Errors made by the consumer credit organisation are often punished by forfeiture of the right to contractual interest. Contractual interest is then replaced by interest calculated at the legal rate.
The problem is that the increase in key ECB interest rates has led to a rise in the legal rate. It is now often the case that the legal rate is higher than the contractual rate. Forfeiting the right to contractual interest allows the bank to benefit from a more advantageous rate.
This renders the sanction completely ineffective.
This led the Court of Justice of the European Union to intervene and lay down new rules.
The principle of entitlement to statutory interest on consumer credit
In principle, a lender who has lost the right to contractual interest can claim statutory interest. According to Article 1231-7 paragraph 1 of the Civil Code :
Article L.313-3 paragraph 1 of the Monetary and Financial Code adds :
"In the event of a pecuniary judgement, the legal interest rate is increased by five points at the end of a period of two months from the date on which the judgement becomes enforceable, even if it is provisional. This effect is attached ipso jure to the judgment of auction on seizure of property, four months after it is handed down.
The legal rate, once increased, can exceed 9 points. Forfeiture of the right to contractual interest thus enabled credit institutions to take advantage of a very advantageous rate. The mechanism, initially intended as a penalty, was deprived of interest.
The problem was also part of a wider context of consumer protection. The failure to impose penalties deprived consumers of essential protection.
Consumer protection is a central concern of European Union law.
Consumer protection
The adoption of Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers and repealing Council Directive 87/102/EEC paved the way for greater respect for the public policy nature of consumer law.
Article 23 of the Directive states that the Member States shall choose the system of penalties applicable in the event of infringement of the national rules adopted pursuant to the Directive.
In addition, they take all necessary measures to ensure that they are applied, and that penalties are effective, proportionate and dissuasive.
From now on, the principle of entitlement to statutory interest could become an exception for consumer loans.
Statutory interest limited by consumer loans
Under the influence of the European Union, legal interest is sometimes limited by the fact that it is classified as a consumer loan.
According to the Court of Justice of the European Communities in the famous Simmenthal ruling of 9 March 1978the national judge is subject to certain obligations.
It must ensure that Community standards are given full effect, if necessary by disapplying any national legislation to the contrary.
On the basis of Article 23 of Directive 2008/48, the Court of Justice of the European Union handed down an important ruling on 27 March 2014.
In LCL / Fesih Kalhan stop, the CJEU ruled that Article 23 of Directive 2008/48 precludes the application of interest at the statutory rate if :
"the amounts likely to be received by the lender as a result of the application of the penalty of forfeiture of the right to interest are not significantly lower than those from which the lender could benefit if it had complied with its obligations.
And the Court of Justice added,
If the sanction of forfeiture of the right to interest were to be weakened, or even purely and simply annihilated, by reason of the fact that the application of interest at the increased legal rate is likely to compensate for the effects of such a sanction, it would necessarily follow that such a sanction would not be a real deterrent" and that it is for the court seised "to compare, in the circumstances of the case before it, the amounts which the lender would have received as remuneration for the loan in the event that he had fulfilled his obligation with those which he would receive pursuant to the sanction of forfeiture of the right to interest", in the circumstances of the case before it, the amounts that the lender would have received as remuneration for the loan if he had complied with his obligation with those that he would receive under the penalty for breach of that same obligation".
The Court of Justice of the European Union has ruled that a lender who has lost the right to interest can no longer avoid the penalty by taking advantage of the statutory interest rate.
Interest on a consumer loan is therefore no longer payable to the borrower as a matter of principle.
On 28 February 2024, the Marseille judicial court applied this case law in favour of our customers.
Once the judgment has been handed down, if you have any questions about the fate of the interest debt, click here.
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