Introduction

In the Philippine financial landscape, loans often involve co-makers who share liability with the principal borrower for repayment. A co-maker, unlike a mere guarantor, assumes primary and solidary obligation, meaning creditors can pursue them directly without first exhausting remedies against the borrower. However, when loan agreements impose excessive or usurious interest rates—charges that exceed reasonable bounds or violate legal standards—co-makers are not without recourse. This article explores the comprehensive legal options available to co-makers in such scenarios, grounded in Philippine statutes, jurisprudence, and regulatory frameworks. It delves into the definitions, prohibitions, remedies, procedural steps, and practical considerations, providing a thorough guide for affected individuals seeking relief.

Understanding Key Concepts

Who is a Loan Co-Maker?

Under Philippine law, particularly the Civil Code of the Philippines (Republic Act No. 386), a co-maker is a party to a loan contract who signs alongside the principal borrower, making them jointly and severally liable for the debt. This is distinct from a guarantor (Article 2047, Civil Code), whose liability is subsidiary and contingent on the borrower's default. Co-makers can be held accountable for the full amount, including principal, interest, and penalties, as per the loan's terms.

Excessive and Usurious Interest Defined

Usurious Interest: Historically governed by the Usury Law (Act No. 2655, as amended), usury refers to interest rates exceeding the legal maximum. However, Central Bank Circular No. 905, Series of 1982, suspended the Usury Law's ceilings, allowing parties to freely stipulate interest rates. Despite this, interest must not be "unconscionable" or "shocking to the conscience," as ruled in cases like Medel v. Court of Appeals (G.R. No. 131622, 1998).
Excessive Interest: This encompasses rates that, while not strictly usurious under suspended laws, are deemed exorbitant, leading to inequitable outcomes. The Supreme Court has invalidated rates as high as 5-10% per month (equivalent to 60-120% annually) if they render repayment impossible or violate public policy (e.g., Chua v. Timan, G.R. No. 170452, 2007).

Factors determining excessiveness include the borrower's bargaining power, economic conditions, and the lender's intent. Informal lenders (e.g., "5-6" schemes) often impose such rates, exploiting vulnerable borrowers and their co-makers.

Legal Framework Governing Interest Rates

Statutory Provisions

Civil Code: Article 1306 voids contractual stipulations contrary to law, morals, good customs, public order, or public policy. Article 1409 declares unconscionable contracts unenforceable. Article 1956 prohibits interest on interest (compounding) unless expressly stipulated and reasonable.
New Central Bank Act (Republic Act No. 7653): Empowers the Bangko Sentral ng Pilipinas (BSP) to regulate interest rates for supervised entities. BSP Circular No. 799, Series of 2013, sets the legal interest rate at 6% per annum on loans without stipulation, but parties can agree otherwise.
Truth in Lending Act (Republic Act No. 3765): Requires full disclosure of finance charges. Non-compliance allows borrowers (and co-makers) to recover penalties and invalidate undisclosed interest.
Financial Consumer Protection Act (Republic Act No. 11765, 2022): Protects consumers from abusive lending practices, mandating fair treatment and prohibiting deceptive terms. It covers banks, non-bank financial institutions, and fintech lenders.
Consumer Act of the Philippines (Republic Act No. 7394): Addresses deceptive sales acts, including hidden charges in credit transactions.
Anti-Usury Provisions in Special Laws: For agrarian loans, Republic Act No. 6657 limits interest to 6% per annum. Pawnshops are regulated under Presidential Decree No. 114, capping rates at 2.5% per month.

Jurisprudential Guidelines

The Supreme Court has consistently intervened in cases of usurious interest:

In Spouses Silos v. Philippine National Bank (G.R. No. 181045, 2011), the Court reduced interest from 3% per month to 1% per month, deeming the original rate unconscionable.
Advocates for Truth in Lending, Inc. v. Bangko Sentral Monetary Board (G.R. No. 192986, 2013) affirmed that while ceilings are lifted, courts retain power to equitably adjust rates.
For co-makers specifically, DBP v. Perez (G.R. No. 148541, 2004) held that co-makers can invoke defenses available to the principal borrower, including usury.

Regulatory bodies like the BSP and Securities and Exchange Commission (SEC) oversee licensed lenders, while the Department of Trade and Industry (DTI) handles consumer complaints.

Rights of a Co-Maker in Cases of Excessive Interest

Co-makers enjoy several inherent rights:

Right to Challenge the Contract: As a party to the loan, a co-maker can seek judicial declaration of nullity or reformation if interest is usurious (Article 1410, Civil Code).
Right to Indemnity: If the co-maker pays the debt, they can seek reimbursement from the principal borrower (Article 1217, Civil Code), but excessive interest paid may be recoverable from the lender.
Right to Disclosure: Under the Truth in Lending Act, failure to disclose effective interest rates entitles the co-maker to refunds and damages.
Protection from Harassment: Republic Act No. 10173 (Data Privacy Act) and BSP regulations prohibit abusive collection practices, such as threats or public shaming.
Statute of Limitations: Actions to annul contracts prescribe in four years from discovery of the vice (Article 1391, Civil Code), while recovery of excess interest may fall under quasi-delict (10 years).

Available Legal Remedies and Options

Co-makers have a spectrum of administrative, civil, and criminal remedies. The choice depends on the lender's nature (formal vs. informal) and the loan's specifics.

1. Administrative Remedies

Complaint with BSP: For BSP-supervised entities (banks, financing companies), file a complaint via the BSP Consumer Assistance Mechanism (CAM). BSP can impose sanctions, order refunds, or revoke licenses. Under Circular No. 1048, Series of 2019, BSP investigates unfair practices.
SEC Complaint: For lending companies registered with SEC, report via the SEC Enforcement and Investor Protection Department. SEC Memorandum Circular No. 18, Series of 2019, requires fair interest rates.
DTI Complaint: For consumer credit issues, file under the Fair Trade Enforcement Bureau. DTI can mediate and impose fines.
National Privacy Commission (NPC): If collection involves data privacy violations.
Barangay Conciliation: Mandatory for disputes under P500,000 (Republic Act No. 7160, Local Government Code), offering amicable settlement before litigation.

2. Civil Remedies

Action for Annulment or Reformation: File a complaint in the Regional Trial Court (RTC) to void the interest clause or reform the contract (Articles 1359-1369, Civil Code). Grounds: lack of consent, fraud, or inequity. Successful suits can reduce interest to legal rates (6% per annum).
Reconvention in Collection Suits: If sued for payment, raise usury as a defense or counterclaim for refund of excess payments (Rule 9, Rules of Court).
Damages and Restitution: Seek moral, exemplary, and actual damages if the lender's actions caused harm (Article 2208, Civil Code). In Macalalag v. People (G.R. No. 164358, 2005), the Court awarded refunds for usurious interest.
Injunction: Obtain a temporary restraining order (TRO) to halt collection pending resolution (Rule 58, Rules of Court).
Class Action: If multiple co-makers are affected (e.g., by a lending app), file a class suit (Rule 3, Section 12, Rules of Court).

3. Criminal Remedies

Estafa (Swindling): If the lender deceives about interest rates, charge under Article 315, Revised Penal Code (RPC). Penalty: imprisonment and fines.
Violation of Truth in Lending Act: Criminal penalties include fines (P100-P2,000) or imprisonment (1-6 months).
Usury as a Crime: Though the Usury Law is suspended, habitual usury can be prosecuted under special laws or as unjust vexation (Article 287, RPC).
Report to Philippine National Police (PNP) or National Bureau of Investigation (NBI): For organized lending schemes involving threats.

Procedural Steps

Gather Evidence: Loan documents, payment records, communications, and witness statements.
Demand Letter: Send a formal demand to the lender for adjustment or refund, preserving the right to litigate.
File Complaint: In appropriate forum (barangay, agency, or court). Pay filing fees (e.g., RTC: based on claim amount).
Engage Legal Counsel: Consult a lawyer or free legal aid from the Integrated Bar of the Philippines (IBP) or Public Attorney's Office (PAO) for indigents.
Appeal: If dissatisfied, appeal to higher courts up to the Supreme Court.

Practical Considerations and Risks

Burden of Proof: The co-maker must prove the interest's unconscionability, often requiring expert testimony on market rates.
Costs: Litigation can be expensive; consider mediation to minimize expenses.
Impact on Credit: Challenging a loan may affect credit scores, but successful suits can clear records.
Informal Lenders: Harder to pursue due to lack of regulation; focus on civil nullity or criminal charges.
Preventive Measures: Before signing as co-maker, review terms, compute effective rates, and seek independent advice.

Notable Case Studies

Sps. Imperial v. Jaucian (G.R. No. 149004, 2005): Court voided 10% monthly interest as usurious, ordering refund.
Equitable PCI Bank v. Ng Sheung Ngor (G.R. No. 171545, 2007): Reduced compounded interest, emphasizing equity.
Lending Company Cases*: Recent BSP actions against online lenders (e.g., 2023 crackdowns) highlight refunds for excessive rates.

Conclusion

Co-makers facing excessive or usurious interest in the Philippines are protected by a robust legal system emphasizing equity and consumer rights. While the suspension of usury ceilings allows flexibility, courts and regulators actively curb abuses. Prompt action—through administrative complaints, civil suits, or criminal prosecution—can lead to contract reformation, refunds, and penalties against lenders. Affected individuals should document everything and seek professional guidance to navigate these options effectively, ensuring financial obligations remain fair and enforceable.