Understanding Interest Caps, Disclosure Rules, and Legal Remedies

Introduction

The rapid rise of instant loan apps in the Philippines has brought both convenience and controversy. While these mobile-based lending platforms offer quick access to credit, many borrowers have reported undisclosed charges, exorbitant interest rates, and abusive collection practices. The question arises: are instant loan apps with hidden fees legal under Philippine law? This article examines the applicable legal framework, regulatory oversight, and borrower rights concerning loan app operations in the Philippines.

Regulatory Framework Governing Loan Apps

1. Bangko Sentral ng Pilipinas (BSP) Oversight

The BSP regulates banks and BSP-supervised financial institutions (BSFIs), which include certain licensed digital lenders. Under the Manual of Regulations for Non-Bank Financial Institutions (MORNBFI), all lending entities offering credit through digital channels must comply with transparency and consumer protection rules, particularly Circular No. 1048 (Consumer Protection Framework).

2. Securities and Exchange Commission (SEC) Regulation of Lending and Financing Companies

Loan apps operated by non-bank lenders—which form the bulk of instant loan platforms—fall under the jurisdiction of the Securities and Exchange Commission (SEC), pursuant to:

Republic Act No. 8556 (Financing Company Act of 1998), and
Republic Act No. 9474 (Lending Company Regulation Act of 2007).

These laws require all lending and financing companies to register with the SEC and to secure a Certificate of Authority before operating. The SEC has consistently reminded the public that any online lending app without such authorization is illegal.

Legality of Hidden Fees and Undisclosed Charges

1. Disclosure Requirements

Under SEC Memorandum Circular No. 19, Series of 2019 (Disclosure Requirements on Online Lending Platforms), all registered lending companies are mandated to fully disclose all loan terms, including:

The nominal interest rate and effective interest rate (EIR),
All processing fees, penalties, service charges, and deductions, and
The total amount to be received by the borrower.

Failure to disclose these details constitutes deceptive lending practice, which can lead to administrative sanctions, suspension, or revocation of the company’s license.

2. Consumer Protection and the Truth in Lending Act

The Truth in Lending Act (Republic Act No. 3765) explicitly prohibits lenders from concealing or misrepresenting loan costs. Section 4 of the Act requires that finance charges must be clearly disclosed to the borrower before consummation of the transaction, ensuring that borrowers are aware of the total cost of credit. Hidden fees, therefore, directly violate this law.

3. Unfair Collection and Data Privacy Violations

The SEC Memorandum Circular No. 18, Series of 2019 (Prohibition on Unfair Debt Collection Practices) penalizes lending apps that engage in harassment or data misuse during collection. Sharing borrowers’ personal information or shaming them publicly for unpaid loans may also violate the Data Privacy Act of 2012 (RA 10173).

Interest Rate Caps and Limits

1. Bangko Sentral ng Pilipinas Circular No. 1133 (2021)

In recognition of predatory lending concerns, the BSP imposed interest rate caps on small-value, short-term loans offered by lending and financing companies, including those delivered through online apps:

Maximum interest rate: 6% per month (or 0.2% per day)
Maximum penalty for late payment: 5% per month on the unpaid amount
Other charges: Cumulative cap of 15% per month inclusive of interest and fees

This regulation aims to protect consumers from usurious rates while ensuring continued access to credit.

2. Anti-Usury Law and BSP Circular 799

Although the Usury Law (Act No. 2655) was technically suspended by BSP Circular No. 799 (2013), lenders remain bound by principles of reasonableness and good faith. Excessive interest rates that “shock the conscience” may still be struck down by courts as contrary to public policy under Article 1306 of the Civil Code.

Enforcement Actions and Penalties

The SEC has actively cracked down on abusive and unregistered loan apps. It has issued cease and desist orders and delisted hundreds of illegal platforms found to:

Charge undisclosed fees and deceptive rates,
Operate without proper registration,
Access or misuse borrowers’ contact lists, and
Engage in harassment and public shaming.

Violators may face:

Administrative penalties, including revocation of their Certificate of Authority,
Criminal liability under Section 12 of RA 9474 (imprisonment of up to 10 years and fines up to ₱1 million), and
Civil damages under general consumer protection and tort principles.

Remedies for Borrowers

Victims of hidden fees or abusive practices by loan apps may:

File a complaint with the SEC Enforcement and Investor Protection Department (EIPD) via www.sec.gov.ph.
Report data privacy violations to the National Privacy Commission (NPC).
Seek redress through small claims court, especially for recovery of overcharges or damages amounting to ₱1 million or below.
Report to the BSP Consumer Assistance Unit if the lender is a BSP-supervised financial institution.

Borrowers are advised to verify the lender’s registration status through the SEC’s online database before availing of any loan.

Conclusion

Instant loan apps are not inherently illegal, but those imposing hidden fees, excessive interest, or undisclosed charges clearly violate multiple Philippine laws—namely, the Truth in Lending Act, Lending Company Regulation Act, and BSP Circular No. 1133. Transparency and fair dealing are central to lawful lending operations. Borrowers should remain vigilant, and regulators continue to strengthen enforcement to protect the public from predatory digital lending practices.

References (Selected):

Republic Act No. 9474 (Lending Company Regulation Act of 2007)
Republic Act No. 8556 (Financing Company Act of 1998)
Republic Act No. 3765 (Truth in Lending Act)
BSP Circular No. 1133, Series of 2021
SEC Memorandum Circular Nos. 18 and 19, Series of 2019
Data Privacy Act of 2012 (RA 10173)