Additional Charges in Extrajudicial Foreclosure in the Philippines

Introduction

Extrajudicial foreclosure is a non-judicial process in the Philippines whereby a mortgagee (typically a bank or lending institution) can sell a mortgaged property to satisfy an unpaid debt without resorting to court proceedings. This mechanism is favored for its efficiency and speed compared to judicial foreclosure. However, the process involves various costs and charges, some of which may be passed on to the mortgagor (borrower). "Additional charges" in this context refer to fees, penalties, and expenses beyond the principal loan amount and accrued interest that the mortgagee may impose or recover during the foreclosure proceedings.

These additional charges are not arbitrary; they are regulated by Philippine laws to prevent abuse and ensure fairness. Understanding them is crucial for borrowers, lenders, and legal practitioners, as improper imposition can lead to disputes, redemption issues, or even nullification of the foreclosure sale. This article comprehensively explores the concept, legal basis, types, limitations, and implications of additional charges in extrajudicial foreclosure, grounded in the Philippine legal framework.

Legal Basis for Extrajudicial Foreclosure and Additional Charges

The primary law governing extrajudicial foreclosure in the Philippines is Act No. 3135, entitled "An Act to Regulate the Sale of Property Under Special Powers Inserted in or Annexed to Real-Estate Mortgages," as amended by Act No. 4118. This statute allows the mortgagee to foreclose on the property if the mortgage contract includes a special power authorizing such action upon default.

Key provisions related to charges include:

Section 4 of Act No. 3135: This outlines the foreclosure sale process, where the proceeds are applied to the payment of the obligation secured by the mortgage, including "costs and expenses of the sale." This implicitly covers additional charges incurred in the process.
Civil Code of the Philippines (Republic Act No. 386): Articles 1956 and 1957 govern interest and penalties in loan contracts. Article 1226 allows for penalty clauses in obligations, which can form part of additional charges if stipulated.
Truth in Lending Act (Republic Act No. 3765): Requires full disclosure of all finance charges, including any additional fees, at the time of loan origination. Non-compliance can invalidate certain charges during foreclosure.
Bangko Sentral ng Pilipinas (BSP) Regulations: Circulars such as BSP Circular No. 799 (effective interest rates) and No. 1093 (foreclosure guidelines for banks) limit excessive charges to protect consumers.
Consumer Protection Laws: The Consumer Act of the Philippines (Republic Act No. 7394) and Magna Carta for Homeowners (Republic Act No. 9904) provide safeguards against unconscionable charges in real estate transactions.

The Supreme Court has consistently held that while mortgagees have the right to recover their claims, charges must be reasonable, stipulated, and not contrary to public policy.

Types of Additional Charges in Extrajudicial Foreclosure

Additional charges can be categorized based on their nature and origin. They are typically recoverable from the foreclosure sale proceeds or, in some cases, demanded from the mortgagor during redemption.

1. Stipulated Contractual Charges

Penalty Interest or Liquidated Damages: If the mortgage contract includes a penalty clause for default (e.g., 2-3% per month on overdue amounts), this can be added. However, penalties must not be iniquitous; courts may reduce them if excessive (Civil Code, Art. 1229).
Attorney's Fees: Commonly stipulated at 5-10% of the outstanding balance. Recoverable if the contract explicitly provides for it and the services are actually rendered (e.g., for preparing foreclosure documents).
Collection Fees: Fees for hiring collection agents or lawyers prior to foreclosure, if agreed upon in the contract.

2. Foreclosure-Specific Expenses

Publication Fees: The law requires the notice of sale to be published in a newspaper of general circulation for three consecutive weeks (Act No. 3135, Sec. 3). Costs vary by region but are typically borne by the mortgagee and recoverable from sale proceeds.
Posting Fees: Notices must be posted in at least three public places. Minimal costs, but chargeable.
Sheriff's or Notary's Fees: For conducting the auction sale. Computed as a percentage of the bid price (e.g., 1-2%) or a fixed amount, as per local rules.
Registration Fees: For annotating the foreclosure on the title or registering the sale with the Register of Deeds.

3. Other Incidental Charges

Appraisal Fees: If a new appraisal is needed for the sale, though often absorbed by the mortgagee.
Insurance Premiums: If the mortgagee advanced premiums to protect the property, these can be added.
Taxes and Assessments: Unpaid real property taxes on the mortgaged property may be advanced by the mortgagee and recovered.
Advances for Repairs: In rare cases, if the mortgagee incurs costs to preserve the property's value (e.g., emergency repairs), these may be chargeable under the mortgage terms.

4. Interest on Additional Charges

Accrued interest on the principal may continue until full payment, but interest on penalties or fees is generally not allowed unless stipulated.

Limitations and Prohibitions on Additional Charges

Philippine law imposes strict limits to prevent usury or exploitation:

Usury Law (as amended by Presidential Decree No. 116): Caps interest rates, though deregulated for certain loans. Additional charges cannot disguise usurious interest.
Reasonableness Requirement: Charges must be fair and not "shocking to the conscience." The Supreme Court, in cases involving foreclosure, has voided charges exceeding 12-24% per annum cumulatively.
Disclosure Obligation: Under the Truth in Lending Act, all charges must be disclosed upfront. Undisclosed fees cannot be collected during foreclosure.
Prohibited Practices:
- Pactum Commissorium: Automatic appropriation of the property without sale is void (Civil Code, Art. 2088).
- Excessive Penalties: Reduced if iniquitous (e.g., penalties over 3% monthly).
- Double Recovery: Mortgagees cannot charge for services not rendered or duplicate fees (e.g., attorney's fees plus collection fees for the same work).
- Post-Foreclosure Charges: During the one-year redemption period (for individuals) or 90-day period (for juridical persons), only stipulated interest accrues; arbitrary fees are disallowed.

If charges are excessive, the mortgagor can challenge the foreclosure via a petition to annul the sale or a complaint with the BSP or Housing and Land Use Regulatory Board (HLURB) for housing loans.

Computation and Application of Additional Charges

Computation

Formula: Total Obligation = Principal + Accrued Interest + Penalties + Attorney's Fees + Foreclosure Costs.
Example: For a PHP 1,000,000 loan at 10% annual interest, defaulting after one year with a 2% monthly penalty and 5% attorney's fees:
- Interest: PHP 100,000.
- Penalty (6 months default): PHP 120,000.
- Attorney's Fees: PHP 55,000 (5% of PHP 1,100,000).
- Foreclosure Costs: PHP 20,000 (publication, etc.).
- Total: PHP 1,295,000.
Costs are itemized in the Notice of Sale and Certificate of Sale.

Application

Proceeds from the auction sale are first applied to costs, then penalties/fees, interest, and principal (Civil Code, Art. 1253).
Surplus goes to the mortgagor; deficiency may be pursued via a separate action if the mortgage allows.

Implications for Stakeholders

For Mortgagors (Borrowers)

Review loan contracts for charge clauses.
Negotiate reductions during restructuring.
Exercise redemption rights by paying the full amount, including valid charges.
File complaints for invalid charges, potentially halting foreclosure.

For Mortgagees (Lenders)

Ensure all charges are stipulated and disclosed.
Maintain records of expenses to justify claims.
Risk sale annulment if charges are padded.

For Legal Practitioners

Advise on contract drafting to include recoverable charges.
Represent in disputes over charge validity.

Redemption and Additional Charges

During redemption:

The redeemer must pay the sale price plus 1% monthly interest and any assessments/taxes paid by the purchaser (Act No. 3135, Sec. 6).
Additional charges from the original mortgage are included in the base amount.
Disputes over charges can extend to redemption calculations.

Policy Considerations and Reforms

The Philippine government, through the BSP and Department of Justice, periodically reviews foreclosure practices to balance creditor rights with debtor protection. Recent trends emphasize financial literacy and alternative dispute resolution to minimize foreclosures. Proposals for caps on total charges (e.g., 20% of principal) have been discussed in legislative committees, though not yet enacted.

In conclusion, additional charges in extrajudicial foreclosure serve to compensate the mortgagee for losses and expenses but are tightly regulated to uphold equity. Borrowers should seek legal advice early to navigate these complexities, ensuring compliance with laws that prioritize fairness in credit transactions. This framework underscores the Philippine legal system's commitment to protecting property rights while enforcing contractual obligations.