Volume 6, Number 15, Page 3

Brazil Issues New Regulation on Usury

By Eduardo Amaral Gurgel Kiss

The Brazilian government recently issued new rules that provide for the nullity of certain contractual provisions related to usury. A copy of the new rules is attached, (Provisional Measure No. 1,820, of April 5, 1999).

The rules regarding usury were not subject to many changes. 12 percent per annum continues to be the maximum interest rate that may be charged outside of the financial system or the capital or security markets (Decree No. 22,626).

As a consequence, transactions providing for an interest rate greater than 12 percent continue to be null, except if they take place within the financial system or the capital or security markets, or if they are entered into by entities controlled by the Central Bank of Brazil. The new measure has created the possibility for the National Monetary Council to exclude from these restrictions businesses that are ancillary, or subsidiary or complementary to those that take place in the financial, capital or security markets.

The aspect in the new rules that calls the attention is that the agreements that provide for profits or advantages considered excessive became null, or subject to adjustment by a judge (Article 1, item II).

Without entering into details about the circumstances in which the new rule applies, which are basically related to the weaknesses of one of the parties, we all know that is very difficult, if not impossible, to determine what is excessive in a concrete situation. When can costs be considered “excessive” ? Certainly each of us has an answer to this question, probably different from each other. In a transaction, one party`s costs will hardly be considered “excessive” by the other. The old rule had an objective criterion: an arrangement for interest greater than 12 percent is null; the new one created a subjective criterion: “excessive” profits and advantages.

The new rule presents some parameters to determine what is “excessive”. It establishes that in order for the profits or advantages to be considered excessive, the following items must be evaluated: the intent of the parties; the circumstances surrounding the closing of the agreement; the nature and content of the agreement; the origin of the respective obligations, the market practice and the permitted interest rates, (Article 1, Sole Paragraph). Of course, these parameters do not help much, as they are also subjective.

Unfortunately, the subjective criteria contribute to the uncertainty with respect to the laws.

Making the situation more complicated, the new rule establishes that whenever a lawsuit is proposed based on its provisions and with the intent of obtaining the judicial declaration of the nullity of an obligation, the burden to prove the legality of the obligations will fall to the creditor, whenever that the allegations of the plaintiff appears to be true, (Article 3). This inverts of the basic principle that whoever makes an allegation must prove what they have alleged. Under the new rule, one party makes an allegation and the other must prove the contrary...

Although there may be good intention on the part of the legislator, one may expect an increase of judicial claims to discuss the “excessive”, and what appears to be true.

PROVISIONAL MEASURE No. 1820, April 5, 1999 – Federal Official Gazette of April 6, 1999

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Provides for the nullity of the contractual provisions it mentions; reverses, in the events herein provided, the burden of proof in proceedings instituted for the declaration thereof and amends art. 1 of Law No. 7347, of July 24, 1985.

THE PRESIDENT OF THE REPUBLIC, in the discharge of the duties conferred upon him pursuant to art. 62 of the Brazilian Constitution, shall adopt the following Provisional Measure with the force of law:

Art. 1 – Contractual provisions shall be lawfully null and void when deemed usurious, such as those which stipulate the following:

I – in loan agreements, interest rates higher than those permitted by law, whereupon the judge, if requested, shall adjust them to the rate provided by law or, in the event they have already been performed, determine the refund in double of the amount paid in excess, together with legal interest as from the date of payment of the amount unduly charged;

II – in legal transactions not provided by the commercial and consumer defense laws, excessive profits or gains stipulated to a party in a vulnerable position, whereupon the judge shall, if required, restore an equitable contractual relationship by adjusting such transactions to their current value or, in the event of the obligation having been complied with, determining a refund in double of the amount received in excess, plus legal interest as from the date the undue payment was made.

Sole paragraph. In order to qualify as excessive profit or gains, there shall be considered the intention of the parties, the circumstances in which the contract was executed, the tenor and nature thereof, the origin of the corresponding obligations, market practices and interest rates provided by law.

Art. 2 – Likewise, contractual provisions shall be deemed null and void when, under the pretext of conferring or transferring rights, they are made for the purpose of guaranteeing, directly or indirectly, loan agreements containing usurious stipulations.

Art. 3 – In lawsuits filed with the purpose of obtaining a declaration that certain provisions are null and void according to the contents hereof, the burden of proof as to the legal conformity of the corresponding obligations shall be incumbent upon the creditor or beneficiary of the transaction whenever the verisimilitude of the allegation is proved by the injured party or by circumstances involving the matter.

Art. 4 – The provisions hereof shall not apply to the financial institutions and other institutions authorized to operate by the Central Bank of Brazil, as well as to operations carried out in the financial, capital and securities market, which shall remain subject to the rules of law and regulations applicable thereto.

Sole paragraph. Likewise, this Provisional Measure shall not apply, upon decision of the National Monetary Council, to other types of operations and transactions of a subsidiary, complementary or ancillary nature regarding the activities performed within the scope of the financial, capital and securities markets.

Art. 5 – Item V of art. 1 of Law No. 7247, of July 24, 1985, shall henceforth have the following wording:

“V – for violation against the economic order and causing economic prejudice to the population”. (NR)

Art. 6 – This Provisional Measure shall take effect on the date of publication hereof.

Art. 7 – Paragraph 3 of art. 4 of Law No. 1521, of December 26, 1951, is hereby revoked. n

Eduardo Amaral Gurgel Kiss is an attorney with Felsberg e Advogados of Brazil.
http://www.felsberg.com.br/english/fr_newslett.htm