Borrower Rights When a Lending App’s Authority Is Revoked: Collection and Enforcement Issues

Introduction

In the Philippines, the proliferation of digital lending applications has revolutionized access to credit, particularly for underserved populations. However, regulatory oversight is crucial to protect consumers from predatory practices. The Securities and Exchange Commission (SEC) plays a pivotal role in regulating financing companies, including those operating lending apps under Republic Act No. 9474 (Lending Company Regulation Act of 2007) and its implementing rules. When a lending app's authority or license is revoked—often due to violations such as unfair collection tactics, data privacy breaches, or non-compliance with disclosure requirements—it raises significant questions about borrower rights, ongoing debt obligations, and the legitimacy of collection and enforcement efforts.

This article explores the comprehensive landscape of borrower rights in such scenarios, focusing on the Philippine legal framework. It covers the implications of revocation, permissible collection activities, potential abuses, and available remedies for borrowers. Understanding these elements is essential for borrowers to navigate disputes and assert their protections under the law.

Regulatory Framework Governing Lending Apps

Lending apps in the Philippines are classified as financing companies if they engage in lending activities without being banks or quasi-banks. The SEC is the primary regulator, requiring registration and compliance with SEC Memorandum Circular No. 19, Series of 2019 (Rules and Regulations Governing the Registration of Financing Companies), and subsequent issuances. Additionally, the Bangko Sentral ng Pilipinas (BSP) oversees aspects related to consumer protection for financial services under Circular No. 1048, Series of 2019 (Guidelines on the Adoption of the Financial Consumer Protection Framework).

Key laws include:

• Republic Act No. 3765 (Truth in Lending Act): Mandates full disclosure of loan terms, interest rates, and charges to prevent deceptive practices.
• Republic Act No. 10173 (Data Privacy Act of 2012): Protects personal data collected during loan applications and collections.
• Republic Act No. 9474 (Lending Company Regulation Act): Establishes licensing requirements and prohibits unfair debt collection.
• Civil Code of the Philippines (Republic Act No. 386): Governs contracts, including loan agreements, under Articles 1156-1422, emphasizing obligations and remedies.
• Consumer Protection Laws: Including Department of Trade and Industry (DTI) regulations and the Consumer Act of the Philippines (Republic Act No. 7394), which address unfair trade practices.

Revocation of authority typically occurs after SEC investigations into complaints or audits revealing violations, such as excessive interest rates exceeding the usury limits implied under the Civil Code or BSP ceilings (though usury laws were suspended by BSP Circular No. 799, Series of 2013, interest must still be reasonable).

Effects of License Revocation on Lending Operations

When the SEC revokes a lending app's authority, the company loses its legal capacity to engage in new lending activities. However, this does not automatically extinguish existing loan contracts. Under Philippine jurisprudence, such as in Philippine National Bank v. Court of Appeals (G.R. No. 108630, 1995), valid contracts remain enforceable unless declared void by a court. Thus:

• Existing Debts Remain Valid: Borrowers are still obligated to repay principal and agreed-upon interest, provided the loan terms complied with laws at inception.
• Prohibition on New Loans: The revoked entity cannot issue new credit or refinance existing ones.
• Transition to Collection Mode: The company may continue collecting outstanding debts but must adhere to strict guidelines to avoid further penalties.
• Asset Wind-Down: In severe cases, revocation may lead to liquidation under SEC rules, where assets (including receivables) are assigned to a receiver or liquidator.

If the app was operating without proper registration initially (e.g., as an illegal lender), loans may be deemed unenforceable under Article 1409 of the Civil Code, which voids contracts contrary to law or public policy.

Borrower Rights Post-Revocation

Borrowers retain robust rights even after revocation, rooted in constitutional protections (e.g., due process under Article III, Section 1 of the 1987 Constitution) and statutory safeguards. Key rights include:

1. Right to Fair and Transparent Collection:

   • Collectors must identify themselves and the debt clearly, without harassment. Republic Act No. 11371 (Anti-Harassment of Debtors Act) prohibits threats, intimidation, or public shaming.
   • No collection during unreasonable hours (e.g., before 7 AM or after 9 PM) or via unauthorized channels.

2. Protection Against Unfair Terms:

   • If the original loan included hidden fees or exorbitant interest (e.g., exceeding 36-42% effective annual rate as per SEC guidelines), borrowers can challenge these as unconscionable under Article 1306 of the Civil Code.
   • Right to demand a statement of account showing payments applied correctly (principal first, per Article 1253).

3. Data Privacy Rights:

   • Under the Data Privacy Act, revoked lenders cannot share borrower data with third parties without consent, even for collection. Violations can lead to fines up to PHP 5 million or imprisonment.
   • Borrowers can request deletion of data post-settlement.

4. Right to Dispute Debts:

   • Borrowers may contest the debt's validity if the lender was unlicensed at origination, potentially rendering it void ab initio.
   • Statute of limitations applies: Actions on written contracts prescribe in 10 years (Article 1144, Civil Code).

5. Protection from Illegal Enforcement:

   • No self-help remedies like repossession without court order; violative under anti-harassment laws.
   • If the lender assigns debts to a third-party collector, the assignee must comply with the same regulations.

6. Right to Information:

   • Borrowers can inquire about the revocation's impact via SEC's public records or the lender's notices.

In cases like the 2022 SEC crackdown on unauthorized online lenders (e.g., SEC Advisory No. 18, Series of 2022), borrowers were advised that payments to revoked entities might not discharge debts if the entity is fraudulent.

Permissible and Impermissible Collection Practices

Post-revocation, collection must be ethical and legal:

• Permissible Practices:

  • Sending written notices or emails detailing the outstanding amount, due date, and payment methods.
  • Negotiating settlements or restructuring, provided no new credit is extended.
  • Filing civil suits for collection in appropriate courts (e.g., Metropolitan Trial Courts for small claims under A.M. No. 08-8-7-SC).
  • Reporting to credit bureaus like the Credit Information Corporation (CIC) under Republic Act No. 9510, but only accurate information.

• Impermissible Practices:

  • Harassment: Threats of arrest (debts are civil, not criminal, unless fraud under Article 315 of the Revised Penal Code).
  • Public Disclosure: Posting borrower details on social media or contacting employers/friends, violative of data privacy and anti-harassment laws.
  • Excessive Fees: Adding penalties post-revocation without basis in the original contract.
  • Impersonation: Collectors posing as law enforcement.

Violations can result in administrative penalties from the SEC (up to PHP 1 million per violation) or criminal charges.

Enforcement Issues and Challenges

Enforcing borrower rights amid revocation presents several hurdles:

1. Jurisdictional Overlaps: Disputes may involve SEC (regulatory), BSP (consumer protection), National Privacy Commission (NPC) for data issues, or courts for contract enforcement.

2. Proof of Revocation: Borrowers must verify status via SEC's website or i-View portal. Lenders sometimes continue operations illicitly, leading to "ghost collections."

3. Cross-Border Challenges: Many lending apps are foreign-owned (e.g., via Philippine subsidiaries). Revocation may not deter offshore entities, complicating enforcement under international treaties like the Hague Convention on Service Abroad.

4. Class Actions and Mass Complaints: Borrowers can file collective complaints with the SEC or DTI, as seen in actions against apps like Cashwagon and FastCash, leading to revocations.

5. Judicial Remedies: Courts may award damages for moral injury (Article 2217, Civil Code) if collections cause distress. In Sps. Quinsay v. Court of Appeals (G.R. No. 127128, 2000), unconscionable interest was struck down.

6. Regulatory Gaps: While SEC Circular No. 10, Series of 2020, addresses online lending platforms, enforcement against revoked apps relies on borrower reporting, straining resources.

Remedies Available to Borrowers

Borrowers facing issues can pursue:

• Administrative Complaints: File with SEC's Enforcement and Investor Protection Department (EIPD) for free, potentially leading to cease-and-desist orders.
• NPC Complaints: For data breaches, with remedies including data blocking.
• Court Actions: Small claims for debts under PHP 1 million; regular civil suits for larger amounts or injunctions.
• Alternative Dispute Resolution: Mediation via Barangay Justice System for local disputes.
• Consumer Advocacy: Seek assistance from groups like the Philippine Association of Lending Companies or legal aid from the Integrated Bar of the Philippines.

Successful cases, such as the 2023 SEC revocation of several apps for harassment, resulted in refunds and debt cancellations for affected borrowers.

Conclusion

The revocation of a lending app's authority in the Philippines underscores the balance between creditor rights and borrower protections. While debts persist, borrowers are shielded by a robust legal framework emphasizing fairness, privacy, and due process. Vigilance in asserting these rights—through documentation, reporting violations, and seeking remedies—empowers individuals against potential abuses. As digital lending evolves, ongoing regulatory refinements will further safeguard consumers.