Illegal Collection Practices and Excessive Interest Charges by Online Lending Apps in the Philippines

I. Introduction

The proliferation of online lending applications in the Philippines has revolutionized access to credit, particularly for unbanked and underbanked populations. These digital platforms, often operating through mobile apps, promise quick loans with minimal documentation, leveraging technology for instant approvals. However, this convenience has been marred by widespread reports of abusive practices, including exorbitant interest rates and aggressive debt collection tactics. These issues not only exploit vulnerable borrowers but also violate fundamental legal protections under Philippine law.

In the Philippine context, online lending apps must comply with a robust framework of financial, consumer protection, and data privacy regulations. Failure to do so exposes operators to administrative sanctions, civil liabilities, and criminal penalties. This article examines the legal dimensions of excessive interest charges and illegal collection practices, drawing on relevant statutes, jurisprudence, and regulatory guidelines. It aims to provide a comprehensive overview for borrowers, legal practitioners, and policymakers, highlighting the need for vigilant enforcement to safeguard consumer rights.

II. Legal Framework Governing Online Lending Operations

Online lending apps in the Philippines are primarily regulated as financing or lending companies under Republic Act No. 9474, the Lending Company Regulation Act of 2007 (LCRA), administered by the Securities and Exchange Commission (SEC). The LCRA mandates registration for all entities engaged in lending activities, ensuring transparency and accountability. Unregistered apps operate illegally, rendering their contracts potentially voidable.

Complementing the LCRA is Republic Act No. 3765, the Truth in Lending Act (TILA), which requires full disclosure of all finance charges, including interest rates, fees, and penalties, prior to loan consummation. Non-compliance invalidates the loan agreement and entitles borrowers to refunds or damages.

The Bangko Sentral ng Pilipinas (BSP) Circular No. 941, series of 2017, and subsequent issuances also apply to fintech lending, emphasizing fair lending practices. Additionally, the Consumer Act of the Philippines (Republic Act No. 7394) prohibits deceptive, unfair, or unconscionable acts in consumer transactions, including those involving credit.

A. Registration and Licensing Requirements

Under SEC Memorandum Circular No. 19, series of 2019, online lending platforms must register as corporations and obtain a Certificate of Authority (CA) to operate. This includes submitting details on ownership, business models, and compliance with anti-money laundering laws under Republic Act No. 9160, as amended. Foreign-owned apps face additional scrutiny under the Foreign Investments Act (Republic Act No. 7042), limiting foreign equity in lending firms.

Unregistered operators, often disguised as "peer-to-peer" platforms, are subject to cease-and-desist orders, fines up to PHP 1,000,000, and imprisonment. The SEC has conducted crackdowns, revoking CAs of non-compliant entities and blacklisting apps involved in predatory practices.

III. Excessive Interest Charges: Legal Limits and Prohibitions

Philippine law does not impose a strict usury ceiling since the repeal of the Usury Law (Act No. 2655) by Central Bank Circular No. 905 in 1982, allowing interest rates to be determined by market forces. However, this freedom is not absolute; rates must be reasonable and not unconscionable.

A. Defining Excessive or Unconscionable Interest

Jurisprudence from the Supreme Court establishes that interest rates are excessive if they are "iniquitous, unconscionable, and exorbitant," rendering them void for being contrary to morals and public policy under Article 1409 of the Civil Code. In cases like Medel v. Court of Appeals (G.R. No. 131622, 1998), the Court struck down rates exceeding 5.5% per month as usurious in effect.

Online lending apps often impose effective annual interest rates (EIR) ranging from 100% to over 1,000%, disguised through daily or weekly compounding, processing fees, and penalties. TILA mandates disclosure of the EIR, and failure to do so allows borrowers to recover twice the finance charges paid.

BSP Circular No. 1133, series of 2021, caps interest rates for credit card transactions at 2% per month but does not directly apply to unsecured loans. However, the SEC enforces a de facto reasonableness test, suspending operations of apps with rates deemed predatory.

B. Penalties and Remedies for Excessive Charges

Borrowers victimized by excessive interest can seek judicial intervention to reform contracts under Article 1308 of the Civil Code, reducing rates to legal levels (typically 6% per annum under Article 2209). Civil actions for damages, including moral and exemplary damages, are available under Articles 19-21 of the Civil Code for abuse of rights.

Administratively, the SEC imposes fines from PHP 10,000 to PHP 50,000 per violation, escalating for repeat offenses. Criminal liability arises if fraud is involved, punishable under the Revised Penal Code (RPC) for estafa (Article 315).

IV. Illegal Collection Practices: Violations and Liabilities

Aggressive collection tactics by online lending apps, such as harassment via calls, texts, or social media, constitute some of the most egregious abuses. These practices often infringe on privacy rights and human dignity, leading to widespread complaints.

A. Prohibited Collection Methods

Under the Data Privacy Act of 2012 (Republic Act No. 10173), lenders cannot access borrowers' contact lists without consent or use personal data for unauthorized purposes, such as contacting third parties (e.g., employers or family) to shame debtors. The National Privacy Commission (NPC) Advisory No. 2020-04 prohibits "name-and-shame" tactics, including posting defaulters' information online, as violations of data privacy principles.

Common illegal practices include:

• Threatening messages implying violence or legal action without basis, violating Article 282 of the RPC (grave threats) or Article 287 (unjust vexation).
• Automated calls at unreasonable hours, contravening BSP guidelines on fair debt collection.
• Public disclosure of debts on social media, punishable under Republic Act No. 10175 (Cybercrime Prevention Act) for computer-related libel or unauthorized data processing.

The Fair Debt Collection Practices under SEC rules require collectors to identify themselves, limit contacts to reasonable times, and refrain from abusive language.

B. Criminal and Civil Liabilities

Victims can file criminal complaints for violations of the RPC, Cybercrime Act, or Anti-Violence Against Women and Their Children Act (Republic Act No. 9262) if harassment involves gender-based elements. Penalties include imprisonment from 6 months to 6 years and fines up to PHP 500,000.

Civil remedies include injunctions to cease harassment and claims for damages. In Santos v. People (G.R. No. 235805, 2019), the Supreme Court upheld convictions for unjust vexation in similar debt collection scenarios.

The NPC has imposed administrative fines up to PHP 5,000,000 for data breaches, as seen in investigations against apps like Cashwagon and JuanHand.

V. Regulatory Enforcement and Recent Developments

The SEC, BSP, and NPC collaborate through the Financial Consumer Protection framework to address complaints. The SEC's Online Lending Platform Monitoring System tracks app activities, while the BSP's Consumer Protection Department handles monetary disputes.

In response to surging complaints during the COVID-19 pandemic, the SEC issued Memorandum Circular No. 18, series of 2020, imposing a moratorium on new online lending registrations and mandating stricter compliance audits. By 2023, over 2,000 unregistered apps were shut down, with ongoing crackdowns.

Jurisprudence continues to evolve; in SEC v. Various Online Lending Platforms (administrative proceedings), penalties were levied for non-disclosure and harassment. The Supreme Court has emphasized borrower protections in fintech cases, reinforcing that technological innovation cannot override legal safeguards.

VI. Remedies and Protections for Borrowers

Borrowers facing illegal practices should:

1. Document all communications and transactions.
2. File complaints with the SEC (via email or hotline) for unregistered lenders or excessive rates.
3. Report privacy violations to the NPC through its Complaints and Investigation Division.
4. Seek BSP mediation for disputes under PHP 100,000.
5. Pursue court actions for contract nullification, refunds, and damages.

Preventive measures include verifying app registration on the SEC website, reading terms carefully, and borrowing only from reputable sources. Legal aid from the Integrated Bar of the Philippines or Public Attorney's Office is available for indigent borrowers.

VII. Conclusion

Illegal collection practices and excessive interest charges by online lending apps represent a critical challenge to financial inclusion in the Philippines. While these platforms offer vital credit access, their abuses undermine trust and exacerbate poverty cycles. Strengthening enforcement, enhancing digital literacy, and enacting specific fintech legislation—such as proposed amendments to the LCRA—are essential to balance innovation with consumer protection. Borrowers must remain vigilant, and regulators proactive, to ensure a fair lending ecosystem.