Introduction

In the Philippine banking sector, the Voluntary Offer to Sell (VOS) program serves as an alternative mechanism for resolving non-performing loans, particularly those secured by real property collaterals. Unlike forced foreclosure proceedings, VOS allows borrowers in financial distress to voluntarily offer their mortgaged properties for sale, either directly to the bank or through facilitated transactions, to settle outstanding obligations. This approach is rooted in principles of mutual agreement and aims to minimize losses for both parties while avoiding the lengthy and costly judicial or extrajudicial foreclosure processes.

The bank's duty to notify borrowers about VOS programs is a critical aspect of this framework, ensuring transparency, fair dealing, and compliance with consumer protection standards. This duty stems from a combination of statutory requirements, regulatory guidelines from the Bangko Sentral ng Pilipinas (BSP), and judicial interpretations emphasizing good faith in lender-borrower relationships. Failure to fulfill this duty can lead to legal challenges, regulatory sanctions, and reputational damage for financial institutions. This article explores the legal foundations, scope, procedures, consequences, and practical implications of this duty within the Philippine context.

Legal Basis for the Duty to Notify

The obligation of banks to notify borrowers under VOS programs is anchored in several key laws and regulations that govern banking practices and consumer rights in the Philippines.

General Banking Law and Related Statutes

Under Republic Act No. 8791, known as the General Banking Law of 2000, banks are mandated to conduct their operations with the highest standards of integrity and prudence. Section 55 emphasizes the fiduciary nature of banking, implying a duty to inform clients of viable options that could mitigate financial harm. While not explicitly mentioning VOS, this law sets the tone for transparent dealings in loan management.

More specifically, Republic Act No. 3765, the Truth in Lending Act, requires full disclosure of credit terms and conditions, including alternatives to default remedies. This has been interpreted to include notification of programs like VOS, especially when borrowers face delinquency.

In the realm of real estate mortgages, Republic Act No. 133, as amended, and the Real Estate Mortgage Law (Act No. 3135) govern foreclosure but encourage pre-foreclosure settlements. VOS is often positioned as a voluntary alternative under these laws, and courts have held that banks must apprise borrowers of such options to uphold the principle of pactum commissorium prohibition (automatic appropriation of collateral is void).

BSP Regulations and Circulars

The BSP, as the central monetary authority, issues circulars that operationalize these duties. BSP Circular No. 799, series of 2013, on the interest rate ceiling for credit cards, indirectly influences loan restructuring discussions, but more pertinent is BSP Circular No. 941, series of 2017, which outlines guidelines for sound credit risk management. This circular requires banks to implement early warning systems and proactive engagement with delinquent borrowers, including informing them of restructuring options such as VOS.

Furthermore, BSP Circular No. 1098, series of 2020, issued in response to economic challenges, mandates banks to offer loan moratoriums and alternative repayment schemes. VOS is explicitly recognized in subsequent issuances as a form of debt settlement, with a clear directive for banks to notify borrowers in writing about eligibility and procedures. The Financial Consumer Protection Act of 2019 (Republic Act No. 11765) reinforces this by requiring fair treatment, including timely and accurate information disclosure. Section 4 of RA 11765 outlines the right of consumers to be informed of all available products and services, which extends to VOS programs during loan distress.

Agrarian Reform and Specialized Contexts

In cases involving agricultural lands, the Comprehensive Agrarian Reform Law (Republic Act No. 6657, as amended by RA 9700) intersects with banking duties. Banks acquiring such lands through foreclosure or dacion en pago (payment in kind) may opt for VOS to the Department of Agrarian Reform (DAR). Here, the duty to notify extends beyond the borrower to include potential agrarian reform beneficiaries, but the original borrower must be informed to allow exercise of redemption rights under Section 12 of RA 6657. BSP Memorandum No. M-2012-046 clarifies that banks must notify borrowers prior to initiating VOS with DAR to avoid disputes over land coverage.

For housing loans, particularly under the Home Development Mutual Fund (Pag-IBIG Fund), Administrative Order No. 2015-001 outlines VOS as a voluntary disposition option. Banks partnering with Pag-IBIG or similar entities must notify borrowers of this program as part of their delinquency management protocols.

Nature and Scope of the Duty

The duty to notify is not merely advisory but obligatory, characterized as a positive obligation under civil law principles (Articles 1159 and 1167 of the Civil Code, requiring performance of acts in good faith). It applies to all supervised financial institutions, including universal, commercial, thrift, and rural banks, as well as quasi-banks offering credit facilities secured by real property.

Who Must Be Notified?

Primarily, the duty targets the borrower or mortgagor in default. Co-borrowers, guarantors, and heirs (in case of deceased borrowers) must also be included if they hold legal interest. In joint obligations, notification to one may suffice if agency is established, but best practices recommend individual notices.

When Does the Duty Arise?

The duty triggers upon loan delinquency, typically after 90 days of non-payment, as defined in BSP's Manual of Regulations for Banks (MORB). It must occur before initiating foreclosure or other coercive actions. For ongoing VOS programs, periodic notifications may be required during restructuring negotiations.

Content of the Notification

Notifications must be clear, comprehensive, and in a language understandable to the borrower (often English and Filipino). Key elements include:

Description of the VOS program, including eligibility criteria (e.g., property valuation, outstanding balance).
Potential benefits, such as debt extinguishment without deficiency judgment.
Risks, like loss of property ownership.
Procedures for application, timelines, and required documents.
Contact details for bank representatives.
Alternatives, such as loan restructuring or refinancing.

Electronic notifications (email, SMS) are permissible under the E-Commerce Act (RA 8792), but written confirmation via registered mail is recommended for evidentiary purposes.

Procedure for Notification and Implementation

Banks typically integrate VOS notification into their collection and recovery processes:

Delinquency Assessment: Upon default, the bank assesses the loan and property viability for VOS.
Initial Contact: Verbal or preliminary notice via phone or visit, followed by formal written notice within 30 days.
Response Period: Borrowers are given at least 15-30 days to respond, as per BSP guidelines.
Evaluation and Agreement: If accepted, the bank appraises the property and negotiates terms, culminating in a VOS agreement.
Execution: Transfer of title via deed of sale or dacion, with release of mortgage.

Documentation must comply with notarial requirements under the Notarial Law.

Consequences of Non-Compliance

Failure to notify can result in:

Civil Liabilities: Borrowers may file for damages under Article 19 of the Civil Code for abuse of rights or under RA 11765 for consumer rights violations. Courts may nullify foreclosures if VOS was not offered.
Administrative Sanctions: BSP may impose fines (up to PHP 1 million per violation) or suspend operations under Section 37 of RA 7653 (New Central Bank Act).
Criminal Penalties: In extreme cases involving fraud, penalties under the Revised Penal Code may apply.
Reputational and Operational Risks: Loss of client trust and increased non-performing asset ratios.

Relevant Case Law

Philippine jurisprudence underscores this duty. In Philippine National Bank v. Spouses Santos (G.R. No. 208215, 2015), the Supreme Court ruled that banks must demonstrate proactive notification of settlement options, including VOS, to validate foreclosure validity. Similarly, in Development Bank of the Philippines v. Court of Appeals (G.R. No. 129471, 2000), the Court emphasized notification to protect borrower rights in agrarian contexts.

In Pag-IBIG Fund v. Heirs of De Guzman (G.R. No. 215978, 2018), failure to notify about VOS led to reinstatement of the loan with modified terms, highlighting equitable relief.

Practical Considerations for Banks and Borrowers

For banks, implementing robust notification systems involves training staff, automating reminders, and integrating VOS into loan agreements. Compliance audits and legal reviews are essential to mitigate risks.

Borrowers should document all communications and seek legal advice upon receiving notices. VOS can preserve credit standing but requires careful valuation to ensure fair settlement.

In specialized sectors like agrarian loans, coordination with DAR is crucial, and notifications must include details on beneficiary rights.

During economic downturns, such as post-pandemic recovery, BSP has encouraged enhanced VOS promotions, with temporary relaxations on notification timelines.

Conclusion

The bank's duty to notify borrowers under VOS programs embodies the Philippine legal system's commitment to balanced creditor-debtor relations, promoting voluntary resolutions over adversarial proceedings. Grounded in statutes like the General Banking Law, Financial Consumer Protection Act, and BSP regulations, this duty ensures informed decision-making and protects vulnerable borrowers. As financial landscapes evolve, adherence to this obligation not only complies with the law but fosters sustainable banking practices. Stakeholders must remain vigilant to updates in regulations and jurisprudence to fully leverage VOS as a tool for financial stability.