(A Doctrinal and Jurisprudential Overview)

I. Introduction

“Usury” traditionally refers to charging interest beyond what the law allows. In the Philippines, however, the term has taken on a more nuanced meaning. While statutory interest ceilings under the Usury Law have long been suspended, courts continue to police exorbitant, unconscionable, or iniquitous interest rates through the Civil Code, constitutional principles, and special statutes (e.g., lending regulation and consumer protection laws).

This article walks through:

The legal framework on usury and interest in the Philippines
The status of the Usury Law after Central Bank/BSP deregulation
Key Supreme Court doctrines and cases on unconscionable interest
The role of special laws (Lending Company Regulation Act, Truth in Lending, Consumer Act)
Civil, criminal, and regulatory consequences of usurious lending practices
Practical implications for borrowers, lenders, and litigation strategy

II. The Legal Framework on Usury

A. The Usury Law (Act No. 2655)

Act No. 2655 (the Usury Law), as amended, historically set maximum interest rates for loans and forbearance of money. Its key features included:

Ceiling interest rates depending on the kind of loan or transaction (e.g., secured vs. unsecured, loans to banks vs. private lenders, etc.)
Criminal liability for lenders charging interest above the statutory maximum
Civil consequences, such as forfeiture of interest or recovery of usurious interest paid

The Usury Law itself was never expressly repealed by Congress; rather, its operative provisions on interest ceilings were “suspended” by monetary authorities.

B. Monetary Board Authority and Deregulation of Interest

Under the Central Bank Act (and later the New Central Bank Act), the Monetary Board was given authority to prescribe maximum rates of interest that banks and non-bank financial intermediaries could charge. Over time, the policy shifted from stringent control to liberalization.

The crucial development:

The Monetary Board issued circulars that effectively removed (or suspended) ceilings on interest rates, allowing parties to freely stipulate interest, subject to the constraints of law, morals, good customs, public order, and public policy.

The Supreme Court has repeatedly held that:

The Usury Law is not repealed, but its interest ceilings are no longer in force.
Usury as a crime is practically inoperative in routine lending cases because there is no fixed maximum rate to exceed.

C. Present Status: No Ceilings, But Not a Free-for-All

Even though interest ceilings are deregulated, freedom to stipulate interest is not absolute. Courts use several legal anchors to scrutinize usurious or abusive lending practices:

Civil Code provisions on contracts
- Article 1306: parties may establish stipulations “not contrary to law, morals, good customs, public order, or public policy.”
- Article 1352: illegal or contrary provisions are void.
Civil Code on interest
- Article 1956: no interest shall be due unless expressly stipulated in writing.
- Articles 1229 & 2227: courts may reduce penalties or liquidated damages if they are “iniquitous or unconscionable.”
Constitutional and general principles
- Social justice, protection to labor and vulnerable sectors, and the policy against oppression and economic abuse.

The net effect: “No legal ceilings” does not mean “anything goes.” Excessive interest can be declared void or reduced, and abusive conduct in collecting or structuring loans may trigger civil, criminal, or regulatory sanctions.

III. Interest and Usury Under the Civil Code

To understand “usurious lending practices,” it is crucial to distinguish between the types of interest recognized in Philippine law.

A. Conventional vs. Legal vs. Penalty Interest

Conventional interest – contractually agreed interest (e.g., 3% per month), which:
- Must be in writing; otherwise, no interest is due.
- Is subject to review if unconscionable or against public policy.
Legal interest – interest supplied by law in the absence of a valid stipulation, typically:
- Imposed by the courts as damages for delay in payment (e.g., on judgments, on loans without stipulated interest).
- Governed by judicial decisions and monetary board circulars (e.g., landmark cases adjusting legal interest to 6% per annum).
Penalty interest or charges – additional interest imposed as penalty for default, distinct from normal interest, e.g.:
- “Penal interest”
- “Late payment charges”
- “Service fees,” “processing fees,” or “rebates” that, in substance, function as interest

Courts look at the total effective charge on the borrower, not merely the label, when judging if a rate or charge is usurious or unconscionable.

B. Key Doctrines From the Civil Code and Case Law

Philippine jurisprudence has settled several important rules:

Interest must be written – Oral assurance of interest is unenforceable.
Unconscionable interest is void – Exorbitant rates (especially when combined with penalties) may be invalidated or equitably reduced.
Severability – The principal obligation remains valid even if the interest stipulation is void; the borrower must still repay the principal, but the court can:
- Disallow the contracted interest and replace it with legal interest, or
- Grant no interest at all, depending on the facts.

IV. Jurisprudence on Usurious and Unconscionable Interest

Supreme Court decisions form the backbone of modern doctrine on usurious lending practices. While the labels vary (“usurious,” “exorbitant,” “iniquitous,” “unconscionable”), the central thrust is consistent: courts will not enforce oppressive interest stipulations.

Below are the main themes from leading cases (names and doctrines, rather than an exhaustive case digest).

A. Recognition That Usury Ceilings Are Suspended, Not Repealed

Several decisions confirm that:

The Usury Law remains in the statute books, but interest ceilings are temporarily non-operative due to monetary board circulars.
Therefore, charging high interest is not automatically “usury” in the strict statutory sense, but it can still:
- Be struck down as contrary to morals or public policy
- Be considered unconscionable, triggering reduction under Civil Code provisions

B. “Unconscionable” Interest Rates and Judicial Reduction

The Court has, in a series of cases, ruled that certain rates cross the line:

Multi-percentage monthly interest (e.g., 3–7% per month or more)
- Courts have repeatedly called these rates “exorbitant and unconscionable”, especially when applied to needy borrowers, small businesses, or simple personal loans.
- Typical judicial response:
  - Declare the stipulated interest void; and
  - Impose legal interest (e.g., 12% or later 6% per annum) instead, usually from default or filing of complaint.
Stacking of interest plus penalty plus other charges
- For example, a loan with 3% per month interest, plus 3% per month penalty, plus 5% service charge.
- The Court looks at the effective yield, not the nominal rates alone. Cumulative burdens can be held iniquitous even if each label appears reasonable.
Interest greater than the principal
- In some cases, accumulated interest and penalties balloon far beyond the original principal. Courts have held that this results in “shocking and confiscatory” liability and have reduced or nullified the excessive portion.
Standard of unconscionability
- There is no fixed threshold (e.g., “anything above 24% is unconscionable”).
- The Court uses a case-by-case, fact-sensitive test, guided by:
  - Circumstances of the borrower (e.g., distress, poverty, lack of bargaining power)
  - Purpose of the loan (e.g., for basic needs vs. speculative investment)
  - Nature of the lender (e.g., professional lender vs. casual loan)
  - Market conditions and prevailing bank lending rates at the time
- Important: rates previously tolerated by courts in older cases may later be branded as unconscionable as economic conditions and social policy evolve.

Several well-known Supreme Court decisions emphasize these principles and have, for example, reduced rates like 5–6% per month or combined interest/penalty charges as contrary to equity and good conscience.

C. Treatment of Penalty Interest and Other Charges

Courts distinguish between:

Regular interest – compensation for use of money
Penalty interest – punishment for delay or default

Key points:

Even if the regular interest is considered reasonable, a penalty rate can still be struck down or reduced if it is punitive beyond reason.
Articles 1229 and 2227 of the Civil Code give courts explicit authority to reduce penalties or liquidated damages that are “iniquitous or unconscionable.”
Courts have repeatedly cut penalty rates (sometimes down to the same rate as the basic interest, or even lower) to restore balance between borrower and lender.

D. Attorney’s Fees and Other “Hidden” Usurious Devices

Some lenders structure their contracts so that oppressive returns appear as:

Attorney’s fees automatically chargeable in case of default
Processing or service fees deducted upfront
Rebates or discounts that effectively increase yield

Jurisprudence instructs courts to:

Treat these as part of the overall cost of borrowing where appropriate, and
Strike down automatic attorney’s fees clauses that are excessive or mechanically imposed, especially where no actual litigation or special effort was required.

E. Borrower’s Consent Is Not a Shield

Lenders often argue that the borrower voluntarily agreed to the interest rate. Courts have consistently held that:

Consent does not validate a stipulation that is illegal or against public policy.
In situations of economic distress, “consent” is viewed in light of the borrower’s lack of real bargaining power.
Thus, even a signed contract can be partially invalidated to strike out the unconscionable terms.

V. Special Laws Regulating High-Cost Lending

Beyond the Civil Code and Usury Law, several special statutes and regulations form the regulatory environment for usurious lending practices.

A. Truth in Lending Act (R.A. 3765)

This law requires creditors to clearly disclose to the borrower:

The true cost of borrowing, including:
- Finance charges
- Interest
- Other fees affecting the total amount due
The effective interest rate

Non-disclosure or inaccurate disclosure may:

Lead courts to invalidate certain charges
Support claims of misrepresentation or unfair trade practice
Strengthen a borrower’s position in contesting a usurious or abusive arrangement

B. Consumer Act of the Philippines (R.A. 7394)

The Consumer Act prohibits unfair or unconscionable sales acts and practices, which can analogously apply to certain credit and lending arrangements, particularly:

Deceptive or misleading statements about interest or charges
Terms so one-sided that they shock the conscience
Abuse of dominant bargaining position against consumers

Borrowers can, in appropriate cases, frame usurious lending not only as a contractual issue but also as a consumer protection issue.

C. Lending Company Regulation Act (R.A. 9474)

R.A. 9474 and its implementing rules:

Require lending companies to be registered and licensed
Mandate disclosure requirements similar to the Truth in Lending Act
Authorize regulatory agencies (typically the SEC) to:
- Sanction unregistered lenders
- Impose penalties for non-compliance
- Suspend or revoke licenses

While the law does not itself set interest ceilings, it provides a framework for monitoring and disciplining abusive lending practices, including those involving usurious interest rates.

D. Financing Company Act and Related Regulations

Financing companies, often charging higher-than-bank interest, are also regulated under special laws and rules. These measures aim to:

Ensure transparency of charges
Prevent abusive collection tactics
Enforce minimum capitalization and governance standards

E. Online Lending Apps and Digital Platforms

In recent years, online lending apps have been associated with:

Sky-high effective interest rates, compounded by fees and penalties
Harassing or shaming collection practices (e.g., contacting the borrower’s phone contacts, social media exposure)
Privacy violations involving unauthorized use of personal data

These issues implicate:

Lending regulations (registration and licensing)
Data Privacy Act (unlawful processing of personal data)
Anti-harassment and cybercrime laws for extreme collection practices

Thus, “usurious lending” in the modern sense is often intertwined with digital privacy and cyber-regulation, not only with classical interest rate doctrine.

VI. Civil, Criminal, and Administrative Consequences

A. Civil Consequences

Invalidation or reduction of interest and penalties
- Courts may declare the interest stipulation void and:
  - Replace it with legal interest (e.g., 6% per annum in many modern cases), or
  - Disallow interest entirely when warranted.
Reformation of contract
- Courts may reform the contract to reflect a fair and reasonable rate.
Restitution of usurious interest paid
- Borrowers who already paid usurious interest can seek refund of the excess, especially when clearly documented.
Damages
- In extreme cases, where lender’s actions are oppressive or abusive, courts may award:
  - Moral damages for mental anguish, fear, or social humiliation
  - Exemplary damages to deter similar conduct
  - Attorney’s fees where the borrower is compelled to litigate to protect their rights

B. Criminal Liability

Classical usury as a crime under Act No. 2655 has been practically neutralized due to deregulation of interest ceilings. However, lenders may still incur criminal liability under other laws, for example:

Estafa (fraud) under the Revised Penal Code if they use deceit or false representations to induce borrowers to agree to oppressive terms
Falsification of documents to conceal the true terms of the loan
Unlawful debt collection practices that constitute:
- Grave threats
- Grave coercion
- Libel or cyberlibel
- Violations of data privacy or cybercrime laws

Hence, while “charging high interest” per se is no longer punished as statutory usury, the way the loan is structured, disclosed, and collected can still lead to criminal cases.

C. Administrative and Regulatory Sanctions

Regulators such as the SEC and BSP can:

Suspend or revoke licenses of lending or financing companies engaged in abusive or usurious practices
Impose administrative fines
Order cessation of operations of unregistered or non-compliant entities

For online lenders, regulators may order removal of apps from digital platforms or issue public advisories warning the public.

VII. Practical Implications in Litigation and Practice

A. For Borrowers

Document everything
- Keep copies of loan agreements, receipts, text messages, app screenshots, and bank records.
- These help show the actual effective interest and collection methods.
Focus arguments on unconscionability and public policy
- Highlight how the interest, penalties, and fees compare to:
  - Prevailing bank rates
  - The borrower’s circumstances (poverty, emergency, lack of bargaining power)
Invoke multiple legal bases
- Civil Code (unconscionable interest, void stipulations)
- Special laws (Truth in Lending, Consumer Act, Lending Company Regulation Act)
- Constitutional and social justice concepts (protection of the poor, against oppressive contracts)
Consider counterclaims
- For damages due to harassment, privacy invasion, or reputational harm from abusive collection tactics.

B. For Lenders

Set interest at defensible levels
- Even with no statutory ceilings, rates should be reasonable relative to:
  - Risk profile
  - Market conditions
  - Nature of the borrower and purpose of the loan
Ensure clear, written, and accurate disclosure
- State the nominal rate, effective rate, and all fees in writing.
- Avoid hidden or ambiguous charges that could later be construed as usurious devices.
Avoid oppressive penalty structures
- Penal rates should not be so high or cumulative as to appear confiscatory.
Use lawful, proportionate collection methods
- Train personnel and agents to comply with data privacy, anti-harassment, and consumer protection laws.
Expect judicial scrutiny
- Especially where borrowers are individuals or small businesses, courts will examine interest and penalty stipulations with an eye toward equity and protection of weaker parties.

C. For Courts and Policy-Makers

The flexible standard of unconscionability allows adaptation to changing economic realities but can also create uncertainty.
There are periodic calls for:
- Clearer statutory or regulatory guidance on maximum effective rates for certain types of consumer loans
- Stronger enforcement of disclosure rules
- More robust oversight of digital and informal lending channels

VIII. Conclusion

Philippine law on “usurious lending practices” has evolved from a rigid regime of statutory ceilings to a deregulated but judicially policed system. Although the Usury Law’s interest ceilings are suspended, courts and regulators retain powerful tools to combat abusive lending:

Civil Code provisions on unconscionable interest and penalties
Special statutes on lending regulation, truth in lending, and consumer protection
Criminal and administrative sanctions for deceptive or oppressive practices

In practice, the real battleground is no longer the question, “Did the lender exceed a statutory maximum?” but rather, “Is this rate or structure so excessive, unfair, or abusive that the law cannot, in good conscience, enforce it?”

Anyone dealing with high-interest or informal lending in the Philippines—whether as borrower, lender, or counsel—must therefore understand not just the text of the Usury Law, but the full tapestry of jurisprudence and related regulation that continues to define, in a very real and practical sense, what counts as usurious today.

(This discussion is for general information and academic use only and is not a substitute for specific legal advice on any particular case.)