Introduction

There may be news in the lending industry, specifically on the French amortization method, the most common criterion used by banks to calculate repayment plans from mortgages. In this method, each periodic installment consists of a portion of interest on the outstanding balance of the debt and a portion of principal; the principal portion tends to increase over time, while the interest portion decreases correspondingly. From a legal point of view it concens the conseguence of not indicating the so- called “French-style amortisation” method in the loan contract.

The first president of the Italian Supreme Court, Margherita Cassano, in a ruling dated Sept. 6, 2023, referred to the united sections the question “Let the Court of Cassation say whether the failure to indicate the French amortization methods and/or the compound capitalization regime of interest payable within a bank loan contract (….) constitutes or not a hypothesis of partial nullity of a bank loan contract".

The issue at hand is to establish whether the failure to indicate the compounding regime of interest capitalization, can result in the indeterminacy of the loan contract and thus, according to Article 117 of the Tub paragraph 4, the violation of transparency and therefore, according to paragraph 7 of the same article, the redetermination of the Bot rate of mortgage interest expense.

This is a decision that could have far-reaching consequences for the mortgage industry since, if the decision of the united sections were to actually confirm the lack of negotiated information and thus the indeterminability of the rate, many mortgages would have to be reformulated at a high cost to the banking system since the French-style amortization system is known to be more costly than a plan formulated with simple interest.

The issue was raised by the judge of the Court of Salerno, with an order dated 19 July 2023, which, with (preliminary reference), pursuant to article. 363 bis of the Italian procedure Code, highlighting that the question in question was necessary for even partial resolution of the judgment and has not yet been resolved by the Supreme Court, furthermore the topic presented interpretative difficulties and the question is likely to arise in numerous trials, therefore it was consequently necessary to clarify the issue.

Failure to indicate the so-called "French-amortisation”: structural nullity of the contract?

The case submitted to the Court of Salerno, dated July 19, 2023, is extremely complex, having as its subject a dispute over the failure to indicate in the bank loan contract the "compounding" interest capitalization regime - even in the face of the written provision of the Annual Nominal Rate (APR) - and the "French" amortization mode. The central question is whether this lack of express negotiated provision can result in the indeterminacy/undeterminability of the contractual object, resulting in its structural nullity, under the combined provisions of Articles 1346 and 1418, para. 2, Civil Code, as well as Article 117, para. 4, of Legislative Decree No. 385 of 1993 (known as the "T.U.B."), which requires, under penalty of nullity, that contracts must indicate "the interest rate and any other price and conditions charged, including, for credit contracts, any increased charges in the event of default," and, finally, violation of the rules on transparency.

The complexity of the case is explained because of the fact that interest capitalization, whether in the "simple" or "compound" regime, is a key concept in financial mathematics. Specifically, in the simple regime, interest is calculated only on the initial principal, while in the compound regime, interest is added to the initial principal, thus helping to generate additional interest over time. This means that the compounding regime can make the loan more onerous for the customer, since the interest itself is capitalized.

In this regard, a first - majority - line of jurisprudence has suggested that the failure to indicate, within a bank loan contract, the "compounding" capitalization regime of debit interest would not affect the validity of the contract. In other words, there would be no consequences in terms of the determinacy or determinability of the subject matter of the contract, nor would there be any problems in terms of violation of banking transparency rules. According to majority case law, in fact, once the amortization schedule is attached to the loan contract and delivered to the customer, the customer could equally infer the amortization mode and, therefore, the composition of the individual installments into which the repayment obligation is divided over time. In addition, the failure to indicate the amortization terms would not affect the client's interests in terms of the price and terms charged, since the amortization schedule concerns only the composition of the individual installments, in application of what is agreed in the terms of the contract, known or knowable ex ante by the client and drafted in writing in the contract.

However, other parts of the jurisprudence have highlighted the importance of so-called banking transparency, arguing that the compounding of interest must be explicitly stated in the contract, as it would represent an additional price or cost for the customer. Furthermore, it has been pointed out that failure to make this capitalization mode explicit could violate Article 117(4) of the T.U.B., which, as mentioned above, requires the clear indication of interest rates and any other costs in the contract. Case law has also referred to the C.I.C.R. Resolution of 09/2/2000, which states that "clauses relating to the capitalization of interest must be specifically approved in writing." Therefore, the lack of an explicit indication of the compounding regime - according to part of the jurisprudence - could lead to the nullity of the contract.

The inescapability of the United Sections' scrutiny for intervention with a nomofilactic character

The subject matter submitted to the interpretative efforts of the United Sections of the Supreme Court can certainly be described as absolutely characterized by a large degree of novelty, not finding to date any consistent or decisive interpretative pronouncement coming from the Ermellini, to imply with this also an important difficulty of an interpretative type. In fact, with reference to the method of formation of the installment, in relation to the connection that exists between principal and interest, the Court of Salerno has implemented a first attempt at interpretation according to which, the lack of specific indication in the aforementioned sense, would not produce any effect, as much in relation pertaining to the correct determinacy or determinability of the contractual object, as for the profiles more strictly inherent to the issue of banking transparency. Therefore, if the amortization schedule is actually attached to the loan contract and, at the same time, delivered to the customer, the same customer could still ascertain and verify, in the correct manner, the type of amortization applied to the contract and, consequently, also the structure of the individual installment amounts. From this it follows that, although lacking precise indication as to the amortization mode applied, the contract would not produce any prejudice in the field to the applicant, both as regards the price charged and the contractual conditions applied; this is given by the fact that the aforementioned indication would produce effects exclusively on the structure of the installment, constituting the amortization plan provided in the contractual mere application of what has been pre-established pactually within the economic conditions, which are for this purpose drawn up in writing precisely to endow them, ex ante, with the element of knowability useful to the customer. Another interpretative strand proposes a different exegetical view, according to which the so-called "French-style" amortization could produce, on closer inspection, an important increase in the overall cost of money related to the sum obtained by the client through the granting of the loan, especially if the payment of accrued interest precedes that of the capital obtained. Such a modality, then, would frame the type of amortization at issue here, in fact, in a cost that the borrower would be required to bear and which, consequently, precisely by virtue of such "taxing" nature, would have to be explicitly disclosed in the text of the contractual document.

Regarding, on the other hand, the different profile inherent to the consequences produced by the omission of reference to the capitalization regime provided in the loan contract, there are two contrasting hermeneutic perspectives:the first of the mentioned interpretations does not endorse the existence of negative repercussions with reference to contractual validity, since the client, through the analytical examination of the contractual documentation and, specifically, of the conditions applied, could well educate himself about the capitalization regime applied;the second, on the other hand, follows a different interpretive path, arguing that the application of a given regime of capitalization of interest can be framed in the same way as an additional price of the money borrowed by the borrower, thereby entailing a clear and evident increase in the overall cost of the loan, all this entailing the necessary fulfillment about the express indication of the capitalization regime within the loan contract, by means of written form and in such a way as to ensure its clarity, comprehensibility and unambiguousness, this in order to ensure the total transparency of the contractual conditions applied.

In conclusion, having found the interpretative divergences on the subject and having ascertained the existence of the objective conditions of admissibility of the preliminary reference required by 'art. 363-bis c.p.c. and considering that "the question, finally, is likely to arise in numerous judgments. The interpretative question is neither sporadic nor episodic, nor does it originate from the peculiarity of the concrete case, but it has a marked character of seriality," the First President of the Supreme Court, Dr. Margherita Cassano, assigned the case under consideration to the United Sections in order to proceed with the enunciation of the principle of law.The hope is to arrive at a pronouncement on the so-called "French-style" amortization that, in deference to the nomofilactic function attributed to the Supreme Court, will serve as a shared jurisprudential orientation for the purpose of better, greater and, certainly, desired predictability of decisions.

authors: Dott. Federico Benedetti. Dott. Antonino Guarino, Dott.ssa Marta Minnici