A bank loan contract is rarely a smooth ride. Behind the main clauses sometimes lie complex calculation mechanisms, the impact of which on the total cost of credit is often underestimated by the borrower. Anatocism, value dates, lombard year: these technical terms refer to banking practices, some legitimate, some questionable, that can significantly increase the financial burden. Understanding how they work is an essential first step for any private individual or company director wishing to ensure that their commitments are accurate. These practices are at the heart of the lender's remuneration and merit careful analysis.
Anatocism: capitalisation of interest and its conditions
Anatocism, or capitalisation of interest, is a mechanism whereby the interest accrued on a capital is itself incorporated into that capital to produce new interest. In other words, interest in turn generates interest. While this practice is economically powerful, it is strictly regulated by law to protect borrowers from their debt spiralling out of control.
Definition and legal principle
Article 1343-2 of the Civil Code sets out very clear conditions for the validity of anatocism. For the capitalisation of interest to be possible, it must be provided for by an express contractual stipulation or be the result of a court application. Furthermore, and this is the most important condition, it can only relate to interest due for at least one full year. It is therefore not possible, except in specific cases, to capitalise interest on a monthly or quarterly basis. This rule is a matter of public policy, which means that the parties cannot depart from it, even by mutual agreement, in a conventional loan contract.
Bank current account
A notable and traditional exception to this principle concerns the operation of current accounts, which are mainly used by professionals. Case law has long accepted that the capitalisation of debit interest on a current account can take place automatically at each periodical closure, generally quarterly. This derogation is not based on a legal text but on established banking practice, validated by the courts. The historical justification lies in the very nature of the current account, which records reciprocal and intermingled remittances. It is important to emphasise that this exception applies only to a genuine current account contract and not to a simple deposit account that would be in debit.
Value dates: a contested banking practice
Value dating is the practice whereby a bank records transactions on an account on a different date from the one on which they actually take place. This time difference, far from being trivial, has a direct impact on the calculation of interest charges.
Origin and impact on interests
In practical terms, the value date can lead to a credit (a cheque deposit, for example) being recorded one or more days after it is actually deposited, and a debit (a withdrawal, a transfer issued) being recorded one day before it is actually carried out. The result is an artificial increase in the duration or amount of the debit balance on the account. During this lag period, the customer pays agios on sums that, for accounting purposes, should not have been considered as overdrafts. For a long time, this practice was justified by the technical time required to process transactions, particularly for cashing cheques. However, with the dematerialisation and acceleration of financial flows, this justification has become increasingly fragile, often transforming value days into a form of additional and opaque remuneration for the bank.
Legal framework and penalties
Case law has progressively sanctioned this practice when it lacks technical justification. The Court of Cassation ruled that value dates applied without any real reason, particularly for transfers or cash remittances, were illegal. The legislator then intervened to provide a firmer framework for this mechanism. Article L. 133-14 of the French Monetary and Financial Code now requires that the value date of a payment transaction credited to an account may not be later than the business day on which the funds are made available to the bank. For debit transactions, the value date cannot be earlier than the day on which the amount is debited. A borrower who has suffered loss as a result of unjustified value dates may claim repayment of the interest wrongly received, subject to the five-year limitation period.
The Lombardy year: a historic practice now marginalised
For decades, the use of the 360-day "Lombard" or banking year has been an abundant source of litigation in banking law. This calculation convention, although seemingly minor, has a direct effect on the cost of credit.
Historical practice and its condemnation
The Lombard year consists of calculating the interest on a loan by dividing the annual rate by 360 days instead of 365 (or 366 for leap years). Mathematically, this method increases the cost of the loan by around 1.39 %. Originating in the Middle Ages and initially justified by the need to simplify calculations, this practice was deemed misleading for consumers by the Cour de Cassation (French Supreme Court). In a landmark ruling in 1995, it stated that the Total Effective Rate (TEG) should be calculated on the basis of the calendar year. Failure to comply with this rule in the case of loans to consumers or non-professionals resulted in the nullity of the stipulation of contractual interest and its replacement by the legal interest rate, a particularly heavy penalty for lending institutions.
The 'decimal rule' and the end of litigation
Faced with a growing number of disputes, the Cour de cassation made a major about-turn by drastically limiting the scope of this sanction. Firstly, it restricted the ban on the lombard year to loans granted to consumers and non-professionals, validating it for loans to businesses. Secondly, and more importantly, it introduced the "decimal rule". According to this case law, for an erroneous TEG to be penalised, the error must be greater than the first decimal after the decimal point. However, the difference in rates generated by the use of the lombard year is usually less than this threshold. As a result, this rule has made it virtually impossible to challenge loans on this basis, thereby drying up what used to be a rich source of litigation.
Legal issues and remedies for borrowers
These different practices, whether or not they comply with the law, have a direct influence on the overall cost of a loan. The main issue lies in their impact on the calculation of the Annual Percentage Rate (APR), which must reflect all the costs associated with the loan.
Impact on TEG/TAEG
A non-conforming anatocism, unjustified value dates or the use of the lombard year in a consumer loan are all factors likely to distort the TEG (or TAEG for consumer credit) indicated in the contract. An inaccurate TEG deprives the borrower of accurate and fair information about the real cost of his commitment. The penalty for a proven error is forfeiture of the right to interest by the lender. In the past, this forfeiture could be total, but today it is proportionate to the damage suffered by the borrower, which leaves the judge a margin of discretion. For a full analysis of these mechanisms, see our article on calculation of the TEG/TAEG and associated penalties.
Time limits and conditions for taking legal action
Legal action to challenge an incorrect TEG is subject to a limitation period of five years. The complexity lies in determining the starting point of this period. For a professional, it runs from the date of the agreement or document that mentions or should have mentioned the rate. For a consumer, the period only runs from the day on which he knew or should have known of the error. This date may be when the contract is signed if the error is apparent from a simple reading, but it may be much later if the anomaly is only revealed by an in-depth financial analysis. Taking such action requires a rigorous mathematical demonstration of the error, which more often than not requires technical and legal expertise.
These complex mechanisms illustrate the need for increased vigilance when taking out a loan. A seemingly insignificant clause or an unexplained calculation practice can conceal significant additional costs. For a detailed analysis of your loan agreement and to defend your rights in the event of irregularities, the assistance of a lawyer with expertise in banking law is essential. If you are faced with such a situation, don't hesitate to contact us for personalised support.
Sources
- Civil Code
- Consumer Code
- Monetary and Financial Code
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