The rules on usury, which aim to cap interest rates on loans, provide essential protection for borrowers. However, its scope is far from universal and has undergone major changes, creating a complex legal landscape in which some transactions are covered and others excluded. Understanding exactly which loans and financing are covered is therefore essential, whether you are an individual or a company director. The aim of this article is to clarify the scope of this legislation, in addition to our comprehensive guide to the regulation of usury under French law.
Broadening the scope of transactions covered by the law on usury
Initially confined to the simple lending of money, usury legislation has gradually extended its reach to encompass a much wider range of financial transactions. The aim of this development is to provide better protection for borrowers by adapting to the diversification of financing techniques.
The influence of codification and the status of the borrower (consumer vs. professional)
The inclusion of the rules on usury in the Consumer Code may have raised doubts as to whether these rules were now reserved for consumers only. This is a legitimate question, but case law has provided a clear and consistent answer. The civil, commercial and criminal divisions of the Cour de cassation have confirmed that, despite this textual localisation, the provisions on usury also apply to loans granted to professionals. The codification was carried out on a "constant law" basis, which means that it did not alter the original scope of the law. The status of the borrower, whether a private individual or a professional, does not therefore exclude, as a matter of principle, the application of this protective regime, even if specific arrangements exist.
The broad concept of "credit transaction": more than just a loan
To determine whether an agreement is subject to usury legislation, we must look beyond the restrictive notion of "loan" as defined by the Civil Code. The legislator is referring more broadly to any "credit transaction". The definition given in article L. 313-1 of the Monetary and Financial Code is extensive. It covers any act by which one person, for consideration, makes funds available or promises to make funds available to another. This broad approach makes it possible to cover a variety of financing mechanisms which, although not formally loans, produce the same economic effects for the borrower. This classification is all the more important as it determines not only the rules on usury but also other areas of banking regulation, such as the rules governing the banking monopoly in France.
Disguised transactions and the power of judges to reclassify transactions
Certain contractual arrangements may be designed to circumvent the regulations on usury. Aware of this risk, case law has long given judges the sovereign power to reclassify contracts. The name chosen by the parties is irrelevant: if an agreement, under the guise of a sale or other deed, in reality conceals a credit transaction, the courts can restore it to its true nature. This power of reclassification is an essential tool for thwarting fraud and ensuring the effective application of the public policy provisions on usury. The judge is not bound by the formal label of the contract; he analyses its substance and real economy.
Examples of transactions: bank advances, overdrafts, credit facilities, discounting, factoring, equity loans, instalment sales, etc.
The concept of a credit transaction covers a wide range of financial techniques. The following in particular are subject to usury regulations:
- Bank advances and overdrafts, which represent the provision of funds by the bank.
- Credit facilities, analysed as a promise to lend that is transformed into a loan as the customer uses the funds.
- Discounting, whereby a bank advances the amount of a bill of exchange before its maturity date, in return for remuneration.
- Factoring is an operation whereby a specialised institution (the factor) takes over a company's receivables and provides it with an advance on their amount.
- Although equity loans have a specific regime, they are expressly subject to the rules on usury under article L. 313-17 of the French Monetary and Financial Code.
- Instalment sales, where the interest generated by payment in instalments is treated in the same way as interest on a loan of money.
Agreements not covered by usury regulations
Despite their broad scope, many financial transactions are not subject to the interest rate cap. The exclusions may relate to the very nature of the agreement or the status of the borrower, reflecting the legislator's desire not to curb certain economic mechanisms.
Exclusions due to the purpose of the agreement: leasing, random contracts, successive loans, debt security issues, etc.
Certain contracts are excluded from the scope of usury by their very nature. This is the case with leasing, which combines a rental with a promise to sell and is therefore not treated as a credit transaction within the meaning of these regulations. Loans where repayment is uncertain are also excluded, as the uncertainty makes it impossible to separate the lender's remuneration from the risk premium. A typical example would be financing for the production of a film, repayable via a percentage of uncertain future receipts. Similarly, in the case of successive loans granted to the same borrower, each contract is analysed independently. Usurious character is assessed at the time each loan is taken out, and not globally. Finally, a ministerial opinion has specified that issues of debt securities, such as bonds, are not covered by usury legislation.
Exclusions based on the borrower's status: removal of the ceiling for professionals and legal entities
A major turning point came with the Economic Initiative Act of 1 August 2003, supplemented in 2005. The legislator "de-capped" interest rates for loans granted to certain categories of borrowers, based on the observation that the usury ceiling could act as a brake on access to credit for businesses, particularly the youngest or riskiest. Article L. 314-9 of the Consumer Code now excludes from the scope of usury loans granted to a legal entity carrying on an industrial, commercial, craft, agricultural or non-commercial professional activity. This exclusion has been extended to natural persons acting for their professional needs. For these economic players, freedom to negotiate the interest rate is therefore the principle.
The special case of account overdrafts for professionals
However, the legislator has maintained specific protection for a particularly sensitive transaction: an overdraft granted to a professional. Aware that an urgent need for cash can place a business in a weak position, the law stipulates that this form of credit remains subject to a ceiling, albeit different from that applicable to private individuals. An overdraft granted to a professional is therefore considered usurious if its overall effective rate exceeds by more than a third the average effective rate charged by credit institutions for similar transactions. This exception is designed to prevent banks from taking advantage of a vulnerable situation to impose excessive financial conditions that would exacerbate the company's difficulties.
The application of wear and tear regulations in space
The international dimension of economic exchanges raises complex questions about the territorial application of usury rules. Determining the applicable law depends on the nature of the dispute, whether civil or criminal, and on the principles of private international law.
The special nature of usury rules in international law
The legislation on usury is unusual in that it has a dual nature, both civil and criminal. On the criminal side, the principle of territoriality prevails. Article 113-2 of the Criminal Code states that French criminal law is applicable if one of the acts constituting the offence took place on French territory. Case law has thus held that if loan offers are accepted in France, the contract is formed on national territory, justifying the jurisdiction of French law to punish any offence of usury.
The law of autonomy and the role of international public policy / loi de police
In purely civil matters, the principle is that of the "law of autonomy": the parties to an international contract are in principle free to choose the law that will govern it. However, this freedom is not absolute. French rules on usury are often regarded as "lois de police", i.e. mandatory provisions whose observance is deemed essential to safeguard the country's economic and social organisation. As such, they can be applied to an international situation even if the parties have chosen another law, thereby overriding the normally competent foreign law. This characterisation as a mandatory rule enables the French court to give precedence to the protection of the borrower as conceived by French law. For a detailed analysis of this mechanism, see our article on overriding mandatory rules and international public policy in banking law.
Consequences and issues for lenders and borrowers
The distinction between transactions subject to the usury ceiling and those excluded from it has major consequences. For borrowers, the classification of the transaction determines the extent of their protection. A private individual or a professional taking out an overdraft on an account may challenge an excessive rate, whereas an entrepreneur taking out an investment loan will not benefit from this ceiling. It is therefore vital to clearly identify the legal nature of the financing envisaged before making a commitment. For the lender, the stakes are just as high. Failure to comply with the regulations, where applicable, exposes the credit institution to severe penalties, not only civil (repayment of overpayments, or even substitution of the legal rate for the agreed rate), but also criminal (fines and imprisonment). An error in the classification of a credit transaction can therefore have significant financial and legal repercussions. The complexity of the boundaries between the different categories of transactions and persons often makes in-depth legal analysis necessary to secure financing.
The legal classification of a credit transaction is a decisive step that conditions the entire applicable regime, particularly with regard to interest rates. An erroneous analysis can deprive a borrower of legal protection or expose a lender to penalties. For a legal advice on qualifying your credit transactions and to ensure that they comply with the law, don't hesitate to contact our firm.
Sources
- Consumer Code
- Monetary and Financial Code
- Civil Code
- Commercial code
EN 
FR