Controlling interest rates is a major issue in protecting borrowers and businesses against abusive practices. In France, the anti-usury system makes it possible to cap interest rates and to penalise lenders that exceed these limits. These regulations, which are often little-known, deserve our full attention because of their far-reaching practical implications.
What is usury under French law?
Usury is legally defined as charging an interest rate higher than the maximum rate authorised by law. According to Professor Carbonnier, usury is "excessive interest stipulated by the debtor of a capital sum". This offence consists of demanding remuneration that is disproportionate to the credit service provided.
The concept of usury has evolved over a long period of time. In Roman antiquity, the interest rate was already limited to 8.33%. In the Middle Ages, the Christian religion totally prohibited lending at interest, considering that "interest is the wage of time, and time belongs only to God". It was not until the French Revolution that the principle of lending at interest was re-established.
The current regulations originate in law no. 66-1010 of 28 December 1966, which gave a generic definition of the total effective rate (TEG). This legislation was codified mainly in the French Consumer Code, in articles L. 314-6 et seq. The system has undergone a number of changes, notably with Law no. 2003-721 of 1 August 2003 on economic initiative, which partially removed the ceiling on certain rates. For a comprehensive overview of all the rules, including the associated penalties, see our complete file on loansharking.
The scope of wear and tear regulations
Operations subject to regulation
The rules on usury apply to a wide range of credit transactions, going well beyond the simple loan of money governed by article 1905 of the Civil Code.
This includes
- Conventional loans
- Bank advances and overdrafts
- Credit facilities (up to the amount of funds drawn down)
- Discounting
- Factoring
- Assignment of trade receivables
- Delay agreements
- Instalment sales
Article L. 314-6, paragraph 2, of the French Consumer Code states that "credit granted in connection with instalment sales is treated as a conventional loan for the purposes of this text". This provision covers all types of credit sales, except those made free of charge.
Case law gives the courts the power to reclassify disguised credit transactions. As the Court of Cassation has stated on several occasions, regardless of the formal classification used by the parties, the trial judges have the power to restore the agreement to its true nature.
Exceptions to the anti-wear device
Some agreements fall outside the scope of usury regulations, either because of their purpose or because of the borrower's status.
The following are excluded by virtue of their purpose
- Leasing transactions
- Random contracts (loans with random repayment)
- Successive loans (which constitute separate transactions)
- Debt securities issues
In addition, since the Economic Initiative Act of 1 August 2003, supplemented by the Act of 2 August 2005, the rules on usury no longer apply:
- Loans granted to legal entities carrying on an industrial, commercial, craft, agricultural or non-commercial professional activity
- Loans to individuals acting for business purposes
This exclusion is intended to facilitate access to credit, particularly for start-ups or companies in financial difficulty. It is based on the idea that capping rates would act as a brake on access to credit for these economic players.
However, an exception remains for overdrafts. Article L. 313-5-1 of the Consumer Code maintains the interest rate limit for this type of credit, even for professionals, to prevent credit institutions from taking advantage of urgent cash needs.
Application in space
The rules on usury raise specific questions in international law. The general principle is that usury rules apply in domestic law but also in international law if French law governs the contract.
The difficulty lies in the fact that these regulations fall under both criminal and civil law. In criminal matters, under article 113-2 of the Criminal Code, French law applies where one of the acts constituting the offence took place on French territory. For civil matters, it is the law of autonomy that applies, subject to the rules of the Rome I regulation on consumer contracts.
The question of international public policy may also arise. Some authors consider that the sanction of excessive remuneration could constitute a rule of French international public policy, capable of setting aside the competent foreign law that would contravene our concept of usury.
Calculating the usurious rate
The principle of the Total Effective Rate (TEG)
The overall effective rate is the central tool for detecting usury. Unlike the nominal rate, it takes account not only of interest but also of all charges, commissions and remuneration relating to the credit transaction.
According to article L. 314-6 of the French Consumer Code, a loan is usurious when the TEG exceeds by more than one third the average effective rate charged by credit institutions during the previous quarter for transactions of the same nature involving similar risks.
The Banque de France conducts a quarterly survey to determine these average rates. The Minister for the Economy then publishes the corresponding usury thresholds for the following quarter in the Journal officiel.
There are currently 11 reference loan categories, defined by the Order of 24 August 2006 as amended by the Order of 26 September 2016. These categories differ according to the type of borrower (consumer, professional, legal entity) and the characteristics of the credit (amount, duration, type).
The TEG is assessed "at the time the credit is granted", i.e. when the consents are exchanged and not when the funds are handed over, as stated by the Cour de cassation in a ruling dated 28 March 2000.
The components of the TEG
Article L. 314-1, paragraph 1, of the French Consumer Code states that "fees, commissions or remuneration of any kind, direct or indirect, including those paid or due to intermediaries involved in any way whatsoever in the granting of the loan, shall be added to the interest".
The following are included in the calculation of the TEG :
- The interest itself, calculated on the basis of the calendar year (365 or 366 days) and not the banking year (360 days), as confirmed by the Court of Cassation in a ruling dated 10 January 1995.
- Application fees, security deposit fees and notarial deed fees, where these constitute a real expense for the borrower and are necessary for the loan to be granted.
- Insurance premiums, where taking out an insurance policy is a condition of granting the loan. The Court of Cassation has confirmed this principle in a number of rulings, including one dated 8 November 2007.
- Bank charges linked to credit, such as the highest overdraft, overdraft or extension charges.
- Pre-financing costs, as recently confirmed by the Court of Cassation in a ruling dated 14 December 2016.
However, the TEG does not include :
- Ancillary services, such as the account maintenance fee, which pays for a service separate from the credit.
- Notarial fees for the purchase of a property that are not directly linked to the loan.
- Optional insurance premiums, which are not a condition of the loan.
- The penalty clause punishing non-performance of the contract, which is not an element of the cost of credit but a penalty.
As an exception, for discounting or overdraft transactions below a threshold set by decree (currently €400 for overdrafts and €800 for discounting), a flat-rate minimum may be charged without being taken into account in the TEG.
How the TEG is calculated
The calculation of the TEG varies according to the nature of the credit. The general principle is a proportional calculation, as confirmed by the Court of Cassation in a ruling dated 9 January 1985.
For loans intended to finance a professional activity, article R. 314-2 of the French Consumer Code specifies that the TEG is "an annual rate, proportional to the period rate, in arrears and expressed per hundred monetary units". When payments are made at a frequency other than annually, the TEG is obtained by multiplying the period rate by the ratio between the length of the calendar year and that of the unit period.
For consumer credit and home loans, the TEG takes the form of the "annual percentage rate of charge" (TAEG), introduced by the decrees of 10 June 2002 transposing a European directive. The APR is calculated "in arrears, using the equivalence method". This method takes into account the capitalisation of interest and ensures equality between the sums lent and the repayments made by the borrower.
Special rules apply to certain types of credit:
- For amortisable loans, the TEG must take account of the fact that repayments are made in instalments, in accordance with article L. 314-2 of the French Consumer Code.
- For account overdrafts, the numbers method is applied, multiplying each debit balance by its duration in days.
- For discounting, the period rate is defined as the ratio of interest and miscellaneous costs to the amount of the discounted bill, for a minimum period of ten days.
The reform of consumer credit introduced by the law of 1 July 2010 also introduced the concept of the "borrowing rate", defined as "the rate expressed as a fixed or variable percentage, applied to the capital borrowed or the amount of credit used, on an annual basis". This rate, which is distinct from the TEG/TAEG, must also appear in the offer of credit.
The elements included in the total cost of credit for calculating the APR include application fees, intermediary fees, compulsory insurance costs and account opening and maintenance fees. However, costs relating to the acquisition of property (taxes, notary fees) and costs arising from failure to meet contractual obligations are excluded.
How do you deal with a suspected usurious rate?
When faced with a potentially usurious loan, a precise analysis of the TEG is essential. This requires in-depth legal and financial expertise. Frequent errors in calculating the TEG can lead to usurious rates.
Our firm can help you with this technical analysis to determine whether your credit is usurious. We have the specific skills to accurately recalculate the real TEG of your contract and check that it complies with the legal thresholds. Do not hesitate to contact us for a personalised review of your credit contracts.
Sources
- Consumer Code, articles L. 314-1 to L. 314-9 and R. 314-1 to R. 314-17
- Monetary and Financial Code, article L. 313-1
- Law no. 66-1010 of 28 December 1966 on usury
- Law no. 2003-721 of 1 August 2003 on economic initiative
- Order of 24 August 2006 amended by the order of 26 September 2016
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