In the Philippine lending landscape, particularly within the microfinance and "fintech" sectors, a common point of contention is the practice of requiring a "security deposit" or "hold-out" amount before a loan is disbursed. While often presented as a risk-mitigation tool, its legality is governed by a strict framework of Central Bank regulations and consumer protection laws.
1. The General Rule: Truth in Lending
The primary legislation governing this practice is Republic Act No. 3765, otherwise known as the Truth in Lending Act. This law is designed to protect citizens from a lack of awareness regarding the true cost of credit.
Under this Act, any creditor is required to furnish the borrower with a clear, written statement prior to the consummation of the transaction. This statement must explicitly disclose:
- The cash price or delivered cost of the service.
- The amount to be credited as a down payment or trade-in (if any).
- The total amount to be financed.
- The finance charges, expressed in terms of pesos and centavos.
- The percentage that the finance charge bears to the total amount to be financed (Effective Interest Rate).
The Legal Conflict: If a lending company requires a security deposit but does not factor that deposit into the computation of the Effective Interest Rate (EIR), they are in violation of the Truth in Lending Act. Effectively, if you borrow ₱10,000 but only receive ₱8,000 because ₱2,000 is held as a "security deposit," your interest should be calculated based on the ₱8,000 you actually received, not the ₱10,000 you are "borrowing."
2. BSP Regulations on "Compensating Balances"
The Bangko Sentral ng Pilipinas (BSP) provides specific guidelines regarding what are known as "compensating balances."
- Banks: Banks are generally allowed to require maintaining balances, but these must be clearly disclosed.
- Lending and Financing Companies: Under BSP Circular No. 706 and subsequent manuals of regulation, "hidden" charges are strictly prohibited. If a security deposit is mandatory and non-withdrawable during the life of the loan, it must be deducted from the loan proceeds when calculating the interest rate.
Failure to disclose that a security deposit will be deducted or withheld can be classified as an Unfair or Deceptive Sales Act or Practice under the Consumer Act of the Philippines (R.A. 7394).
3. The "CBU" Exception: Microfinance and Cooperatives
There is a notable exception in the context of Microfinance NGOs and Cooperatives.
- Capital Build-Up (CBU): In these organizations, members are often required to contribute to a "Capital Build-Up" or "Sinking Fund." This is legally distinct from a security deposit.
- The Difference: A CBU is considered an equity investment or a shared saving requirement of the organization's members. However, even in these cases, the Microfinance NGOs Regulatory Council and the Cooperative Development Authority (CDA) require that these fees be transparently communicated and not used as a deceptive way to inflate interest rates.
4. Prohibited Acts: The SEC Perspective
For lending companies (non-banks) regulated by the Securities and Exchange Commission (SEC), the Lending Company Regulation Act of 2007 (R.A. 9474) applies.
The SEC has issued numerous cease-and-desist orders against companies that employ "unconscionable" practices. Requiring a security deposit that significantly reduces the usable loan amount while charging interest on the full principal is frequently flagged as:
- Unconscionable Interest Rates: When the "net" amount received is so low compared to the "gross" loan, the resulting EIR often exceeds the limits of fairness.
- Lack of Transparency: If the deposit is not explicitly listed in the Disclosure Statement, the contract is technically voidable regarding the interest charges.
5. Summary of Rights for Borrowers
If a lending company in the Philippines requires a security deposit, the following must be true for it to be legal:
| Requirement | Description |
|---|---|
| Written Disclosure | The deposit must be listed in the Disclosure Statement before the loan is signed. |
| EIR Calculation | The interest rate must be calculated based on the net proceeds (Amount received minus the deposit). |
| Refundability | The terms for the return of the deposit must be clearly stated in the contract. |
| Voluntary Nature | Unless it is a CBU for a cooperative, mandatory deposits that are not disclosed as part of the finance charge are generally illegal. |
Conclusion
While not "illegal" per se to have a security arrangement, it is illegal to hide it. Any security deposit that is withheld from the loan proceeds must be reflected as a reduction in the "Amount Financed." Borrowers who find that a company has deducted a deposit without including it in the Disclosure Statement have the right to report such entities to the BSP Consumer Protection Department or the SEC Enforcement and Investor Protection Department.