Overview

In the Philippines, whether a loan “processing fee” or cancellation fee is legal even when the loan proceeds were never released depends on a few core questions:

What exactly was agreed to in writing (and properly disclosed)?
Was there a valid contract of loan already perfected, or was it still just an application/pre-loan stage?
Who caused the non-release—borrower, lender, or a third-party condition (e.g., incomplete documents)?
Are the fees reasonable and not unconscionable, deceptive, or a form of advance-fee scheme?
Is the lender a bank/BSP-supervised institution, an SEC-registered lending/financing company, a cooperative, a pawnshop, or an informal/online lender? (Different regulators, similar legal principles.)

The short legal principle is this: a lender generally cannot keep or demand fees that have no lawful basis, were not properly disclosed, or would result in unjust enrichment—especially if no loan was released and no legitimate service corresponding to the fee was actually rendered. But some application/processing charges can be enforceable if they are clearly agreed upon, properly disclosed, reasonable, and tied to real services (credit investigation, appraisal, notarial work, etc.), even if the loan ultimately does not push through.

This article explains the rules in Philippine context, the common scenarios, what fees may be valid, what fees often aren’t, and what borrowers can do.

Key concepts (Philippine legal framing)

1) Loan vs. loan application

A loan contract (mutuum) is generally understood as requiring delivery of the money (or other consumable) to the borrower—once delivered, the borrower must return the equivalent amount, usually with interest if agreed. In practice, many disputes arise because people sign “loan documents” before release. That stage can include:

Application stage (no approval yet)
Approval/offer stage (approved subject to conditions)
Documentation stage (signing, collateral, underwriting)
Release/consummation stage (proceeds actually delivered/credited)

Depending on the documents, parties may be bound to certain obligations even before release (e.g., paying for appraisal), but the obligation to pay “loan charges” is not automatic unless validly agreed and justified.

2) “Processing fee” can mean different things

In Philippine lending practice, “processing fee” might be:

A legitimate service fee for evaluating the application (credit investigation, background checks)
Bank charges (documentary steps, internal processing)
Third-party costs (appraisal, notarial fees, documentary stamp tax in some structures)
A disguised or padded charge that functions like interest
A scam “advance fee” demanded before any disbursement

The label does not control legality; substance does.

3) Penalty/cancellation fees are tested for fairness

Even if there is a written “cancellation fee,” Philippine law generally allows courts/regulators to strike down or reduce charges that are:

Unconscionable
Contrary to law, morals, good customs, public order, or public policy
Deceptive or not properly disclosed
Functionally a penalty grossly disproportionate to actual loss or costs

Main laws and regulators that typically matter

Civil law principles (Civil Code concepts)

Even without quoting provisions, Philippine civil law revolves around:

Contracts must be validly consented to and have lawful cause
Obligations must have a basis
Good faith in performance
No unjust enrichment: no one should benefit at another’s expense without legal ground
Penalty clauses may be reduced if iniquitous/unconscionable
Damages and rescission when one party breaches

These principles are often enough to challenge fees when no proceeds were released.

Truth in Lending Act (Republic Act No. 3765)

This law requires lenders covered by it (many formal lenders) to properly disclose the true cost of credit, including finance charges. Problems arise when fees are not disclosed clearly or are misleadingly presented.

Consumer protection

Depending on the lender and channel, borrowers may invoke consumer protection norms against unfair, deceptive, or unconscionable practices. Regulators (BSP, SEC, DTI in certain consumer contexts) can treat hidden or abusive fees as violations.

Lending and financing company rules (SEC-supervised)

If the lender is a lending company (RA 9474) or financing company (RA 8556), it is typically under SEC regulatory supervision for registration and certain compliance. While civil law still governs the contract, SEC oversight becomes relevant for complaints about improper practices and licensing.

BSP rules (banks and BSP-supervised financial institutions)

If the lender is a bank or BSP-supervised entity, BSP consumer protection and disclosure rules are often the best complaint route, and BSP scrutiny of fees/disclosures can be strong.

The core question: If the loan proceeds were never released, can fees still be charged or kept?

General rule of thumb

Fees for real, separate services actually performed (and properly agreed/disclosed) may be collectible or non-refundable.
Fees that are essentially part of the cost of borrowing (finance charges) become questionable if no borrowing occurred because there was no release.
Fees demanded upfront as a condition to release, especially to a personal account/e-wallet, are often a red flag and may be unlawful or even fraudulent depending on circumstances.

Below are the most common scenarios.

Scenario-by-scenario analysis

Scenario A: The borrower applied, but the lender denied the loan

Can the lender keep a processing fee? Sometimes yes—if the borrower clearly agreed to an application fee that covers evaluation costs, and the amount is reasonable and properly disclosed.

**But often no—**if:

The fee was not clearly disclosed upfront
It was misrepresented as refundable
The lender cannot show any real service performed
The amount is excessive relative to legitimate costs
The “processing fee” is really an advance-payment scheme

Practical reality: Many reputable institutions do not charge big upfront “processing fees” for personal loans; charges are often deducted from proceeds upon release. When a lender charges a significant upfront fee and then “denies” or “delays forever,” that pattern can indicate an abusive practice.

Scenario B: The borrower was approved but conditions were not met (e.g., incomplete documents, failed verification)

Can the lender charge fees? It depends on which party caused the non-release and what costs were incurred.

If the borrower’s non-compliance caused the cancellation, the lender may have a better argument for retaining specific, itemized costs already spent (e.g., appraisal fees paid to an appraiser, notarial fees already paid, CI fees).
Even then, broad “cancellation fees” or big “processing fees” may still be challengeable if not tied to actual costs or if unconscionable.

Scenario C: The borrower decided to cancel before release

Can there be a cancellation fee even without release? Possibly, but it must be:

Expressly agreed
Reasonable
Not punitive
Connected to actual administrative costs or losses

If the “cancellation fee” is essentially a penalty designed to punish cancellation, Philippine courts and regulators may view it as iniquitous and reduce or disallow it—especially when the lender did not actually disburse anything and can’t show substantial loss.

Best practice for fairness: A lender that incurred real third-party costs may retain only those actual costs, not an arbitrary “percentage of loan amount.”

Scenario D: The lender approved, borrower complied, but the lender failed or refused to release

This is the strongest ground to contest fees.

If the lender is the one that breached or failed to release without valid reason, then charging or keeping fees can be attacked as:

Bad faith
Lack of legal basis
Unjust enrichment
Potentially an unfair consumer practice

In this scenario, the borrower may pursue:

Refund of fees
Damages (depending on proof)
Regulatory complaints (BSP/SEC), especially if the lender’s behavior is systemic

Scenario E: The “processing fee” was demanded upfront “to unlock” release

This is where scams and abusive lending practices commonly appear.

Red flags include:

“Pay first to release your loan” (especially to a personal GCash/Maya/bank account)
“Insurance fee,” “verification fee,” “tax fee,” or “ATM delivery fee” required before disbursement
Constant new fees after each payment
No clear office address, no verifiable registration, no clear loan disclosure statement

In many legitimate lending models, charges are:

Disclosed upfront, and/or
Deducted from proceeds upon release, not paid in advance

If money was paid and no proceeds were released, it may be a case for:

Refund demand
Civil action (collection/refund)
Potential criminal angles if misrepresentation/fraud is present (facts matter)

The legality tests that usually decide these disputes

1) Was there clear, written, and understandable disclosure?

A fee is more defensible if it appears in a document the borrower actually received and understood, such as:

A schedule of fees
A disclosure statement of finance charges (when applicable)
An application form with a clearly labeled non-refundable application fee

A fee is vulnerable if it was:

Only mentioned verbally
Hidden in fine print
Introduced after approval
Not itemized
Misrepresented as refundable or “required by law” when it isn’t

2) Is the fee tied to a legitimate service or actual cost?

The more the fee matches a real expense, the more enforceable it becomes. Examples:

Appraisal fee (with appraisal report)
Credit investigation fee (with CI process evidence)
Notarial/documentation fees (with receipts)

If the lender cannot explain what was done—or the fee is just “processing” without any specifics—its legal basis weakens.

3) Is the amount reasonable, or is it unconscionable?

Philippine doctrine allows intervention when charges are grossly excessive. A “processing fee” that is a large percentage of the loan amount, especially for a loan that never released, is easier to attack.

4) Who caused the non-release?

Fault matters. If the borrower canceled late after the lender incurred costs, limited retention may be fair. If the lender failed to release, keeping fees is harder to justify.

5) Does the fee operate like interest/finance charge without a loan?

If there was no disbursement, then charging “cost of credit” becomes conceptually suspect—because credit was never extended.

Common fee types and how they’re typically treated

Usually more defensible (if documented and actually incurred)

Appraisal fee (collateral-based loans)
Notarial/document preparation fees already performed
Credit investigation/background check fees
Documentary costs paid to third parties (with receipts)

Often contestable (especially if no release)

“Processing fee” that is not itemized or not linked to any service
“Approval fee” charged even though approval did not lead to release
“Cancellation fee” computed as a percentage of the principal amount regardless of costs
“Commitment fee” in consumer loans without clear explanation and disclosure
Any fee demanded upfront as a prerequisite for release, especially via informal channels

What borrowers can do: practical step-by-step (Philippine context)

1) Gather proof

Application forms, promissory note, disclosure statements, fee schedules
Screenshots of chats/emails/SMS
Receipts, transfer confirmations, e-wallet transaction IDs
Timeline: dates of application, approval, compliance, promised release, cancellations

2) Send a written demand

A short demand typically asks for:

Legal basis of the fee
Itemization of services allegedly performed
Refund within a set period if no valid basis exists
Copies of documents supporting retention (receipts, appraisal report)

Written demands matter because they establish a record of good faith and can be used in complaints/cases.

3) Escalate to the right regulator

BSP: if a bank or BSP-supervised entity (banks, many financial institutions)
SEC: if an SEC-registered lending company or financing company
Cooperative Development Authority (CDA): if a cooperative
Local authorities / law enforcement: if facts suggest fraud/scam
Courts (small claims): for straightforward money recovery within the small claims limits and rules

4) Consider small claims for refunds

If the dispute is essentially “I paid X pesos, no loan was released, refund me,” small claims can be a practical route (no lawyers required for parties in many small claims settings, subject to the current rules). It depends on amount, evidence, and venue.

How lenders justify these fees (and how to evaluate the justification)

A lender may argue:

“You agreed it was non-refundable.”
“We incurred processing costs.”
“You canceled after approval and documentation.”

Evaluation:

Was consent informed or buried?
Was it disclosed before payment?
Are there receipts or objective proof of actual costs?
Is the fee proportionate, or effectively a penalty?
Was the borrower misled that payment would guarantee release?

If documentation is weak or the fee is excessive, borrowers often have strong equitable arguments.

Special warning: advance-fee loan scams

A common Philippine scam pattern:

Borrower is “approved” quickly.
Borrower is told to pay “processing/insurance/tax” to release the loan.
After payment, a new fee appears.
No release ever happens.

If this matches the experience, treat it as potentially fraudulent:

Stop sending money.
Preserve evidence.
Report to the proper authorities and platforms used.

Practical checklist (quick guide)

Fees are more likely legal/enforceable if:

Clearly disclosed in writing upfront
Reasonable and proportional
Tied to real services/costs
Supported by receipts/reports
Non-release is due to borrower’s cancellation/non-compliance

Fees are more likely illegal/unenforceable or refundable if:

No clear written basis
Hidden or misleading disclosure
Excessive or punitive cancellation fees
No proof of services or expenses
Non-release is due to lender’s fault or unexplained delay
Demanded upfront “to release” through informal channels

Bottom line

In the Philippines, a blanket rule doesn’t exist that “no release means no fees,” but the law strongly resists fees that are undisclosed, unreasonable, not tied to real services, or that amount to unjust enrichment—especially when no loan proceeds were ever delivered. Legitimate, itemized costs can sometimes be retained, but broad “processing/cancellation fees” with no proof or fairness are frequently challengeable through demand letters, regulators (BSP/SEC), and refund actions (including small claims).

If you share the exact wording of the fee clause (you can redact personal details) and the timeline of what happened, a more precise analysis can be given—especially on whether the fee looks like a legitimate cost reimbursement, a penalty clause that can be reduced, or an unfair/deceptive charge.