From September 1, 2020, in case of early repayment of the loan, banks will be obliged to return part of the paid insurance premium to borrowers. Review by Elena Kazantseva, a lawyer of the Consulting Group TEAM.
What kind of insurance can be waived?
The borrower under the consumer credit agreement has the right to refuse any insurance:
- with a full refund of the insurance premium in case of refusal within 14 days from the date of conclusion of the insurance contract,
- during the entire term of the insurance contract with a refund of part of the insurance premium in proportion to the remaining term of the insurance.
One of the main innovations is that now the bank is obliged, based on the results of the initial screening, to decide whether it is ready to provide a loan to the borrower, regardless of whether the property or his life will be insured. The bank is obliged to offer a potential borrower credit terms with and without insurance, and the choice is already up to the consumer.
What happens if the borrower refuses insurance
If the loan agreement provided for the obligation to conclude an insurance agreement, then in case of refusal of insurance or failure to fulfill the obligation to independently insure within a specified period, the credit provider has the right to increase the interest rate on the loan, if such a right was provided for by the loan agreement.
At the same time, the interest rate on a consumer loan can be increased not only to the alternative without insurance announced at the conclusion of the contract, but also up to the interest rate on similar loans, which is valid at the time of the Bank's decision to increase the interest rate due to non-fulfillment of the insurance obligation.
Thus, the legislator, on the one hand, protected consumers from imposing insurance under the threat of refusal to provide a loan. On the other hand, a borrower who has refused from an already concluded insurance contract will not fool the bank by taking a loan at a low interest rate and returning the insurance premium. On the contrary, he runs the risk of being a debtor with a loan rate higher than in the initially voiced “uninsured” version of the loan terms.
However, the increase in the interest rate is regulated by law. This means that there is a limit for the deterioration of credit conditions, and they are dictated by the market – credit granting to all consumers, and not by the terms of a specific loan agreement. Therefore, it will not be possible to keep the borrower in insurance by including in the agreement conditions for raising the rate above market values, covering up the responsibility for refusing insurance.
Since now the bank will not be able to protect itself from insufficiently solvent borrowers by a limited offer to issue them a loan only with insurance, the number of refusals in loans at the stage of applying to the bank and assessing the borrower's income and documents will increase. The innovations are likely to increase interest rates on loans without collateral or surety, and possibly reduce the issuance of unsecured loans.
In addition, the right of the borrower to choose another policyholder instead of the one offered by the Bank, will increase interest in third-party insurance. Perhaps there will be offers with very cheap insurance from small insurance companies.
At the same time, do not forget that loans, not insurance, is a priority source of earnings for a bank. Abusive practice of interest rate increase can lead to lower demand for consumer loans. Therefore, market rules will not allow banks to miss out on borrowers with a higher loan fee than the price of insurance.
There are two different insurance models currently in use:
- inclusion in the insurance program as an insured person and
- conclusion of an insurance contract on your own behalf.
In the first case, a bank and a insurance company already have an insurance contract, the insured persons of which are borrowers included in the list. A bank charges a fee for inclusion in the program, which is essentially an insurance premium payable by a bank (the policyholder under the contract) in favor of the insurer (insurance organization).
The borrower, on the other hand, has an insurance legal relationship with a bank, not an insurance organization, therefore, if the borrower refuses insurance, the borrower formally refuses to be included in the list of insured persons. Accordingly, the fee for inclusion in the insurance program cannot be collected directly from the insurer, because it was received by it in turn from the bank. Therefore, the borrower who has paid the insurance premium to the bank requires funds from the bank.
In the second case, when concluding an insurance contract on his own behalf, the borrower is the policyholder himself and transfers the insurance premium to the insurer on his own behalf, indicating himself as the insured person. In this case, the bank does not act as an intermediary and the obligation to return the insurance premium lies with the insurer.
In the considered amendments to the federal laws "On consumer credit (loan)" N 353-FZ of 12.21.2013 and "On mortgage (mortgage of real estate)" N 102-FZ of 07.16.1998, the obligation to return the insurance premium is regulated, both otherwise, therefore, the premium will be returned by the organization in favor of which the consumer transferred it.
Banks will not be able to make money on insurance
According to the new amendments, in the event of early repayment of the loan and in the absence of an insured event, both the bank that entered into an insurance contract in the interests of the borrower and (with a different model of legal relationship) the insurer with whom the borrower himself entered into an insurance contract must return to the borrower a part of the insurance premium proportionally covering remaining insurance period.
In fact, the insurer (or bank) is deprived of the opportunity to earn on insurance for a period in which neither the bank nor the borrower has any interest in insurance in relation to the return of funds. That is, the rule of proportional return does not allow earning on unjust enrichment for the period after the cancellation of the contract, which could have previously been recovered in court, citing the inequality of the counter provision and the fact that only part of the insurance premium is equivalent to the services rendered.
Can I opt out of insurance where the amount of the insurance premium depends on the amount of the remaining principal debt?
First of all, for contracts in which the amount of the insurance premium depends on the amount of the loan, the specified linkage is only a procedure for determining the price of the insurance contract, which does not make insurance mandatory. Therefore, such insurance can also be waived.
Secondly, if the insurance premium was paid for an insurance period that has already expired, then its return is not provided for by law. When concluding an insurance contract with a regressive insurance premium, the calculation of the insurance premium is proportional to the loan amount. In this case, the insurer reasonably charges the insurance premium, the higher the amount that it covers in the event of an insured event. Accordingly, the refund of the insurance premium will be made after deducting the insurance fee for the past period, although it cost more than in the period when the cost of insurance decreased.
It is important not to confuse the insurance premium, which is dependent on the price of the loan, with the manipulation of conditions, when the insurer, in order to justify the disproportionate return of the insurance premium, without reason claims that the first months are more expensive, and then there is a discount. The payment for insurance must have a direct connection with the services that are provided to the consumer, namely: with insurance against certain risks, for a certain period and for an agreed amount. Therefore, in the event that the terms of the insurance contract provide for payment terms that are not comparable to the insurance activity itself, such conditions cannot affect the calculation of the insurance premium and its return.
How will the bank know that the liabilities for the respective loan are insured?
The relationship with the loan follows from the terms of the insurance contract itself, which determine the beneficiary under the contract. If it is a bank, then the amount of the outstanding loan will be transferred to it.
The law provides for the right to refuse absolutely any voluntary insurance contract and, as mentioned earlier, the possibility of refusing any insurance is provided by the bank's obligation to provide the borrower with credit conditions without insurance.
The law consolidated the relationship that had already been established regarding the return of part of the insurance premium in case of early repayment of the loan
The law protects the interests of banks as much as possible, but unambiguously gives the consumer the right to choose between a loan and a loan with insurance, depriving the bank of the opportunity to offer only the second option. Accordingly, the borrower can get a loan without concluding an insurance contract at all, since the bank does not have the right to refuse it due to the lack of insurance and is obliged to offer credit terms.
The bank benefits from the insured borrower, not only because he pays the insurance premium, but also because the bank's interests in the return of funds are secured by the right to receive insurance payments. Therefore, banks will continue to offer the conclusion of insurance contracts with a lower interest on the loan in case of its conclusion and non-termination during the entire period of the contract.
It was also unprofitable to refuse insurance after the conclusion of the contract before the changes in question, because the banks reserved the right to increase the interest rate. Now this right is limited - you can increase the interest to the rate that was in effect at the time of the conclusion of the loan agreement without insurance, or in effect at the time of such an increase. Therefore, after the entry into force of the changes, the consequences of canceling insurance will become clearer and fairer.
The blow to the banks can be stated only in terms of the return of the unused insurance premium in case of early repayment of the loan, but such a point practice already existed in the case of the initiative by the borrower himself. In this case, we see another example of a direct indication in the law of a legal norm, which was previously formed by judicial practice and was derived from the rules on termination of the contract for the provision of paid services and norms on unjust enrichment.
The review was compiled by Elena Kazantseva, a lawyer at the Consulting group TEAM.
If you have any questions about insurance refund in case of early repayment of the loan, we will be happy to answer them. Write to us firstname.lastname@example.org