Mortgage Lending: New conditions for agreements between banks and insurance companies relating to borrower risk insurance |
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Date: 01/2011
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Maxim Boulba, Leonid Zubarev
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On 21 December 2010, new anti-monopoly requirements that apply to agreements between banks and insurance companies came into force and will be valid until 19 May 2013. As a result, banks and insurance companies can now co-operate within the framework of mortgage lending, and the position of insurance companies has been strengthened when dealing with banks on the borrower risk insurance market.
As we reported in a CMS Alert released in August 2010, the Russian Federal Anti-monopoly Service (FAS) at the time had launched an initiative to expand the range of permissible agreements between banks and insurance companies within the context of mortgage lending. A draft Decree that took into account the practical application of competition law and sought to improve the position of those involved in the process of issuing mortgage loans and insuring borrower risk was prepared.
Pursuant to the FAS initiative, in late 2010, the Russian Government adopted new rules in relation to agreements permitted between banks and insurance companies. From a practical point of view, the rules contain three significant innovations:
1) an exception to the general rule that a bank may not require a borrower to conclude an insurance agreement for a term exceeding one year has been introduced in relation to mortgage lending, thus allowing banks and insurance companies to enter into co-operation agreements regarding borrower risk insurance for the entire period of the mortgage loan;
2) a maximum time limit and an obligation to narrow the range of required information and documents have been set for banks to conduct their screening on insurance undertakings before signing a co-operation agreement regarding borrower risk insurance; and
3) certain specified contractual terms and conditions in agreements between banks and insurance companies have been ruled impermissible.
The possibility of co-operation between banks and insurance companies within the framework of mortgage loans may be viewed as the most important innovation; however, the other two changes (see 2) and 3) above) are not to be ignored, especially since they apply to lending in general, not just to mortgages.
Possibility to insure borrower risk for the entire period of a mortgage loan
As a general rule, a bank may not require a borrower to conclude an insurance agreement for a term exceeding one year; however the Decree introduces an exception to this rule in relation to mortgage lending. Therefore, from now on, banks and insurance companies can enter into co-operation agreements in order to provide the opportunity to insure a borrower’s risks for the entire period of the mortgage loan.
The exception does not apply to insurance against the non- or improper performance of the loan-repayment obligation by the borrower. An insurance contract regarding other borrower risks will be deemed valid, provided that it stipulates that the insurance premium may be paid in instalments, with a regular insurance premium being paid at least once a year.
Limitation of banks’ powers to conduct screening on insurance undertakings
Before entering into co-operation with an insurance company, banks usually check whether an insurance undertaking complies with the particular requirements set individually by each bank.
Previously in practice, banks were taking a long time to conduct a screening, and the information they required from the insurance companies varied, so it was necessary to adopt a law to restrict any possible abuse. Consequently, the new anti-monopoly rules require a bank:
— to establish an “exhaustive” list of information and documents that an insurance undertaking must submit to a credit institution to conduct the screening; and
— to set a limit of 60 working days to carry out a check and to send a substantiated response to an insurance undertaking within 10 days of the date of taking a decision on whether the insurance undertaking meets the specified requirements.
List of impermissible terms and conditions in agreements between banks and insurance companies expanded
The list of unacceptable terms and conditions in agreements between credit institutions and insurance undertakings has also been revised and expanded within the context of borrower risk insurance.
First of all, banks can no longer prevent insurance companies from co-operating with other credit institutions, meaning that the previously unjustified restrictions on insurance companies’ using various banks as channels to sell insurance products have been eliminated.
In addition, some contractual terms and conditions were deemed unacceptable, as they may restrict competition in the banking market. Consequently, a bank can no longer require an insurance undertaking to:
— place cash in deposits and securities of the bank;
— maintain specific account balances with the bank; and/or
— transfer a specific amount of money via current accounts with the bank.
In the case of a violation of these rules, the anti-monopoly authority can deem the respective agreement between the bank and insurance company to be in contravention of the Russian anti-monopoly legislation and can terminate the agreement partially or in full. Those responsible for the violation can also be prosecuted in accordance with the applicable laws.
Conclusion
The new conditions in relation to agreements between credit institutions and insurance undertakings greatly expand the opportunities for these financial institutions to co-operate in insuring borrower risk.
Specifically, the conditions improve the position of insurance undertakings, who were traditionally less protected and “dependent” on banks when concluding such agreements. Banks can no longer assert pressure on insurance companies by complicating or delaying screening procedures before entering into contracts, or by imposing additional and disadvantageous conditions for insurance undertakings.
If you have any questions on the matters referred to in this Alert, please do not hesitate to contact CMS partners Leonid Zubarev and Maxim Boulba or your regular contact at CMS.
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