France : New Civil Penalties for Errors or Omissions of the Annual Percentage Rate (Taux Effectif Global)

August 7, 2019

French Ordinance No. 2019-740 of 17 July 2019 standardized the civil penalties applicable to errors (or omissions) in the calculation of the Annual Percentage Rate or, as it is known in French, the Taux Effectif Global (TEG).

The Ordinance was adopted pursuant to the Enabling Act "for a State working for a trustworthy society"(“Pour un Etat au Service d’une Société de Confiance”), Law n° 2018-727 of 10 August 2018 and was published in the Journal Officiel on 18 July 2019 (JORF No. 0165), date on which the Ordinance entered into effect.

The TEG indicates the amount that a borrower will have paid (including interest and costs) when it has completed the repayment of a loan. The French Consumer Code, as well as the French Monetary and Financial Code, provide that the TEG must be set forth in the documents relating to a proposed loan (pre-contractual documents) and loan agreements or European standardised information sheets. 

Before the Ordinance of 17 July 2019, an omission or error in the stated TEG resulted in a total or partial loss of the lender's right to charge contractual interest to the borrower. In some cases, the contractual interest rate could be replaced by a public statutory rate.

However, there were practical difficulties in implementing this provision. First, because the calculation of the TEG was impossible in the case of variable-rate loans. Second, because the extent of the penalty (total, partial, limited or unlimited forfeiture) depended on many factors: e.g. the nature of the loan (real estate or consumer loans), the status of the borrower (consumer or not), the document in dispute (pre-contractual phase or in the loan agreement).

With regard to variable-rate loan agreements, the Enabling Act had provided for the possible abolition of the obligation for the lender to mention the TEG in such loans. However, this provision was not finally implemented by the government, which preferred to maintain this element of information in favor of borrowers.

With regard to the determination of the level of the penalty, the Ordinance of 17 July 2019 harmonized the applicable rules.  This choice results from a concern raised in a preliminary report to the Enabling Act, the Constans Report, which notes that in application of two European Directives (Directives 2008/48/EC and 2014/17/EU), penalties in the event of an erroneous or omitted TEG must be "effective, proportionate and dissuasive". The Report therefore considered that the possible automatic total disqualification of interest rights infringed this notion of proportionality.

This logic was followed by the legislator in the Enabling Act, and then by the government in the Ordinance.

The Ordinance of 17 July 2019 now contains only one civil remedy, codified in Article L. 341-48-1 of the Consumer Code and repeated in Article L. 313-4 of the Monetary and Financial Code: "the lender may be deprived of the right to interest in the proportion fixed by the court, in particular with regard to the prejudice for the borrower".

The legislator's solution is clear: going forward, the level of penalty in case of omission or error in mentioning the TEG will always be assessed by the court, which may take into account the damage actually suffered by the borrower. While this harmonization has the advantage of providing a clear vision of the applicable law and ensuring that proportionality is controlled by the court, it will nevertheless have the effect of systematically subjecting lenders and borrowers to a measure judicial uncertainty, until a sufficient body of case law is developed.