Is 100% Weekly Interest Legal? Anti-Usury and Lending Regulation in the Philippines

Introduction

In the Philippines, the regulation of interest rates on loans has evolved significantly over the decades, balancing the need for access to credit with protections against exploitative practices. The question of whether a 100% weekly interest rate is legal touches on core issues of usury, contract law, and consumer protection. Usury, historically defined as charging excessive interest, has been addressed through various laws, but the landscape shifted dramatically in the late 20th century. This article explores the Philippine legal framework governing lending and interest rates, examining the validity of exorbitant rates like 100% per week, the remnants of anti-usury measures, and the regulatory mechanisms in place to safeguard borrowers. It draws on constitutional principles, statutory provisions, jurisprudence, and administrative regulations to provide a comprehensive overview.

Historical Background of Usury Laws in the Philippines

The regulation of interest rates in the Philippines traces its roots to Spanish colonial influences, which were later formalized under American rule. The Usury Law, or Act No. 2655, enacted in 1916, set maximum interest rates for loans: 6% per annum for unsecured loans, 12% for secured loans, and higher rates for specific transactions like those involving agricultural products. Violations were penalized as criminal offenses, with usurious contracts deemed void as to the excess interest.

This law remained in effect for much of the 20th century but faced challenges amid economic pressures, including inflation and the need for financial liberalization. In 1974, Presidential Decree No. 116 amended the Usury Law to allow the Central Bank (now Bangko Sentral ng Pilipinas or BSP) to adjust interest ceilings. The pivotal change came in 1982 with Central Bank Circular No. 905, which effectively suspended the interest rate ceilings under the Usury Law. This suspension was intended to promote a market-driven economy, allowing lenders and borrowers to freely negotiate rates without statutory caps.

The suspension of usury ceilings does not mean a free-for-all in lending practices. The Philippine Supreme Court has consistently intervened in cases where interest rates are deemed "unconscionable" or "iniquitous," rendering them void or reducible under principles of equity and public policy. This judicial oversight fills the gap left by the deregulated environment.

Current Legal Framework Governing Interest Rates

Constitutional and Civil Law Foundations

The 1987 Philippine Constitution provides foundational protections relevant to lending. Article III, Section 1 (due process and equal protection) and Article XII (national economy and patrimony) emphasize social justice and protection from economic exploitation. These principles underpin the invalidation of oppressive contracts.

Under the Civil Code of the Philippines (Republic Act No. 386), interest on loans is governed by several articles:

Article 1956: Interest is only due if expressly stipulated in writing, emphasizing the need for clear agreement.
Article 1306: Contracts must not be contrary to law, morals, good customs, public order, or public policy. Exorbitant interest rates can violate this, making them unenforceable.
Article 1413: Courts may reduce interest rates if they are excessive, based on equity.
Article 2209: If a loan is not paid on time, the borrower owes legal interest (currently 6% per annum under BSP regulations) unless a higher rate is stipulated.

In the absence of usury caps, freedom of contract prevails, but this is tempered by the doctrine of unconscionability. Supreme Court decisions, such as in Chua v. Timan (G.R. No. 170452, 2008), have held that while parties can agree on any rate, courts will strike down rates that shock the conscience, such as those exceeding 3% per month.

Regulatory Oversight by Financial Authorities

The Bangko Sentral ng Pilipinas (BSP) oversees banks, quasi-banks, and other financial institutions under the General Banking Law of 2000 (Republic Act No. 8791) and the New Central Bank Act (Republic Act No. 7653). BSP Circular No. 799 (2013) sets the legal interest rate at 6% per annum for loans without stipulation, but it does not impose ceilings on agreed rates. However, BSP monitors lending practices to prevent systemic risks and promotes fair lending through guidelines on risk management.

For non-bank lenders, the Lending Company Regulation Act of 2007 (Republic Act No. 9474) requires lending companies to register with the Securities and Exchange Commission (SEC) and comply with disclosure requirements. This law aims to curb illegal lending by unregulated entities, such as informal "5-6" lenders who charge daily or weekly rates equivalent to 20% per month or more.

The Truth in Lending Act (Republic Act No. 3765, 1963) mandates full disclosure of finance charges, including interest, fees, and effective rates, before a loan is consummated. Violations can lead to civil penalties and nullification of the credit agreement.

In recent years, the rise of fintech and online lending has prompted additional regulations. SEC Memorandum Circular No. 19 (2019) and No. 18 (2020) regulate financing and lending companies, including online platforms, requiring them to cap interest rates and fees at reasonable levels. For instance, effective annual interest rates (EIR) must be disclosed, and predatory practices like harassment in collection are prohibited. The BSP and SEC have jointly addressed complaints against apps charging rates as high as 1% per day (365% annually).

The Consumer Protection Act (Republic Act No. 7394) and the Philippine Competition Act (Republic Act No. 10667) provide broader safeguards against unfair trade practices in lending.

Is 100% Weekly Interest Legal?

A 100% weekly interest rate translates to an astronomical annual rate—over 5,200% if compounded weekly—far exceeding any reasonable commercial standard. Under the current framework, such a rate is not per se illegal due to the suspension of usury ceilings, but it is almost certainly unenforceable as unconscionable.

Judicial Interpretation of Unconscionability

Philippine jurisprudence has established thresholds for acceptable interest rates. In Spouses Solangon v. Salazar (G.R. No. 125944, 2001), the Supreme Court reduced a 6% monthly rate (72% annually) to 1% monthly, deeming it excessive. Similarly, in Macalinao v. Bank of the Philippine Islands (G.R. No. 175490, 2009), a 3% monthly penalty was struck down as iniquitous.

Rates like 100% weekly would shock the judicial conscience, violating public policy against exploitation. Courts consider factors such as:

The borrower's bargaining power (e.g., desperation in informal lending).
Market rates (commercial loans typically range from 5-15% annually).
Economic context (inflation, risk factors).
Whether the rate was hidden or misrepresented.

In Advincula v. Advincula (G.R. No. 190974, 2014), the Court emphasized that while deregulation allows flexibility, it does not sanction oppression. Thus, a 100% weekly rate would likely be void ab initio as to the interest, with only the principal recoverable, or the entire contract rescinded if fraudulent.

Application to Specific Lending Contexts

Bank Loans: Regulated entities rarely charge such rates, but if attempted, BSP could impose sanctions under anti-money laundering and consumer protection rules.
Informal Lending (e.g., "Bombay" or 5-6 Schemes): Common among low-income groups, these often involve weekly rates of 20%, but 100% would be extreme and prosecutable under estafa (swindling) if deceitful (Revised Penal Code, Article 315).
Online Lending Platforms: Many apps have been shut down for rates exceeding 100% annually. The SEC's moratorium on new online lenders in 2019 and subsequent crackdowns highlight enforcement against usurious fintech.
Pawnshops and Microfinance: Governed by the Pawnshop Regulation Act (Presidential Decree No. 114) and Microfinance NGOs Act (Republic Act No. 10693), these have implicit caps through disclosure requirements, making 100% weekly impossible.

Consequences of Charging Excessive Interest

Lenders charging unconscionable rates face multiple liabilities:

Civil: Borrowers can seek annulment or reformation of the contract via court action. Excess interest paid may be refunded or credited to principal (Civil Code, Article 1413).
Criminal: If involving deceit, charges under estafa or violation of the Bouncing Checks Law (Batas Pambansa Blg. 22) if checks are involved. The Anti-Money Laundering Act (Republic Act No. 9160, as amended) may apply if linked to predatory schemes.
Administrative: Unregistered lenders face fines and closure by SEC or BSP. Registered entities risk license revocation.
Regulatory Enforcement: The Department of Trade and Industry (DTI) and National Privacy Commission address collection abuses, including data privacy violations in online lending.

Protections for Borrowers and Anti-Usury Measures

Despite the lack of strict usury caps, borrowers have recourse:

Judicial Relief: File complaints in regional trial courts for contract nullification.
Government Agencies: Report to BSP's Consumer Assistance Mechanism, SEC's Enforcement Division, or DTI's Fair Trade Enforcement Bureau.
Legislative Initiatives: Proposals to reinstate usury laws have surfaced, such as House Bill No. 478 (2022), aiming to cap rates at 24% annually for consumer loans. The Financial Products and Services Consumer Protection Act (Republic Act No. 11765, 2022) strengthens remedies against unfair financial practices.
Education and Alternatives: Government programs like the Pag-IBIG Fund and Land Bank offer low-interest loans. NGOs and cooperatives provide microfinance at regulated rates.

Conclusion

In the Philippine context, a 100% weekly interest rate is not outright prohibited by a usury ceiling but is rendered illegal and unenforceable due to its unconscionable nature under civil law and jurisprudence. The suspension of the Usury Law has liberalized lending, yet robust protections through the Civil Code, regulatory bodies like BSP and SEC, and Supreme Court doctrines prevent exploitation. Borrowers should insist on written agreements, full disclosures, and fair terms, while lenders must adhere to ethical standards to avoid sanctions. As the economy evolves with fintech innovations, ongoing reforms aim to strike a balance between credit accessibility and social justice, ensuring that lending serves development rather than predation. For specific cases, consulting a legal professional is advisable to navigate these complexities.