Introduction

In the Philippines, lending companies play a crucial role in providing access to credit, particularly for individuals and small businesses that may not qualify for traditional bank loans. These entities are distinct from banks and are primarily regulated under Republic Act No. 9474, also known as the Lending Company Regulation Act of 2007 (LCRA). This legislation, administered by the Securities and Exchange Commission (SEC), establishes the framework for the establishment, operation, and supervision of lending companies to ensure transparency, fairness, and protection of borrowers. Complementary laws, such as the Truth in Lending Act (Republic Act No. 3765), the Consumer Act of the Philippines (Republic Act No. 7394), and the Data Privacy Act of 2012 (Republic Act No. 10173), further bolster consumer safeguards. This article comprehensively explores the legal requirements for lending companies and the mechanisms in place to protect consumers, drawing from the Philippine legal context.

Definition and Scope of Lending Companies

Under the LCRA, a lending company is defined as a corporation engaged in granting loans from its own capital funds or from funds sourced from not more than nineteen persons. This excludes banks, quasi-banks, pawnshops, and other entities regulated by the Bangko Sentral ng Pilipinas (BSP). The law applies to all lending activities, including those conducted online or through fintech platforms, as clarified by SEC issuances. Lending companies must operate as stock corporations with a minimum paid-up capital of PHP 1,000,000, unless higher amounts are required for specific operations, such as those involving foreign investments.

The scope extends to any entity that habitually lends money or extends credit, even if not its primary business, potentially subjecting it to registration requirements. Exemptions include isolated lending transactions without a pattern of repetition, and entities already regulated under other laws, such as cooperatives under the Cooperative Development Authority.

Registration and Licensing Requirements

To operate legally, lending companies must register with the SEC and obtain a Certificate of Authority (CA). The registration process involves:

Corporate Formation

Incorporation as a stock corporation under the Revised Corporation Code (Republic Act No. 11232).
Minimum capitalization: PHP 1,000,000 for domestic corporations; higher for those with foreign equity, subject to the Foreign Investments Act (Republic Act No. 7042, as amended).
At least a majority of shares must be owned by Philippine citizens or entities, unless qualified under negative lists for foreign investment.

Application for Certificate of Authority

Submission of articles of incorporation, by-laws, and a business plan detailing lending operations.
Disclosure of directors, officers, and major shareholders, who must pass fit-and-proper tests, including background checks for integrity and competence.
Proof of compliance with anti-money laundering requirements under the Anti-Money Laundering Act (Republic Act No. 9160, as amended).
Payment of filing fees and submission of audited financial statements if applicable.

The SEC reviews applications within 30 days, granting the CA upon compliance. Renewal is annual, requiring submission of reports on operations, financial condition, and compliance with laws. Failure to register exposes operators to penalties, including fines up to PHP 500,000 and imprisonment.

For online lending platforms, additional guidelines from SEC Memorandum Circular No. 19, Series of 2019, mandate registration as a lending company and adherence to cybersecurity standards.

Operational Requirements

Once licensed, lending companies must adhere to strict operational standards to maintain integrity and solvency:

Capital and Financial Standards

Maintenance of the minimum capital at all times.
Prohibition on sourcing funds from the public or more than 19 lenders to avoid classification as a quasi-bank.
Regular financial reporting to the SEC, including quarterly balance sheets and annual audited statements.

Interest Rates and Charges

Interest rates are not capped by usury laws since the repeal of the Usury Law (Act No. 2655) by Central Bank Circular No. 905 in 1982, allowing market-determined rates. However, rates must not be unconscionable or excessive, as determined by courts under the Civil Code (Articles 1306 and 1409).
Full disclosure of all charges under the Truth in Lending Act, including effective interest rates (EIR), processing fees, and penalties. The EIR must account for all costs, computed using the formula provided in BSP regulations.

Loan Documentation and Practices

Loans must be documented with clear terms, including principal, interest, repayment schedule, and collateral if any.
Prohibition on blank or incomplete loan documents.
Collateral, if required, must comply with the Chattel Mortgage Law (Act No. 1508) or Real Estate Mortgage Law, with proper registration.

Record-Keeping and Reporting

Maintenance of books and records for at least five years, subject to SEC inspection.
Reporting of suspicious transactions under anti-money laundering rules.

Prohibited Acts and Practices

The LCRA explicitly prohibits certain practices to prevent abuse:

Engaging in banking or quasi-banking functions without BSP authority.
Using deceptive names implying government affiliation or banking status.
Harassment in collection, such as threats or public shaming, violating the Anti-Harassment provisions in SEC rules.
Charging hidden fees or altering terms without consent.
Discrimination based on protected characteristics under the Magna Carta for Women (Republic Act No. 9710) or other anti-discrimination laws.

Violations can lead to revocation of the CA, fines ranging from PHP 10,000 to PHP 500,000, and criminal liability.

Consumer Protection Measures

Consumer protection is a cornerstone of Philippine lending regulations, ensuring borrowers are informed, treated fairly, and shielded from predatory practices.

Disclosure Requirements under the Truth in Lending Act

Prior to loan consummation, lenders must provide a disclosure statement detailing:
- Amount financed.
- Finance charges, itemized.
- Total payments and schedule.
- Annual percentage rate (APR).
Failure to disclose renders the loan unenforceable for excess charges, with penalties including refunds and fines up to PHP 100,000.

Fair Debt Collection Practices

Collection must be professional and respectful, prohibiting violence, obscenity, or undue pressure.
The SEC's Fintech Lending Guidelines ban the use of social media for shaming or accessing contacts without consent, addressing issues with online lenders.
Borrowers can file complaints with the SEC or BSP's Consumer Protection Department.

Data Privacy and Security

Under the Data Privacy Act, lenders must obtain consent for data collection, ensure security, and allow access/correction rights.
Personal data breaches can result in fines up to PHP 5,000,000 and imprisonment.
For online platforms, compliance with National Privacy Commission guidelines on data processing is mandatory.

Right to Rescission and Prepayment

Borrowers have a right to rescind certain loans within a cooling-off period under consumer laws.
Prepayment without penalty is allowed, with rebates on unearned interest computed via the Rule of 78s or actuarial method.

Remedies for Borrowers

Civil remedies: Annulment of unconscionable contracts under the Civil Code.
Administrative complaints: To SEC for license suspension.
Criminal actions: For estafa (swindling) under the Revised Penal Code if fraud is involved.
Class actions: Possible under the Rules of Court for widespread violations.

The Consumer Act provides additional protections against defective services, allowing claims for damages.

Enforcement and Penalties

Enforcement is primarily by the SEC, with powers to investigate, impose cease-and-desist orders, and refer cases to the Department of Justice. Penalties under the LCRA include:

Fines from PHP 10,000 to PHP 500,000 per violation.
Imprisonment from six months to ten years for officers.
Corporate dissolution for repeated offenses.

The BSP collaborates for overlapping issues, and the National Privacy Commission handles data-related complaints.

Recent Developments and Challenges

As of 2026, the landscape has evolved with increased focus on fintech. SEC Memorandum Circular No. 18, Series of 2021, strengthened oversight of online lending, requiring platforms to register and implement borrower verification. The rise of buy-now-pay-later schemes has prompted discussions on extending LCRA coverage.

Challenges include informal lenders evading regulation, high-interest traps, and digital harassment. Advocacy groups push for interest rate caps, but current policy favors financial inclusion with robust protections.

In conclusion, the Philippine framework balances access to credit with stringent safeguards, ensuring lending companies operate ethically while empowering consumers through transparency and recourse.