Saturday, April 14, 2012

Consumer credit: assessment of the impacts of the law Lagarde

Within five years, from October 2006 to September 2011, the Bank of France were nearly 1,022,273 records filed with the Debt Commissions, an average of nearly 204,455 cases a year. Trailing 12 months, from October 2010 to September 2011, the caseload is up 6.4%.

Hence the issue of law reform Lagarde on mortgage lending, the consumer credit and the fight against overindebtedness.

But the establishment of this regulatory mechanism has not been neutral for companies to consumer credit.

 The latest provisions came into force on 1 May 2011, but there are still many difficulties in implementation, as well as financial and operational impacts significant. Lagarde law is also regularly quoted in the analysis of the restructuring of Laser Cofinoga, announced in January 2012 ...

Back on the main measures of the law Lagarde

The law Lagarde been 14 decrees and four arrested. It has been established on the following schedule:

In summary, the major reform measures are aimed, firstly, to reinforce the information from the borrower before engaging in a consumer credit (advertising framework, visibility on the expiry of a revolving credit ...), and secondly, to increase the obligations of the lender in terms of credit check (on subscription but also during the life of a loan).

Moreover, a reduction of the gap between the wear rate of a personal loan and the revolving credit has been established. This gap will be reduced gradually until 2013.

Finally, specific measures are planned for borrowers facing financial difficulties (with payment) or find themselves in serious debt. They are realized by including an early exit from the FCC FILING FICP, a reduction of debt plan, and an acceptance of the owners in serious debt by the relevant committees, or by measures to improve relations between banks and individuals financial difficulties (eg maintaining the deposit account ...).

The table below details the content of the law:

Note that the implementation of the file remains locked positive to date. This topic is addressed in the committee "positive file", created in July 2010. Nevertheless, the proposals made by this committee have so far been very criticized by the CNIL and ASF (cost of the solution, data protection, questioning the real need for this file).

What implications for institutions?

First, lenders may have difficulty in applying certain statutory requirements Lagarde. For example, credit institutions have still not possible to know the number of loans that a borrower has already contracted. Indeed, as part of appropriations totaling less than EUR 3000, the required documents relate only to income of the borrower and not the current charges. We can also quote triennial verification of the creditworthiness of the borrower to the lender imposed. Some organizations send a point when the client budget, but no response from the lender believes that his position has not changed. Therefore, there is no requirement to indicate the client financial failure compromising its ability to repay. Today, no means are provided by the device to meet this need.

In addition, as part of the distribution circuit along (right at the point of sale), the law imposes a training of employees of the sign by credit institutions, allowing them to master the product sold and awareness the client at risk of debt distress. However, channel partners are often reluctant to show and partnership relations are thereby more difficult.

Then a real impact on GNP are recognized and, more broadly, the business model. Indeed, we note a complex sales process, especially when compiling an application, which lengthens the time of granting credit. The result is now an increased number of incomplete records returned by borrowers and a lengthening of the process of investigating the case. In addition, for retailers revolving credit, we see a significant reduction in the margin realized, attributable particularly by limiting the duration, the amount and the minimum share capital to be repaid from the first.

Moreover, the law has forced lenders to adjust their business models. This issue primarily impacts the pure players of consumer credit, including revolving credit distribution could represent up to 80% of their annual GNP. For example Cofidis plans to achieve a balanced proportion (50%) between the distributions of revolving credit that is redeemable in 2013, while this type of credit represented 80% of assets in 2010. Other institutions have rethought some revolving credit products, and have referred to a personal credit (eg loan Myself Financo). Credit Agricole Consumer Finance has meanwhile decided to work more intensively with networks that are the Regional Banks and LCL (35 of 39 regional banks entrust their funds to renewable CACF, and their 25 personal loans), to treat his customer relationship throughout the credit life and develop more partnerships with Internet retailers (in the image of the agreement with Pixmania in October 2010). A term, revolving credit, which was the most profitable product, will be more distributed as a temporary solution cash for all transactions under 3000 euros and personal credit as a solution as part of a defined project.

In conclusion, consumer credit, which is already highly regulated, has had to adapt to the new system imposed by law Lagarde. The measures imposed by law on lenders demanded substantial financial investment, sometimes for an inconclusive result on the indebtedness of households, as the main reasons for these situations are related to accidents of life (unemployment, divorce, death ...). A finding difficult in a context where the industry is already challenged by stagnant consumer spending.