Legality of Additional Fees Before Releasing Loan Amount in Philippines

The Legality of “Additional Fees” Before Releasing a Loan in the Philippines

An all-in, practice-oriented guide for lenders, borrowers, and counsel.


1) Executive summary

Charging “additional fees” before releasing a loan is not per se illegal in the Philippines. Fees are lawful if they are:

  1. Clearly disclosed in writing before the borrower agrees (Truth in Lending principles),
  2. Reasonable and not unconscionable (Civil Code & jurisprudence), and
  3. Compliant with sector-specific rules (banking/BSP, lending & financing companies/SEC, insurance/IC, consumer disclosure & abusive-practices rules incl. the Financial Consumer Protection Act).

Conversely, fees can be unlawful or void if they are hidden, misleading, excessive, tied, or used to circumvent interest limits or court-recognized standards of fairness.


2) Legal sources & who regulates whom

  • Civil Code: contracts must have consent, object, and cause; stipulations that are contrary to law, morals, good customs, public order, or public policy are void. Courts may strike unconscionable interest/charges. Landmark cases have reduced 4–5% per month interest and similar oppressive charges as void or reduced to legal/market-reasonable levels.

  • Truth in Lending (Philippine regime): requires meaningful disclosure of the finance charge and effective interest rate (APR/total cost of credit) prior to consummation. “Finance charge” typically includes interest, discounts, investigation/appraisal fees, service charges, collection fees, credit-life premiums if required, and other charges incident to the extension of credit.

  • Financial Consumer Protection Act (FCPA) (and earlier sectoral rules): prohibits unfair, deceptive, and abusive acts or practices, mandates clear, prominent, accurate fee disclosures, and provides complaint/restitution mechanisms.

  • Regulators & coverage

    • BSP: banks, quasi-banks, EMI/PSOs, and their credit products.
    • SEC: lending companies and financing companies, including most online lending platforms (OLPs).
    • Insurance Commission (IC): credit-life or similar insurance tied to loans.
    • DTI: merchant/retailer credit and consumer protection for non-financial sellers.
    • Courts: contract enforcement, rescission, damages; may reduce unconscionable charges.

Practical effect: the same fee can be acceptable for a bank if transparently disclosed and permitted by BSP standards, but problematic for a lending company if it hides the true cost or breaches SEC rules on caps/abusive practices.


3) What counts as an “additional fee”?

Common lawful in principle items (if properly disclosed & reasonable)

  • Documentary Stamp Tax (DST) and notarial fees (official/third-party costs).
  • Appraisal & investigation fees (secured loans), title verification, CR/OR verification (auto), chattel mortgage registration.
  • Processing/service fee (flat or %), disbursement fee, intermediation/arranger fee (corporate loans).
  • Credit-life or MRI/Fire insurance if voluntary or, if required, only when justified, reasonably priced, and freely chosen provider options are offered (no forced tie-ins).
  • Prepaid interest / discount (e.g., interest deducted from proceeds) provided the effective rate and total finance charge are clearly disclosed.

Red flags / often illegal or voidable

  • Hidden or back-loaded fees revealed only at release (no prior written disclosure).
  • Junk fees that provide no service (e.g., “facilitation” or “marketing” fee to staff).
  • Coerced add-ons (e.g., “we won’t release unless you buy this insurance from our chosen agent”).
  • Duplicative fees (charging both “processing” and “service” for the same function without basis).
  • Excessive notarial or appraisal charges grossly above prevailing rates.
  • Withholding of a large “advance penalty” or “reserve” with vague triggers.
  • Structuring fees to evade interest/fee caps or to mask the effective APR.

4) The disclosure rule that decides most cases

The golden sequence

  1. Before the borrower signs or clicks “I agree”: lender must give a written pre-contract disclosure setting out:

    • Principal, tenor, repayment schedule.
    • All finance charges and every fee, their amounts or formulas, and when/how they are collected (e.g., deducted from proceeds vs. billed on top).
    • Effective interest rate / total cost of credit (ideally annualized).
    • Whether insurance is required, its premium, and the borrower’s freedom to choose an insurer of equivalent cover.
  2. At consummation: borrower receives the disclosure and contract; no last-minute alterations.

  3. At release: the net proceeds equal the disclosed gross loan minus exactly the disclosed deductions. Any new/unagreed fee is presumptively unfair.

If any of the above fails, the fee is exposed to regulatory sanction, civil liability, and judicial reduction/invalidity.


5) “Deducted-from-proceeds” fees vs. “financed-into-amortization”

  • Deducted-from-proceeds (“take-out” deductions): cash the borrower receives is reduced. This raises the effective interest rate because the borrower pays interest on the full principal but receives less cash. Disclosure must show both the nominal rate and the effective cost.
  • Financed-into-amortization: fees are added to principal and repaid over time. Also increases effective cost; again, show the total.

Practice tip for lenders: always present a Key Facts Statement/Disclosure Statement with (a) gross loan, (b) itemized deductions, (c) net proceeds, (d) amortization table, (e) total payments, (f) effective rate. Practice tip for borrowers: compare net cash in hand vs. total peso outlay—not just the “rate”.


6) Reasonableness & unconscionability

Even without statutory interest ceilings, Philippine courts strike down finance charges that are “iniquitous, unconscionable, and exorbitant.” Courts may:

  • Reduce interest and corresponding penalties to a reasonable rate;
  • Invalidate penalty clauses and usurious equivalents (fees that function as disguised interest);
  • Treat ambiguous charges contra proferentem (against the drafter).

Signals of unconscionability

  • Effective monthly cost soaring to several multiples of the stated rate because of stacked fees.
  • Penalty + late fee + collection fee + “reactivation” fee on the same default (“double recovery”).
  • Micro-loans with “one-time” fees exceeding a meaningful fraction of principal (e.g., P500 fee on a P2,000 14-day loan) without clear justification.

7) Sector snapshots

Banks & credit card issuers (BSP-supervised)

  • Must follow strict transparency standards, give pre-contract disclosures, and prominently state fees (annual fees, cash advance fees, late/over-limit, processing, etc.).
  • Add-on: Banks may deduct fees at take-out (e.g., appraisal, notarial, DST) if they were disclosed and official receipts are issued for 3rd-party charges.
  • Prohibited: misleading teaser rates, hidden “activation” fees at release, unilateral fee changes without proper notice/consent (except as allowed by contract/regulations).

Lending & financing companies; online lending platforms (SEC-supervised)

  • Must be registered, display SEC details, and follow disclosure & fair collection rules.
  • SEC has acted against undisclosed/abusive fees and certain OLP practices (contact-shaming, hidden charges, misrepresentation).
  • Local caps / ceilings: In some product bands (e.g., small-value, short-tenor loans), the SEC has implemented rate/fee caps and “total cost of credit” limits. Additional fees that cause an over-cap are unlawful, even if disclosed.

Insurance add-ons (IC-supervised)

  • If insurance is mandatory for credit approval, the cost is a finance charge. Borrowers should be allowed to use equivalent cover from other insurers (no forced tie-in). Commissions must be lawful and disclosed.

8) Are specific fees lawful? A quick matrix

Fee Generally allowed? Conditions / pitfalls
Processing/service fee Yes Must be disclosed, reasonable, and not duplicated by other vague fees.
Appraisal/investigation fee Yes Reflect actual cost; show breakdown; no padding.
Notarial fee Yes Within prevailing range; provide official receipt.
Documentary Stamp Tax Yes Statutory rate; provide BIR proof.
Credit-life/MRI Yes (if required or optional) Must be disclosed; offer choice; reasonable premium; no coercion or secret commissions.
Disbursement/withdrawal fee Conditional Justify cost; include in APR calculation.
“Facilitation/marketing” fee paid to staff No Typically abusive / conflicts with fair-dealing standards.
“Advance penalty” deducted at release No Penalties presuppose default; charging at release is suspect.
Collection fee at booking No Collection costs arise only if default occurs; otherwise a disguised finance charge.

9) Sample compliance checklist (for lenders)

  1. Licensing: Are you properly registered/supervised (BSP/SEC) for the product?
  2. Product sheet: Contains all fees, timing, and APR/total cost.
  3. Key Facts Disclosure handed before consent; borrower keeps a copy.
  4. Contract mirrors the disclosure; no last-minute add-ons.
  5. Take-out sheet shows gross vs. itemized deductions vs. net proceeds.
  6. Third-party charges supported by receipts (BIR, notary, registry).
  7. Insurance: document voluntariness or required-coverage rationale; allow choice.
  8. Caps: For covered small-value loans, confirm you are within total cost limits.
  9. Governance: train staff; prohibit side-payments; retain call/chat transcripts.
  10. Change management: notify borrowers of fee changes as required; obtain consent where needed.

10) Borrower playbook

  • Before signing: ask for a one-page summary showing (a) all fees, (b) net proceeds, (c) total repayable, (d) effective rate.

  • At release: confirm that the actual deductions exactly match the disclosure.

  • Keep everything: screenshots, SMS, app screens, receipts.

  • If surprised by a fee:

    1. Write a dispute letter/email within a few days; ask for reversal and basis.

    2. Escalate to the regulator with your documents:

      • Banks & EMIs → BSP consumer assistance.
      • Lending/financing/OLPs → SEC complaints.
      • Insurance add-ons → Insurance Commission.
      • Retailer credit issues → DTI.
    3. Consider legal action: rescission, reformation, damages, or judicial reduction of unconscionable charges. For modest amounts, small-claims procedure (no lawyer required) may apply—check the current monetary threshold.


11) Sample clause language (illustrative only; tailor to your regulator)

Fees and Charges; Net Proceeds. Borrower acknowledges receipt, prior to execution, of the Disclosure Statement setting out the finance charge and effective interest rate. The following fees will be collected by deduction from loan proceeds at take-out: (a) Processing Fee: ₱; (b) Appraisal Fee: ₱; (c) Notarial Fee: ₱; (d) Documentary Stamp Tax: ₱; and (e) Insurance Premium (if Borrower elects Company-arranged coverage): ₱. No other fees shall be collected at take-out. The net proceeds shall be ₱. Any change to fees prior to release requires Borrower’s prior written consent.

Voluntary Insurance. Insurance is optional unless required for collateral protection. If required, Borrower may procure equivalent coverage from an insurer of Borrower’s choice. Premiums constitute part of the finance charge and are included in the total cost of credit.


12) Worked example: why disclosure of “prepaid” fees matters

  • Advertised: “₱100,000 at 24% p.a., 12 months, equal amortization.”
  • Also charged at release: 2% processing, ₱3,000 appraisal, ₱1,500 notarial₱6,500 total fees.
  • Net cash received: ₱93,500.
  • If the borrower pays interest on ₱100,000 but only receives ₱93,500, the effective annual cost is higher than 24% because of the upfront deductions. This must be clearly disclosed (and assessed for reasonableness).

13) Penalties, late fees, and “collection charges”

  • May be valid only upon default and must be reasonable, non-duplicative, and disclosed.
  • Stacking a penalty interest, a late fee, and a collection fee for the same missed installment is often excessive; courts may pare down to a single reasonable charge.

14) Digital & app-based lending

  • Screens count as disclosures if presented before consent, in clear language, and retained (email/PDF copies).
  • “Dark patterns” (e.g., hiding fees behind expandable menus, pre-ticked insurance boxes, or surfacing fees only at cash-out) risk UDAP/FCPA violations.
  • Contact-shaming and threats are illegal; so are undisclosed deductions at e-wallet cash-out.

15) Practical Q&A

Q: Can a lender deduct a “service fee” before releasing the loan? A: Yes, if it was pre-disclosed, reasonable, part of the finance charge, and does not breach any total cost limits applicable to the product.

Q: The bank deducted a “disbursement fee” I never saw. What now? A: Dispute in writing, request the disclosure copy you were shown, and ask for reversal. If unresolved, escalate to the regulator.

Q: Is forced credit-life insurance legal? A: Requiring insurance for risk management can be legitimate, but tying to a specific insurer/agent without choice, or overpricing it, can be abusive. Premiums must be disclosed and included in the finance charge.

Q: We charge a flat ₱1,000 processing fee on any loan size—is that okay? A: Flat fees are acceptable if disclosed and proportionate; for micro-loans, a large flat fee can become unconscionable relative to principal.


16) Remedies & enforcement

  • Regulatory: administrative fines, orders to refund/cease-and-desist, license actions.
  • Civil: rescission, reformation, damages, attorney’s fees; judicial reduction of charges.
  • Criminal: rare, but fraud/false representations or data-privacy abuses can attract liability.
  • Collective relief: coordinated complaints may prompt regulators to require mass refunds where patterns are found.

17) Takeaways

  • For lenders: Treat every peso taken at release as part of the finance charge. If a fee isn’t necessary, transparent, reasonable, and documented, don’t charge it.
  • For borrowers: Never accept “we’ll tell you the deductions at release.” Insist on a Key Facts Disclosure and check that net proceeds match the paper.
  • For counsel: Build your case around disclosure timing, effective total cost, and reasonableness; preserve app screenshots and proof of deductions.

Disclaimer

This article provides general information on Philippine law and regulatory practice. It is not legal advice. Facts and rules evolve; consult a qualified Philippine lawyer or the relevant regulator for specific cases.

Disclaimer: This content is not legal advice and may involve AI assistance. Information may be inaccurate.