Excessive Collection Fees on Delinquent Bank Loans in the Philippines
A comprehensive legal primer (2025 edition)
Abstract
This article surveys the entire Philippine legal landscape on collection fees imposed by banks (and by the collection agencies to which they outsource) when a consumer or business loan goes delinquent. It consolidates statutory provisions, Bangko Sentral ng Pilipinas (BSP) and Securities & Exchange Commission (SEC) regulations, landmark Supreme Court rulings, and emerging consumer-protection doctrines. It also maps out practical remedies for borrowers and compliance checkpoints for lenders.
1. What are “collection fees”?
| Term | Typical Philippine usage | Distinction |
|---|---|---|
| Collection fee / charge | A flat peso amount or a percentage of the past-due balance that the bank adds after default to cover the cost of pursuing payment, whether in-house or through a third-party agency. | Separate from penalty interest (a higher rate on overdue amounts) and attorney’s fees (litigation or foreclosure stage). |
| Penalty clause | Broad label in Civil Code Art. 1226—may combine penalty interest and collection fees in one figure. | Courts may reduce or strike it under Arts. 1229 & 2227 when “iniquitous or unconscionable.” |
| Finance charge | The Truth in Lending Act (TILA) and BSP’s Disclosure Rules treat any amount the borrower must pay “as a condition of the extension of credit” as part of the effective interest rate (EIR). Hidden or mislabeled collection fees must be annualized and disclosed up-front. |
2. Principal Sources of Law
Civil Code (1950)
- Freedom to stipulate (Art. 1306) tempered by Arts. 19-21 (abuse of rights) and Arts. 1226–1229 (penalty clauses).
- Interest must be express in writing (Art. 1956).
Suspended Usury Law (Act No. 2655 as amended; CB Circular 905-82)
- No statutory ceiling since 1982, but courts may still invalidate “unconscionable” rates.
Truth in Lending Act – RA 3765 (1963) & BSP Circular 730-11
- Pre-loan disclosure of total finance charge and EIR in per-annum terms.
- Undisclosed fees are unenforceable; bank may incur administrative sanctions.
Lending Company Regulation Act – RA 9474 (2007) & SEC Memo Circ. 7-22
- Extends TILA-style disclosure to non-bank lenders; prohibits “excessive or unconscionable charges.”
Credit Card Industry Regulation Law – RA 10870 (2016)
- Delegates power to BSP to cap interest, penalty and other fees on credit-card receivables.
Financial Products & Services Consumer Protection Act – RA 11765 (2022)
- Makes it unlawful to impose fees that “are unfair, unreasonable or excessive;” grants BSP/SEC power to order restitution.
BSP Manual of Regulations for Banks (MORB)
- § X309 & Part X, Subsec. 432 (Consumer Protection): Board-approved fee policy; periodic public disclosure; actual cost basis for pass-through collection expenses.
Key BSP Circulars (illustrative, not exhaustive)
| Circular | Coverage | Effect on collection fees |
|---|---|---|
| 702-05 | Credit card disclosure & collection practices | Prohibits harassment; requires fees to be “reasonable” and disclosed. |
| 857-14 / 1048-19 | Financial consumer protection framework | Mandates clear pricing; empowers BSP to nullify abusive charges. |
| 1098-20 → 1132-21 → 1165-22 → 1182-23 | Credit-card interest & penalty caps (presently 3.5 %/month interest; late-payment fee ₱200 or 1 %) | Though circulars speak to credit cards, courts quote them as persuasive on reasonableness for other consumer loans. |
3. Judicial Standards: When is a Fee “Excessive”?
The Supreme Court, exercising equity under Arts. 1229 & 19-21 Civil Code, has fashioned a two-step test:
- Nominal Unconscionability – Face-value comparison of rate or fee vis-à-vis commercial norms.
- Effective Interest Test – Convert all default charges (penalty interest, collection fee, attorney’s fee) into an annualized cost of credit. If the EIR “shocks the conscience,” the Court reduces it pro rata.
Representative cases
| Case | G.R. No. | Ratio decidendi |
|---|---|---|
| Spouses Castro v. Tan (28 Feb 2001) | 132431 | 5 % per month penalty + 10 % attorney’s fees reduced to 12 % p.a.; bank may recover only actual collection cost. |
| Asian Cathay Finance v. Spouses Gavino (27 Dec 2006) | 160010 | 6 % monthly penalty + 5 % collection fee void; Court allowed 2 % per month default interest as still high but not “shocking.” |
| Development Bank of the Phils. v. CA (20 Oct 1998) | 125838 | Blanket 10 % “service and collection fee” on top of 16 % interest struck down; fee must reflect documented expenditure. |
| Nacar v. Gallery Frames (13 Aug 2013) | 189871 | Re-set legal interest to 6 % p.a. for judgments; cited as default benchmark when the contract is void or silent on rates. |
Observation: The Court is most likely to cut fees when the combined penalty/collection load exceeds 2 % per month (≈ 24 % p.a.) or when the fee is a flat 10 % of principal regardless of effort.
4. Regulatory Enforcement & Industry Practice
| Regulator | Powers vis-à-vis collection fees |
|---|---|
| BSP | Issue cease-and-desist orders; impose fines up to ₱1 M per day; require restitution (RA 11765); disqualify bank directors. |
| SEC (lending / financing companies) | Suspend license; blacklist online lending apps; publicize violators. |
| DTI | Enforce Consumer Act on deceptive acts in marketing loan products. |
Collection agencies engaged by banks must be BSP-registered and follow Fair Debt Collection rules:
- No calls before 6 a.m. or after 10 p.m., nor on Sundays/Holidays without consent.
- No threats, obscenities, or disclosure of debt to third parties.
- The agency fee itself cannot be tacked on top of the borrower’s obligation unless the loan contract authorized it and the amount is “reasonable and duly disclosed.”
5. Borrower Remedies
Internal dispute – Write the bank’s consumer assistance unit (CAU); request computation showing itemized actual cost of collection.
BSP Financial Consumer Protection Department – Free complaint portal; BSP may summon parties and issue binding directives.
SEC Complaints Desk – For loans from lending/financing companies.
Judicial action –
- Small Claims (≤ ₱400 k, A.M. 08-8-7-SC) – summary procedure; judges routinely slash unconscionable fees.
- Regular civil action – for reformation of contract or refund; attorney’s fees may be awarded to the borrower if bad faith is shown.
Class or test case – Viable under RA 11765; public interest NGOs may sue on behalf of consumers.
6. Compliance Checklist for Banks & Their Collection Partners
| Checkpoint | Why it matters |
|---|---|
| Board-approved fee matrix updated yearly and disclosed on website. | Required by MORB § 432; failure = BSP sanction. |
| Pre-signing EIR computation that rolls in potential collection fees (worst-case scenario). | TILA/BSP Circular 730. |
| Clear contractual language: “Bank may recover only the actual collection cost but in no case more than ___% of the amount in arrears.” | Avoids Art. 1229 reductions. |
| Collection agency contract: holds bank liable for agency’s violations; sets a cap to be absorbed by the bank, not the borrower. | Prevents pass-through of inflated outsourcing fees. |
| Documented proof (receipts, invoices) of collection expenditure for presentation to court/regulator. | Needed to sustain a fee claim. |
7. Emerging Trends (2024-2025)
- Digital-first lenders now bundle all delinquency costs into a single, declining-balance penalty rate to stay within the BSP-encouraged ≤ 2 % monthly corridor.
- Open Finance APIs allow borrowers to compare all-in APRs, pressuring banks to keep collection fees modest.
- Legislative proposals (House Bill 8575, “Fair Debt Collection Practices Act”) seek to codify the 24 % p.a. combined ceiling (interest + penalty + collection fees) across all consumer credit.
8. Conclusion
Even after the Usury Law ceilings were lifted in 1982, Philippine law never gave banks a blank check to load defaulting borrowers with exorbitant charges. Statutes such as RA 3765, RA 10870 and RA 11765, reinforced by BSP circulars and an unbroken line of Supreme Court decisions, treat collection fees as valid only when they are:
- Expressly stipulated and clearly disclosed ex-ante;
- Commensurate with actual, documented collection cost; and
- Reasonable in light of prevailing market rates.
Failing any of these tests, the fee risks administrative penalties and near-certain judicial reduction or outright nullity. Borrowers, regulators and the courts thus share a robust toolkit to curb excessive collection fees, while lenders retain the right to fair compensation for legitimate recovery efforts.
This article is current as of 24 June 2025 and is for general guidance only; it is not a substitute for personalized legal advice.