borrowers and lenders. It would be a pity, therefore, to restrict the initiatives proposed by the Commission to the mortgage credit market alone. Cost/benefit analysis As regards the costs and benefits of greater integration, we suggest that studies should not be limited to the one conducted by London Economics, which does not give a totally convincing insight into the potential benefits of greater integration in the European mortgage credit markets. As the Commission has pointed out, these markets are highly complex and influenced by many factors, particularly sociological and cultural, which the London Economics study was not really able to take into account. The extrapolations drawn from the UK market need analysing in greater depth, especially as regards consumer behaviour. We also need a better insight into the risks arising from a substantial increase in household indebtedness given the social cost of over-indebtedness and the effects of a market that works on a speculative basis. Basic principles One form of integration is the development of cross-border lending. CA contributes by providing financing for non-residents and through its various offices involved in cross-border deals. We are very much in favour of introducing measures that would facilitate this, provided it does not distort the competition nor lead to disproportionate costs. We believe the best way forward is full harmonisation of regulations on key issues. This would reduce competitive distortions and provide a stable environment that would foster consumer confidence and therefore encourage business development. In our view, these key issues include advertising, information and advice (and particularly a definition of the APR), contract acceptance times and terms, and early repayment terms. As far as applicable law is concerned (paragraph 31 of the Green Paper), we believe that, provided there is full harmonisation on the key issues, the parties to a loan contract should be able to choose between the law applicable in the borrower s home country and the law of the country where the property is situated. This solution would reconcile commercial imperatives with consumer protection concerns, without putting a brake on cross-border transactions. 2

3 In order to minimise the impact of harmonisation on production and distribution costs, we suggest that regulations are based on two fundamental principles. The first is to limit specific regulations. For example, costs could be avoided if European law was the same regardless of selling method (e.g. face to face, distance selling). The second is to ensure a degree of inter-operability by borrowing aspects from the consumer credit process, which implies at the very least common definitions of the total cost of credit and the APR. Consumer protection We completely share the view that borrowers should be given sufficient time to compare offers and choose the most competitive. Under French law, a loan offer is valid for one month. Borrowers cannot accept a loan for ten days after receiving the offer (reflection period). This mechanism provides better protection than the code of conduct, as the comparison is made on the basis of firm offers valid for one month and not on simulations that are not binding on the bank. However, the ten-day reflection period, which to our knowledge is specific to France, leads to heavy administrative costs. It also delays the whole process, which can have repercussions on property chains and can cause problems for the borrower. A retraction clause would protect the borrower just as well. As far as early repayment is concerned (paragraphs 20 on of the Green Paper), we believe it preferable to let competition take its course in this field. Capping the early repayment charge by law would artificially restrict the product offering. As regards advice (paragraphs 17 and 18 of the Green Paper), we freely acknowledge that it is the bank s responsibility to provide borrowers with full information on the terms of the financing proposal, including where applicable the risks and advantages/disadvantages, so that the borrower can take an informed decision. But it is equally important for borrowers to provide a clear and comprehensive view of their position to the credit institution. Furthermore, it would be unreasonable to expect the bank to take any responsibility for the borrower s ultimate choice of financing. We therefore believe that the law should confine itself to listing the standard information to be given to the borrower, by a means such as the loan offer itself. By contrast, preliminary discussions about financing needs and solutions between the customer or future customer and the bank do not lend themselves to standardisation. 3

4 Guarantees and limitation of the Green Paper to mortgage credit As far as guarantees are concerned, first of all we support the measures concerning mortgages proposed in part IV of the Green Paper, and we are in favour of harmonisation in this field. It is important that any risk mitigation can be measured accurately and varies little from one country to another. Special attention should be paid to the reliability of land registers, ease of access to them, and forced sale procedures. However, mortgage loans only form part of the overall home loans market and we suggest that the regulations should also include loans guaranteed by specialised guarantee companies, which would not only put them on a level playing field with mortgage loans but should also encourage market integration. In many cases, a guarantee provides an alternative to a mortgage, which is advantageous to the borrower. In France, it is substantially less expensive than a mortgage and encourages voluntary settlement with the borrower in the event of default. This type of guarantee is also much appreciated by the banks as it provides them with a second opinion on the credit risk. The guarantee companies assess a borrower s creditworthiness either using their own scoring system or on the information provided by the bank. The guarantee system also allows the banks to outsource all or part of the recovery process in the event of default and encourages the development of interbank platforms in this field. As indicated in the Appendix, this type of financing is very common in France. The guarantees are provided by two types of organisation: mutual guarantee companies or insurance companies. It is important to note that there are several competitors in the French market, sometimes within the same banking network. Drawing on experience in the French market, we believe this type of guarantee could be a prime driver of integration and encourage business development, for example in countries where taking a mortgage exposes both borrower and lender to heavy costs and long delays. The guarantee system, which a priori is more homogeneous in Europe in terms of law and administration than the mortgage system, could also facilitate co-operation between institutions in different countries. We see this as a promising route and suggest that any barriers to the creation of pan-european instruments of this type should be analysed by the Commission at the same time as the barriers to harmonisation of mortgages. 4

5 Appendix Home loan guarantees, an effective mechanism Home loan guarantees are specific to the French market. More than one half of all new loans are now covered by a guarantee. The market share gains made by this mechanism (38% in 2001 and 51% in 2003 in value) reflect its increasing popularity among the mutual banks, and particularly Crédit Agricole. It also overcomes the distrust felt by French people towards mortgages, which they see as a restriction of their ownership. The market is split between players with bank status, such as Crédit Logement, CMH (Crédit Mutuel) and the SOCAMIs (Banques Populaires) and insurance companies such as SACCEF (Caisses d'epargne), CAMCA (Crédit Agricole) and CNP Caution. The main difference between the two is a question of prudential requirements. For those with bank status, there is 100% risk weighting for the guarantees provided and an 8% capital adequacy ratio, compared with 16-18% of premiums or a percentage of claims for insurance companies, which is much more favourable. However, loans guaranteed by a guarantee company with bank status carry a 20% risk weighting for the lending bank against 100% for insurance company guarantees. At the moment, though, capital requirements for banks and insurance companies are not consolidated and it is therefore more favourable for a bank to own a guarantee company with insurance rather than banking status. The biggest player by far is Crédit Logement, with over half of the market. It has gained market share in the past few years. The guarantee works like a credit insurance mechanism for the bank in the event of default. The borrower pays a premium or contribution to the mutual guarantee fund, and the guarantee company pays the bank in the event of default. The borrower therefore becomes liable to the guarantee company for the amount of the debt. The guarantee companies usually seek voluntary settlement or, in the last instance, will obtain a mortgage over the property through the courts, which means that if the borrower does not pay it has the right to foreclose on the property as if it had had a mortgage from the outset. The guarantee covers the borrower of a loan contract but may still remain valid if the loan is transferred to another property. In theory, then, the borrower can sell the property and transfer both loan and guarantee to another property, which is not the case for mortgage loans. In practice, though, the loan is often repaid and the guarantee discharged in favour of a new loan agreement. Lastly, the administrative procedure is much shorter and more straightforward for a guarantee than a mortgage (no need for registration). The total cost of a guarantee is slightly less than that of a mortgage. At Crédit Logement for example, the borrower pays a set-up fee on a stepped basis, plus a contribution to a mutual guarantee fund which averages 1.4% of the loan principal. Of this sum, at least 75%, depending on the technical results of the guarantee portfolio, is reimbursed to the customer when the loan is repaid, whether at or before maturity. Although the initial payment is slightly higher than the cost of a mortgage (about 1.3% for a registered mortgage and 0.7% for a lender s lien), the final cost is lower after reimbursement of the mutual guarantee fund contribution, especially for bigger loans. (Extract from CA Chevreux report on French Banks, Nov. 2005) 5