After High Court decision No. 14899/2000, the Italian Council of Ministers issued, on December 29 2000, Law Decree No. 394, on the subject of usurious loans. It aims to avoid the negative consequences that the Bank of Italy and the Italian Banking Association had anticipated would be produced by the Court's decision on the stability of the entire credit system.
The Law Decree excludes any retroactive interpretation of the anti-usury law, nullifying the retroactivity attributed by the decision handed down by the Supreme Court. It states that the determination of whether interest rates applied by banks on loans are usurious or not, will have to be made at the time of entering into a relevant loan agreement; the argument being that if an interest rate falls within the limits fixed by law at the time the agreement is entered into, it cannot be deemed usurious at a later stage, if the interest rates subsequently decrease, rendering the contractual interest rate at its lowest point within the parameters fixed by law.
The Law Decree has already been approved by the Senate of the Republic of Italy, with the introduction of some amendments suggested by the majority party as to the interest rate at which loan agreements falling within the usurious rates definition must be re-negotiated. The Law Decree limits the compulsory re-negotiation of interest rates on existing loan agreements to interest accruing as of January 3 2001. However, the rate applicable to such re-negotiation, as referred to in the original draft of the Law Decree, should be equal to the average of the last 25 years of the gross-yield of long-term treasury bonds with a residual maturity of more than one year. The rate was determined for 2001 as approximately 12.21%.
The introduction of the amendments has determined a significant reduction of the rate, which is equal to the average rate between January 1986 and October 2000 of the gross-yield of long-term treasury bonds with a residual maturity of more than one year, ie approximately 9.96%.
It is also provided that if the borrower is a company or a person carrying out an entrepreneurial activity, the substitute rate will be increased by 1.5 percentage points. The substitute rate will decrease to 8%, with respect to loans which have been entered into for an original amount not higher than L150 million ($71,000), and for the purpose of purchasing houses (not luxury houses).
The provisions state that the application of a substitute rate will not apply to outstanding financing and loans, granted to or made available by public entities, in accordance with special laws concerning public debt as referred to in Article 104 of the European Union Treaty.
The new regulation, especially after having been amended by the Senate, has not, however, satisfied the Italian Banking Association, since the cost of re-negotiation for Italian banks is estimated at around L3.9 trillion, and is considered too high an amount for credit system charges.
The Law Decree, which is subject to examination from the Chamber of Deputies, has also been considered unsatisfactory by the consumers' associations, and could be subject for further amendments before its conversion into law.