The professional experience and recent judicial decisions provide us with the opportunity for a brief focus on two issues of ever-present interest relating to the mortgage loan agreement (“mutuo fondiario”) –, being as well known one of the most widespread bank financing, both among consumers, for the purchase of personal real estate, and companies, for investments in corporate real estate – that is nameley: exceeding the limit of financeability and anatocism in case of “French” depreciation.
At the outset it is necessary to say that art. 38 of Italian Consolidated Law on Banking (T.U.B.) states that the object of credit land is to have the Banks to grant medium and long-term loans secured by first mortgage on real estate, reserving to this type of loans particular prerogatives and advantages, consisting mainly in the consolidation in just 10 days of the mortgage registered on the properties as collateral (art. 39 T.U.B.), with an evident reduction of the risks deriving from the bankruptcy of the borrower, and to the management of credit recovery procedure in case of default (art. 41 T.U.B.).
- Financing Limit
The above-mentioned provision also states that the Bank of Italy, in accordance with the resolutions of the C.I.C.R. (Interministerial Committee of Credit and Savings) must determine the maximum amount of financing, so that it can be considered as a land credit and not as a simple loans to be identified, in relation to the value of the assets mortgaged or to the cost of the works to be performed on them.
In fact, such cap is determined by law in the percentage of 80% of the value of the collateral but might be increased up to 100% only if additional guarantees are provided to banks, such as bank guarantees or insurances.
The Legislator’s intent is, of course, to avoid a disproportion between mortgaged assets and financed amount and, therefore, a potential impairment of the stability of the credit system; in other words, without said limitations, banks would no longer be able to recover the sums lent to borrowers, as they could not rely on mortgages worth as much as the loans granted.
In the event of breach of this ratio the penalty provided for by Italian law is of a severe importance; in fact, the prevailing case law of the Italian Supreme Court has stated that exceeding the financing limit entails the nullity of the mortgage contract, being the legislation placed to safeguard the public order.
In this regard, let us point out the following recent decisions of the Supreme Court:
- The limit of financing pursuant to art. 38, paragraph 2, D.Lgs. n. 385 of 1993, is an essential element of the content of the contract and its failure to comply with it determines the nullity of the contract itself (with the possibility, however, of conversion into ordinary mortgage financing where the relevant conditions are met)and constitutes an absolute limit to private autonomy on account of the public nature of the protected interest (Cass. civ., Sez. I, Ordinanza, 14/06/2021, n. 16776)-;
- In the matter of mortgages, the limit of financeability ex art. 38, paragraph 2, T.U.B. is an essential element of the content of the mortgage agreement, and its failure to comply with it determines the nullity of the contract itself, constituting a mandatory limit to private autonomy due to the public nature of the protected interest, aimed at regulating the quantum of credit performance (Cass. civ., Sez. I, Ordinanza, 21/01/2020, n. 1193);
- Compliance with the limit of financing does not exhaust its effects on the conduct of the lending institution, but it is essential for the valid qualification of the mortgage contract as land credit and for the applicability of more favorable rules for the creditors both substantive and procedural; therefore, exceeding this limit implies the nullity of the entire contract (Cass. civ., Sez. III, 28/06/2019, n. 17439)
- French amortization plan and anatocism
The Italian amortisation plan provides for the repayment of the principal more quickly than the French one; in fact, the constant reduction of the residual principal causes a constant decrease in residual debt and, therefore, a progressive decrease of the interest to be paid.
On the other hand, the so called “French amortization” provides for the payment, by the borrower, of a fixed and constant installment for the entire duration of the loan, in which the interest rate is decreasing over time, while, correspondingly, the principal quota increases.
This second type of reimbursment plan has raised several questions over time, still debated in the courtrooms, especially, in relation to the anatocism that may eventually arise from it.
Let us also point out the following case law rulings on the matter, which confirms prevalent judicial trend in Italy:
- The French method of amortisation means that the interest is calculated only on the capital share gradually decreasing and for the period corresponding to each instalment. In other words, in the progressive system each instalment involves the settlement and payment of all and only the interest due for the period to which the instalment refers to. This amount is then paid in full with the instalment, where the remaining part of it already goes to pay off the principal. This does not involve capitalisation of interests, since the interests included in the next instalment is in turn calculated only on the remaining part of the principal, that is to say, on the original capital minus the amount already paid with the previous instalment or instalments, and only for the period following the payment of the immediately preceding installment (Tribunale Trapani, 24/01/2022, n. 82);
- The French mortgage, although more expensive, has the advantage of making the instalment, in the absence of change in rates, (if it is a variable rate loan), always equal to itself. The French-style amortisation system does not involve any anatocism, since, in the first instalment, the interest is calculated on the sum granted for the loan and, in each of the subsequent instalments, the share of the interest is calculated on the remaining debt of the previous period, constituted by the share capital still due (Tribunale Foggia, Sez. I, Judgment, 03/06/2021, n. 1387);
- In terms of loans, the French amortisation plan is characterised by constant repayment instalments over time, including a share of principal and a share of interest payments, which, by itself, does not involve the application of anatocism, because the interest is calculated only on the remaining principal, the one still to be returned, and not on the interest produced (it is, therefore, simple interest and not already compound interest) (Court Milan, Sec. VI, Judgment, 22/02/2021, n. 1545).
The professionals of Landolfi & Associati active in the Banking & Financial Lawsector remain available to deepen the jurisprudential and regulatory innovations described above and their concrete application to issues related to specific banking and financial relations in English, French and Spanish.
Edited by Simona Tarantino and Antonio Landolfi