Legal Limits on Loan Interest Rates and Usury Laws in the Philippines

Introduction

In the Philippine legal system, the regulation of interest rates on loans is rooted in principles of equity, fairness, and protection against exploitative lending practices. Usury, traditionally defined as the charging of excessive or illegal interest on loans, has been a subject of legislative and judicial scrutiny to safeguard borrowers from predatory lenders. While the country once enforced strict caps on interest rates through dedicated usury laws, the regulatory landscape has evolved significantly, shifting toward a more liberalized approach influenced by economic policies. This article provides a comprehensive examination of the legal limits on loan interest rates and usury laws in the Philippines, encompassing historical developments, current statutory provisions, judicial doctrines, enforcement mechanisms, and practical implications for lenders and borrowers.

Historical Background

The foundation of usury regulation in the Philippines traces back to the Spanish colonial period, where civil law traditions emphasized moral and ethical constraints on lending. The Usury Law, formally known as Act No. 2655, enacted on February 3, 1916, during the American colonial era, established maximum allowable interest rates for various types of loans. Under this law:

For loans secured by real estate or first mortgages, the maximum rate was 12% per annum.
For loans secured by personal property or second mortgages, the cap was 14% per annum.
For unsecured loans, the limit was set at 14% per annum, with additional provisions for commissions and other charges.

Violations of these ceilings were punishable by fines, imprisonment, or both, reflecting a strong public policy against excessive interest that could lead to debt bondage or economic exploitation.

This framework remained largely intact until the post-World War II era, when economic pressures prompted amendments. Republic Act No. 265, which created the Central Bank of the Philippines (now Bangko Sentral ng Pilipinas or BSP) in 1948, empowered the Monetary Board to regulate interest rates. Subsequent laws, such as Presidential Decree No. 116 (amending Act No. 2655) in 1973, adjusted ceilings in response to inflation and monetary policy needs.

A pivotal shift occurred in the early 1980s amid financial liberalization efforts. Central Bank Circular No. 905, Series of 1982, issued on December 22, 1982, effectively suspended the interest rate ceilings under the Usury Law. This circular removed statutory limits on interest rates for most loans, allowing market forces to determine rates while retaining oversight for unconscionable practices. The suspension was justified as a means to promote credit availability and economic growth, aligning with global trends toward deregulation.

Current Legal Framework

Today, the Usury Law (Act No. 2655, as amended) remains on the books but is largely inoperative due to the suspension of its rate ceilings by Circular No. 905. Instead, the regulation of interest rates is governed by a combination of civil law provisions, BSP regulations, and consumer protection statutes. Key elements include:

Civil Code Provisions

The New Civil Code of the Philippines (Republic Act No. 386, effective August 30, 1950) addresses interest in contracts of loan (mutuum) under Articles 1956 to 1961 and related provisions:

Article 1956: No interest shall be due unless it has been expressly stipulated in writing. This underscores the consensual nature of interest agreements.
Article 2209: In cases of delay in payment of monetary obligations, indemnity for damages shall be the agreed interest or, in its absence, the legal interest rate. The legal interest rate, originally 12% per annum, was reduced to 6% per annum effective July 1, 2013, by BSP Circular No. 799, Series of 2013. This applies to the period from judicial or extrajudicial demand until full payment.
Article 1413: Courts may intervene to reduce interest rates that are iniquitous or unconscionable, even if agreed upon by the parties, based on principles of equity.

For loans, since ceilings are suspended, parties are free to stipulate any interest rate, provided it is not contrary to morals, good customs, public order, or public policy (Article 1306). However, this freedom is not absolute; excessive rates can be declared void or modified.

BSP Regulations

The Bangko Sentral ng Pilipinas, as the central monetary authority, oversees banking and non-banking financial institutions through various circulars:

Circular No. 905 (1982): As noted, this suspended usury ceilings, allowing floating or adjustable rates based on market conditions.
Manual of Regulations for Banks (MORB) and Manual of Regulations for Non-Bank Financial Institutions (MORNBFI): These impose disclosure requirements, such as the Effective Interest Rate (EIR) under Republic Act No. 3765 (Truth in Lending Act), ensuring borrowers are informed of all charges.
Circular No. 730 (2011): Regulates credit card interest rates, capping them at 3% per month (36% per annum) for cash advances, though this was adjusted in response to economic conditions.
Circular No. 1098 (2020): Temporarily reduced ceilings on credit card transactions to 2% per month during the COVID-19 pandemic, illustrating BSP's flexibility in crisis situations.

Special laws govern specific sectors:

Republic Act No. 9474 (Lending Company Regulation Act of 2007): Regulates lending companies, requiring registration with the Securities and Exchange Commission (SEC) and compliance with BSP rules on interest rates.
Republic Act No. 10607 (Amended Insurance Code): Limits interest on policy loans to rates not exceeding the prevailing market rates.
Republic Act No. 10870 (Philippine Credit Card Industry Regulation Law): Reinforces caps and transparency for credit cards.

Consumer Protection Laws

Broader statutes protect against usurious practices:

Republic Act No. 7394 (Consumer Act of the Philippines): Prohibits deceptive, unfair, or unconscionable sales acts, including excessive interest in consumer loans.
Republic Act No. 3765 (Truth in Lending Act): Mandates full disclosure of finance charges, with penalties for non-compliance.
Republic Act No. 11223 (Universal Health Care Act) and related laws indirectly influence lending in healthcare financing by promoting affordable terms.

Judicial Interpretations and Doctrines

The Philippine Supreme Court has played a crucial role in interpreting usury laws post-suspension, emphasizing the doctrine of unconscionability. Key rulings include:

Spouses Limso v. Philippine National Bank (G.R. No. 158622, January 27, 2006): The Court held that while no fixed ceiling exists, interest rates must not be shocking to the conscience. Rates exceeding 3% per month (36% per annum) are presumptively excessive.
Advocates for Truth in Lending, Inc. v. Bangko Sentral Monetary Board (G.R. No. 192986, January 15, 2013): Upheld the validity of Circular No. 905, confirming the suspension of usury ceilings but reaffirming judicial power to strike down unconscionable rates.
Macalinao v. Bank of the Philippine Islands (G.R. No. 175490, September 17, 2009): Declared a 3% monthly interest on credit card debt as unconscionable, reducing it to 1% per month.
Equitable PCI Bank v. Ng Sheung Ngor (G.R. No. 171545, December 19, 2007): Emphasized that escalation clauses allowing unilateral rate increases must be mutual and reasonable.

Courts consider factors such as the borrower's bargaining power, economic conditions, and the lender's intent when assessing unconscionability. Compounded interest (interest on interest) is allowed if stipulated, but excessive compounding can be deemed usurious.

In foreclosure cases, under Republic Act No. 3765, failure to disclose true interest rates can invalidate the loan contract or allow recovery of overcharges.

Penalties and Enforcement

Violations of remaining usury-related provisions carry civil and criminal sanctions:

Civil Remedies: Borrowers may seek annulment of the interest stipulation (Article 1410, Civil Code), reduction of rates, or refund of excess payments. Damages and attorney's fees may be awarded.
Criminal Penalties: Under the suspended Usury Law, penalties included fines up to PHP 200 or imprisonment up to six months, but these are rarely invoked. Instead, violations of the Truth in Lending Act incur fines from PHP 1,000 to PHP 30,000 or imprisonment from one to six months.
Administrative Sanctions: The BSP can impose fines up to PHP 1,000,000 per violation on regulated entities, suspend operations, or revoke licenses. The SEC enforces similar measures for lending companies.
Enforcement Agencies: Complaints can be filed with the BSP Consumer Assistance Mechanism, Department of Trade and Industry (DTI), or courts. Class actions are possible under the Rules of Court.

Exceptions and Special Cases

Certain transactions are exempt or subject to different rules:

Pawnshops: Governed by Presidential Decree No. 114, with interest caps at 2.5% per month for loans up to PHP 500, decreasing for higher amounts.
Microfinance: BSP Circular No. 272 allows higher rates for small loans to cover costs, but with transparency requirements.
Islamic Financing: Shari'ah-compliant products under Republic Act No. 11439 avoid interest altogether, using profit-sharing models.
Government Loans: Programs like those from the Social Security System (SSS) or Government Service Insurance System (GSIS) have fixed low rates, e.g., 8-10% per annum.
Foreign Currency Loans: Subject to BSP approval, with rates influenced by international markets.

Practical Implications and Reforms

For lenders, the liberalized regime encourages competitive pricing but requires robust compliance with disclosure rules to avoid litigation. Borrowers benefit from market-driven rates but must vigilantly review terms to prevent abuse. Common pitfalls include hidden fees, penalty interest, and escalation clauses.

Recent discussions on reform focus on reinstating ceilings amid rising online lending scams. The Department of Finance and BSP have proposed amendments to cap rates for digital lenders, as seen in Circular No. 1104 (2021) regulating fintech. The rise of peer-to-peer lending platforms under SEC oversight further complicates the landscape, emphasizing need-based regulation.

In conclusion, while the Philippines has moved away from rigid usury caps, the legal system maintains safeguards through judicial oversight and regulatory transparency. Stakeholders must navigate this framework with diligence to ensure equitable lending practices.