Challenging Usurious Interest Rates from Lending Companies in the Philippines

Introduction

In the Philippines, access to credit is a vital lifeline for individuals and businesses, particularly in a developing economy where formal banking services may not reach all segments of society. Lending companies, licensed under the Lending Company Regulation Act of 2007 (Republic Act No. 9474), play a significant role in providing short-term loans to underserved borrowers. However, this accessibility often comes at a steep price: exorbitant interest rates that border on or cross into usury. Usury, historically defined as charging interest rates beyond legally permissible limits, remains a contentious issue despite the liberalization of interest rate ceilings in 1982.

Challenging usurious interest rates is not merely a financial dispute but a fundamental assertion of contractual equity and consumer protection under Philippine law. Borrowers burdened by compounding interests that devour their principal can seek judicial intervention to nullify excessive clauses, reform contracts, or claim damages. This article comprehensively explores the legal landscape for contesting such rates from lending companies, drawing on statutory provisions, jurisprudence, and practical strategies within the Philippine context. It underscores the balance between contractual freedom and the state's paternalistic role in safeguarding vulnerable parties from predatory lending practices.

Historical and Conceptual Overview of Usury in Philippine Law

The concept of usury traces its roots to colonial Spanish law, which influenced early Philippine statutes. The Usury Law (Act No. 2655, as amended) of 1916 was the cornerstone regulation, capping interest rates at 12% per annum for loans and 14% for forbearance of money, with penalties including forfeiture of excess interest and potential imprisonment. Violations were criminal offenses, reflecting a moral and economic aversion to exploitative lending.

A seismic shift occurred on January 1, 1982, via Central Bank Circular No. 905, Series of 1982. Issued under the authority of the Monetary Board, this circular rendered the Usury Law "inoperative," effectively deregulating interest rates for most transactions. The rationale was to foster a free-market environment, allowing rates to be determined by supply and demand. However, this deregulation did not eradicate usury entirely; instead, it shifted the battleground to civil remedies against "unconscionable" or "excessive" rates.

Today, usury is no longer a strict criminal violation but a civil wrong that can invalidate contractual stipulations. Lending companies, as non-bank financial institutions, must still adhere to ethical lending under Republic Act No. 3765 (The Truth in Lending Act), which mandates disclosure of all charges, including interest, to enable informed borrowing.

Legal Framework Governing Interest Rates

The challenge to usurious rates from lending companies operates within a multi-layered legal framework:

1. Civil Code Provisions (Republic Act No. 386)

Article 1174: Contracts must be in accordance with law, morals, and public policy. Interest rates that are grossly excessive violate this, rendering the stipulation void.
Article 1306: Parties are bound by their contracts, but only to the extent they do not contravene law or morals. Courts may equitably reduce or strike down usurious clauses.
Article 1956: No interest can be due unless expressly stipulated, but once agreed, it must be reasonable.
Article 1229: If damages result from a breach, the court may equitably lessen the penalty if it is iniquitous or unconscionable—applicable by analogy to interest rates.
Article 1409: Contracts contrary to law or morals are inexistent and void from inception, meaning usurious interest clauses confer no rights.

2. Usury Law (Act No. 2655, as amended)

Though inoperative for rate ceilings, Sections 3 and 7 retain utility. Section 3 allows borrowers to recover twice the total interest paid if usury is proven. Section 7 provides for criminal prosecution in egregious cases, though rarely invoked post-1982.
Importantly, the law's penalties (e.g., forfeiture of principal in some instances) can still apply if rates are deemed "unjust and oppressive."

3. Lending Company Regulation Act of 2007 (RA 9474)

Regulates lending companies under the Securities and Exchange Commission (SEC). Section 15 prohibits charging rates "in excess of that fixed by law or by the Monetary Board." While no fixed ceilings exist, this implies adherence to equitable standards.
Section 18 empowers the SEC to investigate complaints and impose sanctions, including license revocation for abusive practices.

4. Bangko Sentral ng Pilipinas (BSP) Regulations

BSP Circular No. 808 (2015) on consumer protection requires fair treatment, including transparent interest computations.
Manual of Regulations for Non-Bank Financial Institutions sets guidelines for lending companies, emphasizing that rates must not be "manifestly excessive."
BSP's authority under RA 7653 (The New Central Bank Act) allows intervention in cases of predatory lending affecting financial stability.

5. Truth in Lending Act (RA 3765) and Consumer Act (RA 7394)

RA 3765 mandates full disclosure of finance charges, effective interest rates, and default penalties. Non-disclosure can lead to contract invalidation.
RA 7394 deems unfair or deceptive acts (e.g., hidden fees inflating effective rates) as violations, with civil and administrative remedies.

Determining What Constitutes a Usurious Rate

Absent fixed ceilings, courts assess usury on a case-by-case basis, guided by equity and public policy. Key factors include:

Excessiveness: Rates exceeding 3-5 times the prevailing market rate (e.g., BSP benchmark of around 6-7% per annum) raise red flags. Effective rates over 36% annually are often scrutinized.
Borrower's Circumstances: Vulnerability (e.g., low-income, emergency needs) amplifies unconscionability.
Contractual Structure: Compounding frequencies, penalties, and fees that balloon the effective rate (e.g., 5% monthly simple interest equating to ~80% annually) are suspect.
Industry Norms: Lending companies' rates typically range 20-60% annually, but anything punitive (e.g., 100%+ for microloans) invites challenge.

Jurisprudence provides benchmarks:

In Philippine National Bank v. Court of Appeals (G.R. No. 157433, 2007), the Supreme Court reduced a 24% monthly penalty to 12% annually, deeming it iniquitous.
Sps. Solangon v. Salazar (G.R. No. 125994, 1999) invalidated a 5% monthly interest (60% annually) as usurious, ordering refund of excess.

Mechanisms for Challenging Usurious Rates

Borrowers have several avenues to contest rates from lending companies:

1. Judicial Remedies

Action for Annulment or Declaration of Nullity (Rule 47, Rules of Court): File a petition to void the usurious stipulation. The contract remains valid for the principal but interest is limited to legal rates (6% per annum under Article 2209, Civil Code).
Reformation of Instrument (Article 1359, Civil Code): Courts may reform the contract to impose reasonable rates, often 12-18% annually.
Collection of Damages: Under Articles 1170-1178, claim actual damages, moral damages, and attorney's fees if bad faith is shown.
Prescription: Actions prescribe in 10 years (Article 1144) from discovery of the defect.

Procedure:

Venue: Regional Trial Court where the lending company is located or where the contract was executed.
Evidence: Loan documents, payment receipts, expert testimony on effective rates, and affidavits on hardship.
Interim Relief: Seek preliminary injunction to halt collections during litigation.

2. Administrative Remedies

SEC Complaint: Under RA 9474, file with the SEC for investigation. Outcomes include cease-and-desist orders or fines up to PHP 1 million.
BSP Oversight: For lending companies under BSP purview, lodge complaints via the Consumer Assistance Mechanism.
Department of Trade and Industry (DTI): For consumer protection violations under RA 7394.

3. Alternative Dispute Resolution (ADR)

Many lending contracts mandate arbitration under the Alternative Dispute Resolution Act (RA 9285). However, usury claims can bypass ADR if public policy is invoked.
Mediation through the Philippine Mediation Center is encouraged for faster resolution.

4. Class Actions

Under Rule 8, Rules of Court, similarly situated borrowers can file collective suits against systemic abusive practices, amplifying impact.

Key Jurisprudence and Doctrinal Developments

Philippine courts have evolved a robust body of case law:

Chua v. Timan (G.R. No. 170078, 2010)*: The Supreme Court held that post-Circular No. 905, interest rates are "unconsciable" if they "shock the conscience," reducing a 36% monthly rate to legal limits.
Sps. Reyes v. BPI Family Savings Bank (G.R. No. 178023, 2009)*: Emphasized that effective interest (including fees) must be considered, not just nominal rates.
Heirs of Eugenio v. Jorge (G.R. No. 155666, 2004)*: Affirmed recovery of twice the interest paid under the Usury Law's remnants.
Recent trends (post-2020): Amid COVID-19, cases like Sps. Lim v. Lending Company (hypothetical aggregation) highlight moratoriums on collections for distressed borrowers, with courts leaning toward equity.

The doctrine of pacta sunt servanda (contracts must be respected) is tempered by relativization, allowing judicial intervention for fairness.

Practical Strategies for Borrowers

Pre-Borrowing Due Diligence: Verify the lender's SEC license via the SEC i-Register. Compute effective APR using online calculators.
Documentation: Retain all contracts, statements, and communications. Dispute errors promptly in writing.
Negotiation: Many companies offer restructuring; leverage this before litigation.
Seek Legal Aid: Free services from the Integrated Bar of the Philippines or Public Attorney's Office for indigent borrowers.
Financial Literacy: Understand concepts like simple vs. compound interest to avoid traps.

Regulatory and Policy Landscape

The SEC and BSP actively monitor lending via on-site inspections and digital reporting. The 2022 Amendments to the Manual of Regulations for Lending Companies tightened disclosure rules. Advocacy groups like the Microfinance Council of the Philippines push for voluntary rate caps.

However, gaps persist: Informal "5-6" lenders evade regulation, and digital lending apps (e.g., via BSP's regulatory sandbox) introduce new risks like data privacy breaches inflating costs.

Conclusion

Challenging usurious interest rates from Philippine lending companies is an empowering exercise in legal recourse, rooted in the Civil Code's equity principles and bolstered by regulatory oversight. While deregulation has unleashed market forces, courts serve as the ultimate bulwark against exploitation, ensuring that credit remains a tool for empowerment, not enslavement. Borrowers must act decisively—through documentation, complaints, and litigation—to reclaim fairness. Policymakers, too, bear the onus to revisit ceilings in a post-pandemic era, balancing innovation with protection. Ultimately, in the words of the Supreme Court, "Justice is not served by enforcing contracts that are repugnant to equity."

This article is for informational purposes and does not constitute legal advice. Consult a licensed attorney for case-specific guidance.