conventional loan requirements.
The Total Effective Rate (TEG) is the total cost of the loan expressed as an annual percentage of the amount borrowed. It includes all the costs generated by the credit transaction, namely the processing fees, guarantee fees, insurance costs and all other expenses even commission for intermediaries who would have facilitated the obtaining of the loan.
The TEG is an indicator of the total cost of the loan that has been introduced to prevent the lender from concealing part of the costs of the loan transaction. The borrower has the opportunity to compare the rates offered by different lenders and their impact before choosing the most interesting offer.
The legislator has created an obligation of written stipulation of the TEG that he has established as a rule of public order. We will analyze the requirement of a written stipulation of the TEG (1) before beginning the form of this writing and the sanctions of its breach (2).
1- The requirement of a written stipulation of the TEG
Article 1907 of the Civil Code specifies that the interest rate in lending transactions may be legal or conventional. The conventional home loans is that which is agreed by the parties contrary to the legal interest which is determined by the law. The conventional interest rate may exceed that of the law without reaching a usurious rate.
In all cases, “the conventional home loans interest rate must be set in writing “as required by Article 1907 of the Civil Code mentioned above.
Article L313-2 of the Consumer Code goes in the same direction by providing that “the global effective rate (…) must be mentioned in any writing establishing a loan agreement “. The judges recall that this rule is the condition of validity of the stipulation of interest.
The mere mention of the elements that make up the TEG is not sufficient to satisfy the written stipulation of the TEG. This obligation is validly fulfilled only if the amount of the Global Effective Rate is clearly specified in the loan agreement.
The rule is to protect the borrower. This is why it was held that the lender could not claim it. The surety cannot take advantage of it because it is a purely personal exception.
It is a rule of public order to which the borrower cannot derogate even by written agreement. Any agreement or clause by which it undertakes to waive the requirement of the written stipulation of the TEG will be considered null and void.
The absence of a written stipulation of the overall effective rate in a loan contract, be it civil or commercial, contracted with a consumer or a professional will be penalized.
2- The form of the writing and the sanction of the breach
The law does not prescribe a specific form or precise location to enter the amount of the Global Effective Rate in loan agreements. The only legal requirement remains the obligation to inform in writing, not erroneously, the amount of the Global Effective Rate.
However, referencing the TEG as a footnote with an inconspicuous font size can be interpreted as having betrayed the spirit of the law and sanctioned in the same way as the absence of a written stipulation.
Sanctions are criminal and civil.
The penal sanction is the temporary prohibition to exercise the function or activity in connection with which the offense was committed. Article L313-2 of the Consumer Code adds a fine of € 150,000.
On the civil side, the absence of written stipulation of the TEG does not entail the nullity of the loan contract, but only the nullity of the agreed conventional home loans rate and its substitution by the legal rate generally more favorable to the borrower.
However, the invalidity of the loan agreement may exceptionally be envisaged in the event of omission of the TEG, provided that the borrower demonstrates that he would not have contracted the loan had he known the real rate.
The nullity invoked is a relative nullity which cannot be raised automatically by the judge. The action in nullity is prescribed by five years hence the need for the borrower to act as soon as possible upon discovery of the breach.
The dispute over the written stipulation of the TEG still occupies the courtrooms. While banks and financial institutions were thought to be sufficiently informed on the issue, the scale of the proceedings reveals that they have not yet mastered the rule, or rather that the overload of pre-contractual legal obligations related to underwriting leads to “forgetting” other equally important requirements.