The loan contract is a common act in the lives of individuals and businesses, but its remuneration is strictly regulated. Among the safeguards established by law, the prohibition on usurious lending is one of the oldest and most important. It is an essential protection for borrowers, designed to protect them from excessive interest rates. However, defining what constitutes a usurious rate, understanding how it is calculated and knowing the penalties attached to it is a technical exercise. The usury regime is in fact one of the fundamental limits to the lender's remuneration and ignoring it can have serious consequences, both for the borrower and for the credit institution.
The notion of usurious loan in French law
A loan is considered usurious if its interest rate exceeds a maximum threshold set by law, known as the "usury rate". More specifically, article L. 314-6 of the French Consumer Code defines a usurious loan as any contractual loan granted at a Total Effective Rate (TEG) which, at the time it is concluded, exceeds by more than a third the average effective rate charged during the previous quarter by credit institutions for transactions of the same nature involving similar risks.
This prohibition has its roots in a long historical and moral tradition, which originally prohibited interest-bearing loans outright, on the grounds that they were tantamount to the exploitation of poverty. Although the remuneration of capital is now a lawful and economically necessary practice, the legislator has maintained this limit to protect the most vulnerable borrowers against abusive credit conditions. The classification of a rate as usurious therefore does not depend on a subjective assessment of whether it is 'too high', but on a mathematical comparison with an official benchmark.
Determining the usury rate: a strict regulatory framework
Setting the usury rate is not left to the discretion of the parties or the judge. It follows a regulated procedure, published quarterly in the Journal Officiel. The Banque de France is responsible for calculating the average effective rates (TEM) used as a basis, by carrying out a survey of credit institutions on the rates they have actually charged.
For each category of loan, the usury threshold is then determined by increasing the TEM by its third. For example, if the APR for a loan category is 3 %, the usury rate for the following quarter will be 3 % + (1/3 * 3 %) = 4 %. Any loan in this category with an APR higher than 4 % will be considered usurious. To check that a loan is compliant, it is the Total Effective Rate (TEG) of the loan that must be compared with the usury threshold. The method of calculation of the TEG is therefore a key issue, as it must take into account all the costs involved in granting credit. For an in-depth analysis of the rules and components of the TEG, as well as its full scope of application, see our detailed guide.
Calculating the usury rate
The calculation method is based on two pillars: the collection of average effective rates (METRs) and the segmentation of transactions into homogeneous categories. The Banque de France calculates APRs based on a simple arithmetic average of the APRs recorded for loans granted during the previous quarter. A ministerial order, issued after consultation with the Financial Sector Consultative Committee (CCSF), then defines the different categories of transaction in detail. This segmentation is fundamental, as it allows loans with similar characteristics and levels of risk to be compared, thereby ensuring that the thresholds are appropriate.
Loan categories concerned
The regulations distinguish between several categories of loans in order to set usury thresholds tailored to each market. The main distinctions are between loans granted to individuals and those granted to professionals, but also according to the nature of the loan. There are categories for :
- Home loans (fixed-rate loans, variable-rate loans, bridging loans).
- Consumer credit, subdivided by amount (for example, less than or equal to €3,000, between €3,000 and €6,000, etc.).
- Account overdrafts for individuals, which are treated in a special way.
- Loans granted to certain non-profit-making legal entities.
This detailed classification ensures that consumer credit, which by its nature is riskier and therefore more expensive, is not compared with a home loan, which generally comes with solid guarantees.
The scope of the prohibition on usury
The scope of usury legislation has changed significantly. Initially very broad, it has been refocused to reconcile the protection of borrowers with the financing needs of the economy.
Persons and entities covered by the law on usury
Historically, the ban on usury applied to all loans, whether granted to individuals or businesses. However, Act no. 2003-721 of 1 August 2003 on economic initiative marked a major turning point. Since this reform, protection against usury is mainly reserved for borrowers considered to be in a weak position.
The following are currently protected: natural persons who take out a loan for non-business purposes, legal entities that do not have an industrial, commercial, craft, agricultural or professional activity (such as associations or co-owners' associations), and sole traders in the case of overdrafts.
On the other hand, loans granted to natural persons for their business needs (except overdrafts) or to legal persons engaged in an economic activity (commercial companies, craftsmen, etc.) are excluded from the scope of the prohibition on usury. The legislator felt that these people, who are considered to be more sophisticated, did not need this specific protection and that removing it would promote their access to credit.
Credits and exclusions
Virtually all credit transactions are covered by usury legislation, as long as they are granted to protected persons. This includes traditional repayable loans, revolving credit, overdrafts and instalment sales.
However, certain specific transactions are not covered by this system. The most notable of these is the leasing contract. Because of its hybrid legal nature, combining a lease and a promise to sell, case law traditionally considers that it is not subject to the prohibition on usury, even though the rent includes a financial component that may be high.
Application to international contracts
The question arises as to whether French usury law applies to a loan taken out with a foreign institution. Case law qualifies the prohibition of usury as a mandatory rule. In practical terms, this means that it is considered to be a mandatory rule, essential to French social and economic organisation. As a result, it must be complied with for any loan that is sufficiently connected with France, even if the contract designates a foreign law as applicable. A foreign lender cannot therefore disregard this rule if it grants credit to a consumer in France.
Penalties for loansharking: a deterrent system
The legislator has provided for an arsenal of sanctions to punish loan sharking, combining civil measures aimed at restoring the balance of the contract and criminal sanctions designed to punish the offending lender. For a more detailed exploration of sanctions and recent regulatory developments, please consult our dedicated article.
Civil penalties: imputation and restitution
In civil law, the penalties are set out in the Consumer Code and the Monetary and Financial Code. When a loan is deemed usurious, the contract is not cancelled in its entirety. The main sanction is that all excessive collections, i.e. interest paid in excess of the capital and interest at the legal rate, must be deducted ipso jure from the normal interest still due. If this interest has already been paid, it will be deducted from the principal amount of the debt.
If the loan has already been repaid in full, including principal and interest, the lender must repay the borrower the sums wrongly received. These sums will themselves bear interest at the legal rate from the day they are paid by the borrower.
Criminal penalties: imprisonment and fine
It is an offence to grant usurious loans. Article L. 341-50 of the French Consumer Code provides for a penalty of up to two years' imprisonment and a €300,000 fine. This penalty applies not only to the lender, but also to any person who has assisted, directly or indirectly, in obtaining such a loan. An intermediary or adviser could therefore be held liable.
Additional penalties may also be imposed by the court, such as closure of the business for up to five years, or a ban on carrying on a professional or commercial activity. These criminal penalties underline the seriousness that the legislator attaches to this practice.
Elements of the offence and statute of limitations
For the offence of usury to be established, two elements must be present. Firstly, the material element, which corresponds to the fact of having granted a loan at a rate exceeding the usury threshold. Secondly, the intentional element, which presupposes that the lender acted with full knowledge of the facts. Mere negligence is not enough, but the fact that the lender is a credit professional creates a strong presumption that the borrower knew that the interest rate was usurious.
The starting point of the statute of limitations for public prosecution is a notable particularity. The offence of usury is considered to be a continuous offence. The three-year statute of limitations therefore only begins to run from the date on which the lender last received interest or capital. This allows the borrower to take action throughout the loan repayment period.
Determining a usurious rate and applying the corresponding penalties requires precise legal and financial knowledge. The stakes are high, whether you are contesting an excessive rate or ensuring that your lending practices are compliant. If you are faced with a loan agreement where the cost seems excessive, the assistance of a lawyer is essential to assess the situation, calculate the APR accurately and, if necessary, take appropriate action. For an analysis of your situation and advice on the strategy to adopt, contact our firm.
Sources
- Consumer Code (in particular articles L. 314-6 to L. 314-9 and L. 341-50 to L. 341-51)
- Monetary and Financial Code (in particular articles L. 313-5 to L. 313-5-2)
- Ministerial orders relating to the determination of loan categories for the calculation of the usury rate
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