Excessive Collection Fees After Loan Maturity in the Philippines
(A comprehensive legal overview as of 24 June 2025 — Philippine jurisdiction)
1. Conceptual Framework
| Key Term | Meaning in Philippine Law |
|---|---|
| Loan maturity | The date when the principal (and any contractually accrued interest) falls due and the borrower is obliged to pay in full. |
| Collection fee / charge | Any amount—fixed, percentage-based, or contingent—imposed after a loan is already in default, purportedly to cover the lender’s cost of follow-up, collection efforts, or enforcement. |
| Penalty interest | A higher-than-regular rate that automatically applies upon default. |
| Attorney’s fees | Compensation for legal services, recoverable only under specific circumstances (Art. 2208, Civil Code). |
Although terminology varies, courts examine substance over labels: any sum demanded on top of the unpaid obligation (plus agreed regular interest) is scrutinised as a penalty or liquidated damages under Articles 1226–1229 and 2227 of the Civil Code.
2. Sources of Regulation
Civil Code of the Philippines
- Freedom to contract (Art. 1306) is tempered by laws, morals, good customs, public order, and public policy.
- Excessive or unconscionable stipulations may be reduced or struck down (Arts. 1229, 1352, 1423–1424).
Bangko Sentral ng Pilipinas (BSP)
- MORB § X320 / Sec. 305 of the Manual of Regulations for Banks: banks must disclose all charges clearly; hidden or “one-sided” penalties constitute unsafe or unsound practice.
- BSP Circular 1133 (2022) requires consumer credit providers to adopt fair collection policies; harassment, threats, and unreasonable fees are prohibited.
Securities and Exchange Commission (SEC) – non-bank lenders
- Lending Company Regulation Act (RA 9474) & Financing Company Act (RA 5980, as amended): Implementing Rules cap penalties and bar “excessive” collection fees; SEC Memorandum Circular 18-2019 sets standards (e.g., total penalties—including collection fees—may not exceed 5 % of amount due per month for lending companies).
- SEC Memorandum Circular 7-2022 (Rules on Fair Debt Collection) echoes BSP standards; violations can lead to license revocation and administrative fines.
Financial Products and Services Consumer Protection Act (RA 11765, 2022)
- Empowers BSP, SEC, and the Insurance Commission to void abusive terms sua sponte and to order restitution of illegal fees.
Consumer Act of the Philippines (RA 7394)
- Declares as deceptive acts the imposition of undisclosed or unconscionable charges in consumer credit transactions.
Special statutes
- Pag-IBIG, SSS, GSIS, and Microfinance regulations each have their own ceilings on penalty charges (typically 1 % per month of outstanding balance).
3. Jurisprudential Guidance
The Supreme Court repeatedly intervenes where contractual charges “shock the conscience”:
| Case | Year | Ratio / Holding on Collection Fees & Penalties |
|---|---|---|
| Spouses Abella v. Spouses Cruz | 2022 | Slashed a 6 % per month penalty interest plus 5 % collection fee to 2 % per month total, calling the stipulation “predatory.” |
| Legacy Savings & Loan Ass’n v. Lasala | 2017 | Cut combined penalty and collection charges from 4 % per month to a flat 12 % per annum, stressing the court’s equity power. |
| Spouses Castro v. Tan | 2014 | Invalidated a 10 % “collection surcharge” for lacking basis in actual cost and for duplicating attorney’s fees. |
| Reformina v. Judge Gomez | 2010 | Clarified that banks may collect “reasonable costs of collection,” but burden of proof of reasonableness lies with the creditor. |
Common threads:
- Overlapping charges (penalty interest and collection fee and attorney’s fees) invite reduction.
- Courts compare the fee to prevailing market rates and actual effort expended.
- A stipulation of “liquidated damages equal to 25 % of unpaid amount” is “prima facie unconscionable.”
4. Practical Limits and Benchmarks
| Charge Type | Typical Acceptable Ceiling (industry practice & agency rules) |
|---|---|
| Penalty interest | 2 %–3 % per month (24 %–36 % p.a.) — anything beyond may be reduced. |
| Flat collection fee | ≤ ₱500 for micro-loans; ≤ 5 % of amount due for bigger loans. |
| Contingent attorney’s fees | 10 % of amount collected after filing of suit; barred if lender employs in-house counsel only. |
| Actual expenses (e.g., notarisation, sheriff’s fees) | Reimbursable upon proof of payment/receipts. |
These are not statutory limits; they arise from SEC circulars, BSP advisories, and case-law trend lines. Lenders bear the burden of proving they are approximately the cost of collection, otherwise courts will pare them down.
5. Enforcement & Borrower Remedies
Regulatory complaint
- BSP Financial Consumer Protection Department (for banks, quasi-banks, payment system operators).
- SEC Corporate Governance and Finance Department (for lending/financing companies).
- Agencies can issue cease-and-desist orders, impose fines (up to ₱2 million per breach under RA 11765), and mandate refunds.
Civil action
- Borrower may sue for annulment or reformation of contract, or raise excessive fee as a defence in collection suits.
- Courts may apply Art. 1229 to reduce liquidated damages and Art. 2227 to equitably lower interest.
Administrative sanctions on abusive collection
- Harassing calls/messages, threats, shaming on social media automatically violate SEC MC 7-2022 & BSP Circular 1133, independent of the fee’s amount.
Criminal liability
- Lending Company Regulation Act imposes up to ₱100 000 fine and 6-month imprisonment for operations that violate interest/fee disclosure rules.
- Unauthorised collection practices may constitute Estafa or Unfair Competition under the Revised Penal Code if accompanied by fraud.
6. Interaction with the Lifted Usury Law
Central Bank Circular 905 (1982) suspended usury ceilings. Important: this does not give lenders carte blanche. Courts still strike down:
- Exorbitant interest before maturity (often reduced to 12 % or 6 % p.a.).
- Excessive penalties and collection fees after maturity, on equitable grounds and public policy.
Thus, the lack of a statutory cap on interest heightens, rather than loosens, judicial scrutiny of post-maturity charges.
7. Drafting & Compliance Tips for Lenders
- Disclose in pesos and percentage the exact basis of all charges—vague wording (“reasonable collection fee”) is non-compliant.
- Single penalty clause: bundle penalty interest or collection fee, not both.
- Cap total default charges (penalty, fee, attorney’s fees) at no more than 24 % p.a. effective rate unless you can evidence genuine higher cost.
- Grace periods and cure notices reduce regulatory risk; many BSP/SEC examiners expect at least 15 calendar days before penalties accrue.
- Separate line‐item accounting for actual out-of-pocket expenses (sheriff, appraisal, publication) supports enforceability.
8. Defensive Strategies for Borrowers
- Ask for computation—Regulation mandates lenders to provide an itemised breakdown.
- Invoke Articles 1229 & 2227 in pleadings to request reduction.
- Offer immediate payment of principal plus lawful interest in court to stop further accrual of penalties (consignation or tender).
- Document harassment—screenshots, call logs bolster administrative complaints.
9. Emerging Trends (2023-2025)
- Digital-only lenders: SEC ordered more than 100 apps delisted for hidden “service recovery charges.”
- Open Finance: BSP’s 2023 Framework requires standardised fee nomenclature, easing comparison and consumer awareness.
- AI-driven collection bots: regulators caution that algorithmic decision-making must still comply with fair-collection rules; automatic escalation of fee tiers without human intervention may be considered “predatory.”
- Class actions: First certified class suit (Metro Manila, 2024) challenged 8 % post-maturity “collection facilitation fee” across 1.2 million micro-loan accounts; case is sub judice but regulators filed amicus curiae stressing RA 11765.
10. Conclusion
Even after the abolition of traditional usury ceilings, excessive collection fees following loan maturity remain tightly policed in the Philippines through a combination of:
- Civil Code equity doctrines that empower courts to reduce unconscionable penalties;
- Sector-specific statutes (RA 9474, RA 11765) that grant regulators broad cease-and-desist and refund powers; and
- Rich jurisprudence steadfast in protecting borrowers from predatory charges.
The cardinal rule: charges must reflect a reasonable approximation of the lender’s actual cost of collection. Anything more is vulnerable to regulatory sanction and judicial pruning.
This article is for informational purposes only and does not constitute legal advice. For advice on a particular case, consult a Philippine attorney experienced in banking and finance law.