Is Legal Action Possible When the Bank Grants a Loan Agreement But Then Refuses to Issue the Loan Offer?

When a banking institution grants an in-principle agreement for a loan but then refuses to issue the final loan offer, many borrowers wonder about the possible remedies available in this situation. This issue, frequently encountered during mortgage or professional financing processes, raises essential legal questions about the bank’s commitment and the borrower’s rights. Discover here the applicable principles, the bank’s obligations, and the possible solutions in the event of a refusal to issue the loan offer despite an initial agreement.

1. General principles: the bank’s freedom, but duty of good faith

Under French law, the bank has, in principle, discretionary power to grant or refuse credit, as long as it has not already committed itself through a firm and unconditional offer. Case law recalls that, “except where bound by a prior commitment, the banker is free, without having to justify its discretionary decision, to refrain from proposing credit or to refuse to grant it” (CA Aix-en-Provence, 12 Dec. 2013, No. 11/12024). However, even at the negotiation stage, the bank must observe:

• good faith in the conduct of negotiations,
• fairness in the information given to the prospective borrower.

A mere in-principle agreement, even if containing figures (amount, duration, rate, fees), is not a firm and final offer, but a commitment to negotiate in good faith. The Court of Cassation holds, regarding an in-principle agreement “subject to standard conditions”:

“an in-principle agreement given by a bank “subject to standard conditions” necessarily implies that the final terms for granting its assistance remain to be defined and only obliges the bank to continue, in good faith, the ongoing negotiations“. Cass. com., 10 Jan. 2012, No. 10-26.149.

 It is therefore necessary to distinguish:

 The central question therefore becomes: what exactly does “loan agreement granted” cover in your situation? Is it a mere in-principle agreement or a genuine loan offer already issued and withdrawn before signature?

2. When a “loan agreement” is merely an in-principle agreement

2.1. In-principle agreement “subject to standard conditions”

 The decisions relating to mortgage loans show that:

• The “in-principle agreement subject to standard conditions” is not a firm offer.
• It does not oblige the bank to grant the credit; it only obliges it to:

• continue the discussions,
• examine the file,
• vérifier, par exemple, le taux d’endettement, les garanties, la stabilité de la situation professionnelle, etc.,
   et à le faire de bonne foi.

 Thus, in the Gonzalez case (Cass. com. 10 Jan. 2012, No. 10-26.149):

• The bank had sent a letter of “in-principle agreement subject to standard conditions” for a mortgage loan (amount, duration, rate, processing fees indicated). [2]
• It subsequently refused the loan due to an excessive debt-to-income ratio.
• The lower court judges had considered that the bank had committed to making an offer in accordance with these terms; the Court of Cassation quashed: the in-principle agreement is not a binding offer, it only obliges the bank to negotiate in good faith.

Thus, an in-principle agreement “subject to standard conditions” does not entail an obligation to grant the loan, but only to conduct negotiations in good faith.

2.2. Consequence: freedom to refuse to issue the offer

 Within this framework, the bank may still refuse to issue the loan offer, for example:

• if a more thorough analysis of the file reveals an excessively high debt-to-income ratio,
• if the proposed guarantees are deemed insufficient,
• or more generally if the internal risk criteria are no longer met.

 This refusal is not in itself wrongful, provided that:

• it occurs within the context of negotiations that are still incomplete,
• and that the bank acts in good faith (no dishonest or purely opportunistic grounds, no misleading conduct).

3. When does a binding loan offer exist?

3.1. Concept of a “firm and unconditional offer”

For property sales subject to a condition precedent of obtaining a loan, the Court of Cassation has specified that the condition is deemed fulfilled as soon as a firm and unconditional offer exists, in conformity with the contractual stipulations, regardless of whether the Consumer Code formalities are perfectly observed (these formalities protect the borrower, not the seller or the bank).

A firm offer is: the bank’s letter or written document that:

• sets the amount, duration, rate, and
• is only subject to purely technical or customary conditions that do not call into question the reality of the commitment (e.g. “subject to obtaining guarantees and insurance” does not remove the firm character). Cass. 1st civ., 14 Jan. 2010, No. 08-21.520; Cass. 3rd civ., 23 June 2010, No. 09-15.963.

Not a firm offer:

• a mere “in-principle agreement” on bank letterhead,
• an agreement conditional on the future completion of numerous substantive formalities or on guarantees that remain undetermined. Cass. 3rd civ., 7 Nov. 2007, No. 06-17.413 and No. 06-19.148.

The condition precedent of obtaining the loan is deemed fulfilled upon delivery of a firm and unconditional offer characterising the obtaining of a loan in conformity with the contractual stipulations.

3.2. Effects of a genuine loan offer

 When the bank has issued a genuine loan offer:

• It is then legally bound: if the borrower accepts the offer within the legal period (generally after the statutory reflection period and before the offer’s validity expires), the loan contract is concluded.
• A unilateral withdrawal of the offer before its expiry, without legitimate grounds and while the stated conditions are still met, could constitute:

• a wrongful breach of advanced negotiations or
• a failure to respect the binding force of an already firm commitment.

In the documents provided, the typical situation primarily concerns the enforceability of the offer against the seller for the condition precedent, but the logic is transposable to the bank/borrower relationship: a firm offer creates rights and obligations.

4. Possible remedies against the bank

 Everything therefore depends on the exact nature of what was granted by the bank.

4.1. If the bank only gave an in-principle agreement

In this case, the claim lies in tort (Article 1240, formerly 1382 of the Civil Code) for wrongful breach of negotiations. Case law and legal scholarship indicate:

• The bank must continue negotiations in good faith.

• It is not required to reach a contract, but it cannot:

• invoke manifestly spurious grounds (e.g. a false pretext when the real reason is a market opportunity, interest rate increase, etc.),
• nor adopt contradictory or disloyal behaviour in light of what it itself led the client to believe (principle of consistency, close to “estoppel”).

 The remedy is then, in principle, limited to compensation for the harm caused by the wrongful breach of negotiations, which is generally analysed as:

• loss of a chance to negotiate credit with another institution under better terms of time or rate,
• expenses incurred in vain (appraisals, application fees, preliminary agreement costs, etc.), subject to their causal connection.

 But case law is cautious:

• In the in-principle agreement case “subject to standard conditions” (Cass. com. 10 January 2012 No. 10-26.149 (No. 27 F-D), Sté Lyonnaise de banque v. Gonzalez), the Court of Cassation clearly recalled that the bank was not bound by the in-principle agreement and does not necessarily commit a fault by subsequently refusing credit, where it merely exercised its decision-making power in light of the final information (debt-to-income ratio).
• The bank is free to make the granting of the loan conditional on the fulfilment of conditions it deems necessary, provided it does so in good faith and observes the fairness that governs contractual negotiations.

 Therefore, a remedy is only possible if you demonstrate a specific fault:

• E.g.: a clear promise of final approval, then withdrawal for a reason unrelated to credit risk and entirely contrary to what had been announced;
• or contradictory behaviour by the bank causing the applicant to lose the chance to approach another bank in time.

4.2. If a firm loan offer was issued then not honoured

The courts primarily focus on:

• the scope of in-principle agreements,
• the fulfilment of the condition precedent in property sale contracts,
• and the bank’s liability in the wrongful granting or performance of the loan (duty to warn, acceleration of the debt).

Accordingly:

• If the bank has already issued a genuine firm and unconditional offer, it is bound by it for as long as it remains valid; a withdrawal for personal convenience could be analysed as a violation of the principle of good faith in the performance of agreements and of the binding force of the contract (Articles 1103 and 1104 of the Civil Code).
• The remedy would then presumably be of a contractual nature (if the loan contract is already considered concluded or if the offer is analysed as a unilateral contractual commitment) or quasi-contractual/tortious in the alternative scenario.

However, caution is therefore required:

• the type of written document issued by the bank (simple letter, mortgage offer compliant with the Consumer Code, unsigned draft…) is decisive in characterising its scope,
• the exact chronology (date of the agreement, date of the offer, date of withdrawal) is essential.

4.3. Connection with the condition precedent in a preliminary sale agreement

 If the loan agreement or loan offer occurred in the context of a preliminary property sale agreement with a condition precedent of obtaining a loan, other issues arise:

• The sale is concluded “subject to the condition precedent of obtaining the loan”.
• The condition is fulfilled as soon as a firm and unconditional offer in conformity with the preliminary agreement is delivered to the purchaser, even if the mortgage offer formalities are not entirely observed.
• Conversely, a mere in-principle agreement is not sufficient to characterise the fulfilment of the condition. Cass. 3rd civ. 7 Nov. 2007, No. 06-17.413.

This primarily applies in the purchaser/seller relationship (the seller’s argument that the condition has failed or been fulfilled), but it may also factor into the assessment of the purchaser’s harm against the bank (loss of the sale, earnest money forfeiture, etc.).