Introduction

In the rapidly evolving landscape of financial technology (fintech) in the Philippines, lending applications have become a popular means for individuals to access quick loans. These apps often impose daily penalties for late payments, raising questions about their legality under Philippine law. This article examines the permissibility of such penalties, the constraints imposed by usury laws, mandatory disclosure requirements, and the role of the Securities and Exchange Commission (SEC) in enforcement. Drawing from relevant statutes, regulations, and jurisprudence, it provides a comprehensive overview of the legal framework governing these practices.

Legal Framework for Lending Apps in the Philippines

Lending apps operate as lending companies or fintech platforms under Philippine jurisdiction. The primary laws include:

Republic Act No. 9474 (Lending Company Regulation Act of 2007): This act requires all lending companies to register with the SEC and comply with operational standards. It defines a lending company as any entity engaged in granting loans to the public, whether online or offline.
Republic Act No. 3765 (Truth in Lending Act): This mandates full disclosure of all finance charges, including interest, penalties, and fees, to borrowers before consummation of the transaction.
Civil Code of the Philippines (Republic Act No. 386): Articles 1956 to 1961 address interest rates and usury, while Articles 1306 and 1409 deal with unconscionable contracts.
SEC Memorandum Circulars: Notably, SEC MC No. 19, Series of 2019, on the Prohibition on Unfair Debt Collection Practices, and MC No. 10, Series of 2020, on the Registration of Lending and Financing Companies, specifically target online lending platforms.

Additionally, the Bangko Sentral ng Pilipinas (BSP) oversees banks and quasi-banks, but non-bank lending apps fall primarily under SEC supervision. The Consumer Protection Act (Republic Act No. 7394) and the Data Privacy Act (Republic Act No. 10173) provide ancillary protections against abusive practices.

Are Daily Penalties by Lending Apps Legal?

Daily penalties, often charged as a percentage of the outstanding loan per day of delay, are not inherently illegal but must comply with legal limits and principles. Philippine law distinguishes between interest (compensation for the use of money) and penalties (charges for default).

Permissibility Under the Civil Code

Under Article 1229 of the Civil Code, penalties may be imposed in contracts to ensure performance, but courts can reduce them if they are iniquitous or unconscionable. Daily penalties that accumulate to exorbitant amounts could be deemed void for being contrary to morals or public policy (Article 1409).

In jurisprudence, such as Spouses Silos v. Philippine National Bank (G.R. No. 181045, 2011), the Supreme Court has struck down penalties exceeding reasonable bounds, emphasizing that they should not serve as a means to enrich lenders unduly.

Classification as Interest or Penalty

If daily penalties are structured to function like interest, they may be scrutinized under interest rate regulations. The Supreme Court in Advocates for Truth in Lending, Inc. v. Bangko Sentral Monetary Board (G.R. No. 192986, 2013) clarified that penalties can be considered part of the "effective interest rate" if they effectively increase the cost of borrowing.

Lending apps often advertise low interest but impose high daily penalties (e.g., 1-5% per day), which can lead to annual rates far exceeding legal norms. Such practices may violate the principle against disguised usury.

Specific Rules for Online Lending

SEC MC No. 19-2019 explicitly prohibits "unfair collection practices," including harassing borrowers or imposing excessive penalties. Daily penalties are allowed if disclosed and reasonable, but apps must avoid compounding that leads to debt traps.

Usury Limits in the Philippine Context

Usury refers to the charging of excessive interest. Historically, the Usury Law (Act No. 2655) set ceilings, but these were suspended by Central Bank Circular No. 905, Series of 1982, allowing market-determined rates. However, this does not permit unlimited charges.

Current Usury Standards

No Fixed Ceiling: Post-1982, there is no statutory cap, but interest must be reasonable. The Supreme Court in Medel v. Court of Appeals (G.R. No. 131622, 1998) held that rates above 5.5% per month (66% per annum) are presumptively usurious and unconscionable.
Effective Interest Rate (EIR): Under BSP and SEC rules, the total cost of credit, including penalties, must not be excessive. For microfinance and small loans, rates can be higher to cover risks, but daily penalties pushing EIR beyond 100-200% annually have been challenged.
Jurisprudence on Excessive Rates: Cases like Chua v. Timan (G.R. No. 170452, 2008) voided contracts with 7% monthly interest compounded monthly. For lending apps, penalties accruing daily (e.g., 2% per day) could equate to 730% annually, rendering them voidable.
Exceptions for Certain Lenders: Pawnshops (under Presidential Decree No. 114) have a 2.5% monthly cap, but lending apps are not exempt and must adhere to general unconscionability standards.

Borrowers can seek judicial intervention to nullify usurious provisions, with lenders potentially liable for restitution of excess payments.

Disclosure Rules Under Philippine Law

Transparency is a cornerstone of consumer protection in lending.

Truth in Lending Act Requirements

RA 3765 requires lenders to disclose in writing:

The cash amount advanced.
Finance charges, itemized to include interest, fees, and penalties.
The effective interest rate.
The total amount to be paid and payment schedule.

For lending apps, disclosures must occur before loan approval, typically via app interfaces or emails. Failure to comply can result in penalties up to P100,000 or imprisonment, and borrowers may recover twice the finance charge paid.

SEC-Specific Disclosures for Fintech

SEC MC No. 10-2020 mandates online lenders to provide clear terms on penalties, including daily rates, in plain language. Apps must also disclose their SEC registration and any affiliations.

In SEC v. Various Online Lending Platforms (enforcement actions in 2019-2020), undisclosed high penalties led to cease-and-desist orders.

Data Privacy and Consent

Under RA 10173, apps must obtain explicit consent for penalty structures and data use in collections. Non-disclosure of how penalties are calculated (e.g., compounding) violates these rules.

SEC Enforcement Mechanisms

The SEC is the primary regulator for non-bank lending entities, including apps.

Registration and Licensing

All lending apps must register as corporations and obtain a Certificate of Authority (CA) from the SEC under RA 9474. Unregistered apps are illegal, and operations can be shut down.

Monitoring and Complaints

The SEC's Enforcement and Investor Protection Department (EIPD) handles complaints via its online portal. Common issues include excessive penalties, leading to investigations.

Penalties for Violations

Administrative Sanctions: Fines from P10,000 to P1,000,000 per violation, suspension, or revocation of CA.
Cease-and-Desist Orders (CDOs): Issued for usurious practices or non-disclosure, as seen in 2019 when the SEC targeted over 2,000 unregistered apps.
Criminal Liability: Under RA 9474, officers can face imprisonment of 6 months to 10 years for operating without authority.

Collaborative Enforcement

The SEC coordinates with the BSP, National Privacy Commission (NPC), and Department of Justice (DOJ) for holistic enforcement. For instance, joint operations have led to app delistings from app stores.

Recent Developments

In response to complaints during the COVID-19 pandemic, the SEC issued moratoriums on new penalties for affected borrowers (MC No. 4-2020). Ongoing reforms include proposed bills for a Fintech Regulatory Sandbox to test innovative but compliant models.

Remedies for Borrowers

Affected borrowers can:

File complaints with the SEC or BSP.
Seek court annulment of usurious contracts.
Claim damages under the Civil Code for moral or exemplary harms.
Report to the NPC for privacy breaches in penalty enforcement.

Consumer groups like the Laban Konsyumer Inc. have advocated for stricter caps on penalties.

Conclusion

Daily penalties by lending apps are legal only if reasonable, fully disclosed, and non-usurious. Philippine law balances lender rights with borrower protections, emphasizing fairness. As fintech grows, ongoing SEC enforcement and potential legislative updates will shape this area. Borrowers should scrutinize terms, and lenders must prioritize compliance to avoid sanctions. This framework underscores the need for ethical lending practices in the digital age.