Sylviane Hamon, a former bank employee, lives in the small village of Benais in the Indre-et-Loire department.
The area is known as Chinon, leading to the woman being dubbed the "Madoff du Chinonais" by French media.
The nickname is a reference to Bernie Madoff who was jailed in the US for operating a ponzi scheme that turned into one of the largest financial frauds in the country's history.
Local newspaper La Nouvelle République revealed the story, reporting that the woman operated a scheme where she promised investors returns of 10 percent a year.
She then allegedly paid the returns using funds from new investors, with the total amount invested rising to up to €3 million ($3.9 million).
Police caught up with her on Monday morning at her home in the village where she was a local councillor for seven years.
"My wife was supposed to give her €40,000," the newspaper reported one man as saying. "She promised returns of 10 percent. She asked her not to talk to me about it but, fortunately, my wife didn't follow that advice. I immediately thought it sounded like a pyramid scheme."
Tens of victims who did part with their money were not as lucky with investments ranging from a few hundred to several hundred thousand euros.
Hamon is being held by police for further questioning.