Guarantee system

version française

Principles

The philosophy of successive systems focuses on two central concerns:

• Reducing the cost of risk : by spreading the risk of borrower default between the State and each credit institution. This mutualisation takes the form either of a guarantee fund supplied ex ante under the former system, or a provisioning mechanism in the credit institution accounts and commitment by State signature, under the new FGAS.
  
  
• Avoiding dilution of the responsibility of credit institutions for risk management.

The operational principles based on this philosophy lead to three procedures depending on the default level :

• As long as defaults do not reach the reference default rate (defined as a percentage of the initial loan amounts determined in advance and regularly updated), the loss is covered equally by the State and the affiliated credit institutions.
  
  
• Within the default bracket between this threshold and a ceiling, the credit institution bears the entire default burden. This bracket is called the "malus" zone as it is to some extent excessive risk-taking by the credit institution which should have contained the defaults within the limit of the reference rate. This rule results from the incentive mechanism for risk control by credit institutions.
  
  
• The State intervenes as ultimate guarantor for each generation beyond the ceiling referred to above ("systemic" risk).

Nature and definition of FGAS and new FGAS guarantee

The FGAS and new FGAS guarantee is a State guarantee whose principal features are defined by agreement.

In the event of borrower default, its purpose is to compensate any loss, defined as a reduction in the actuarial yield rate expected by the credit institution when granting the loan, taking account, where appropriate, of the portion of ancillary costs legally recoverable from the borrower.

Two conditions must be fulfilled before a loss may be compensated by FGAS: firstly, registration of the loan in FICP (French creditor default file), and secondly, proof from the credit institution of the occurrence of an event described in the agreement (contractual recovery plan, executory court order, collective procedure, amicable or forced sale, debts deemed irrecoverable). However, SGFGAS may indemnify the loss even if FICP registration has not yet been made, for borrowers whose long-term situation is compromised.

The very wide definition of default which may be compensated enables FGAS/new FGAS to intervene not only in standard litigious cases leading to a sale with the usual social consequences, but also before the litigious stage for the bona fide borrower who has, for a particular and temporary reason (job loss, divorce, illness, etc), been unable to meet his repayments.

Such preventive action is designed to enable a borrower in difficulty to achieve his property ownership project under conditions which satisfy all parties.

The guarantee covers the charges in the debit account at the credit institution, i.e. :

• unpaid instalments;
• interest and late payment penalties up to the legal limits;
• legal and procedural costs legally recoverable from the borrower;
• insurance premiums (death, work invalidity, loss of job) remaining due to the credit institution.

The FGAS/new FGAS guarantee does not cover cancellation compensation nor other costs not mentioned (in particular, dispute management costs).

Finally, it is a guarantee which, in principle, may only come into play when all other guarantees have been used.

"Monitoring account" process

To oversee its mission, SGFGAS publishes, at least once a year, monthly-updated "monitoring accounts" which set out the commitments of the credit institutions and the State resulting from the principles described in the preceding chapter. These "monitoring accounts" enable in particular the supervision of trespassing the various default thresholds and ceilings. A monitoring account is prepared per affiliated credit institution (within the meaning of banking law) and per loan generation (one generation corresponds, unless excepted, to all loans disbursed during the same year).

The Company also knows the details of each loan declared except the name of the borrower, and monitors the events occurring during the life of this loan (modifications to initial capital, total premature repayment, payment incidents, default, etc). It also monitors the obligatory annual declaration of outstanding amounts and quarterly declarations of payment incidents.

SGFGAS sends monitoring indicators prepared by its data system to the credit institution.

The monitoring account is shown as follows :

In the event of default, the credit institution may apply for compensation to SGFGAS.

Old FGAS / New FGAS : what has changed / what hasn't changed

The main changes :

1. The principal difference is the absence of contributions paid when the loan is disbursed, i.e., prior to realisation of the risk covered.
2. The balance of monitoring accounts (difference between contributions and default indemnity) constituted, until 2005, the guarantee fund invested in the financial markets and which appeared in the company's balance sheet. This has now been replaced by a commitment under signature which for credit institutions means provisioning up to the preceding rate of contribution to the Fund, and an obligation to bear, in the event of default, 50% of the amount of compensation, the remainder being borne by the State.
3. Recourse to securitization is facilitated by an indemnity guarantee of 100% to the transferee.
4. Payment of compensation to credit institutions will accelerate in all the cases due to standardisation of the simplified declaration system, loan eligibility control being returned a posteriori within a maximum of 3 years from compensation.

What hasn't changed :

Everything else, including :

1. For generations prior to 2007, SGFGAS has been given a specific mandate by the State to compensate default under the same conditions as before, always provided that the financial participation of credit institutions may only now be requested in principle in the default "malus" zone.
2. The SGFGAS Board of Directors continues to fix the financial parameters of the following generation, subject to the two government representatives' right of veto.
3. Keeping the "monitoring accounts": the former contribution rates have become the rates which, applied to the initial amount of the loan, serve as the basis for calculating the commitment to pay a financial contribution at the appropriate time; the same order of magnitude has been retained modulo the translation to the flat rate which depends on the intrinsic average characteristics of loans in each generation: 0.13% as an annual actuarial rate for the State and the credit institution up to a "malus" threshold equal to 0.26%. However its "malus" ceiling is limited to 0.78%, as against 1.14% for the most recent old FGAS generations (still actuarial).

Risk supervision authorities have accordingly always granted a favorable treatment for FGAS guaranteed loans in comparison to non guaranteed mortgage loans. They benefit from a lower capital allocation ratio (risk weighting).

Thus, as of today loans with a mortgage lien have a 35% risk weighting (loans with no mortgage lien, which is often the case in France, have a higher weighting) "old FGAS" loans, as they get a 100% state guarantee cover, benefit from a 0% risk weighting.
For "new FGAS" loans, benefitting from a 50% State guarantee, the risk weighting is now 17.5% (i.e. 50% of the mortgage risk weighting).
The French risk supervision authority (ACPR, Autorité de Contrôle Prudentiel et de Résolution) will monitor on a yearly basis the results of the FGAS scheme and depending on the observed loss ratios, may decide to modify the risk weighting.

More information on risk weighting can be found on the following link to a notice issued by ACPR in 2014:
http://acpr.banque-france.fr/fileadmin/user_upload/acp/Communication/Communication_a_la_profession/201408-notice-modalites-calcul-ratios-prudentiels-cdriv.pdf