Below is a practitioner-grade explainer on the Legality of Deducting “Processing Fees” from Loan Proceeds in the Philippines. It is comprehensive but still general information—not legal advice.

Executive takeaways

Yes, net-off is generally lawful: A lender may deduct properly disclosed finance charges (e.g., processing/handling fees) and official taxes/charges from the proceeds if (1) the loan contract clearly authorizes the deduction, (2) the fees are itemized and disclosed before consummation, and (3) the effective interest rate (EIR) and total cost of credit are disclosed.
But it becomes unlawful when deductions are undisclosed, deceptive, excessive, or unauthorized, or when “fees” are used to mask usurious/equivalent unconscionable charges. Even though statutory interest ceilings are suspended, courts routinely strike down unconscionable rates and charges and reduce penalties.
Regulators police transparency and fairness: Lending and financing companies are under the SEC; banks and non-bank lenders under BSP; insurance-backed credit under IC. The Truth in Lending Act (TILA), the Lending Company Regulation Act (LCRA), the Financing Company Act (FCA), and the Financial Products and Services Consumer Protection Act (FCPA, 2022) require clear, prominent disclosure and prohibit abusive practices.

Legal framework (Philippine context)

Truth in Lending Act (R.A. 3765) and implementing rules
- Requires meaningful disclosure to the borrower of finance charges and the true cost of credit.
- “Finance charge” includes any charge payable directly or indirectly by the borrower as a condition of the loan, whether collected up-front (deducted from proceeds) or on top of the principal.
- Deductions at release do not convert those amounts into “non-interest”; for TILA, they count toward the cost of credit.
Lending Company Regulation Act (R.A. 9474) & IRR (SEC-regulated entities)
- Lending companies must disclose interest, penalties, and all other charges; use plain language; display rates in per-annum terms or disclose EIR if quoting monthly.
- Prohibits misleading or unfair practices (e.g., hidden charges, bait rates).
- Requires official receipts and proper itemization of every amount withheld from proceeds.
Financing Company Act (R.A. 8556) & IRR (SEC)
- Mirrors LCRA duties for financing companies; emphasizes clear disclosure of fees and charges and fair collection practices.
BSP Truth-in-Lending/Disclosure regime (for BSP-supervised lenders)
- Requires disclosure of EIR, total finance charge, and amortization schedule; if any amount is deducted at release (e.g., processing fee, DST), it must still be included in computing EIR and shown in a pre-contract disclosure statement.
Financial Products and Services Consumer Protection Act (R.A. 11765, 2022)
- Cross-sector consumer law covering SEC/BSP/IC-regulated providers.
- Outlaws fraudulent, abusive, or unfair terms and practices; mandates suitability, prominent disclosure, and transparent pricing; gives regulators administrative enforcement and penalty powers.
Civil Code & jurisprudence
- Freedom to contract is limited by law, morals, good customs, public order, or public policy (Art. 1306).
- Courts may strike down or reduce unconscionable interest/penalties/charges (e.g., cases invalidating 3%–6% per month interest or excessive penalty fees).
- Compensation/set-off: Netting fees at disbursement is a form of agreed application of funds; it must be authorized in the contract and not impair statutory rights.

What counts as “processing fees” (and related deductions)

Legitimate finance charges: application/processing/handling fees; credit investigation/ appraisal fees; service fees for disbursement channels; commitment fees.
Official charges typically netted:
- Documentary Stamp Tax (DST) on the loan instrument (often netted from proceeds).
- Notarial fees.
- Chattel mortgage registration fees (for secured loans).
Not legitimate: vague “miscellaneous,” “facilitation,” or “system” fees that are not itemized, are duplicative, or bear no relation to an actual service or cost.

When deduction from proceeds is lawful

Clear authorization in the loan agreement and pre-contract disclosures.
Itemized schedule stating: name of each fee, peso amount, when/how collected (e.g., “deducted at release”), whether recurring or one-time, and refundable or not.
EIR & total cost of credit reflect all finance charges, including upfront deductions.
No double-charging (e.g., charging an “appraisal fee” and separately recovering the same cost as part of a “processing fee”).
Taxes and government fees are correct and backed by receipts.
No unfair tying (e.g., forcing unrelated services/insurance unless legally required or truly optional with consent).

When it becomes unlawful or problematic

Hidden or inadequately disclosed deductions; failure to give a pre-contract disclosure statement.
Mislabeling interest as “fees” to mask the true cost; EIR not shown or computed only on the gross while releasing net, causing a deceptive APR.
Unconscionable total charges (interest + fees + penalties) even if individually “allowed.” Courts may void/reduce them.
Unauthorized set-off (deducting items not agreed upon) or over-collection beyond the agreed fee.
Non-issuance of ORs for fees/taxes deducted.
Unfair collection practices (threats, shaming) related to disputed “fees” can trigger regulatory sanctions.

Computation principles you must get right

Key concept: If you deduct fees at release but compute interest on the stated principal, your borrower receives less cash but pays interest as if they received more; the EIR rises. This is lawful only if the EIR/total cost are fully and prominently disclosed.

Illustration (simplified):

Stated principal: ₱100,000
Upfront processing fee: ₱3,000; DST & notarial: ₱1,250 (total deduction ₱4,250)
Cash released: ₱95,750
Nominal interest: 24% p.a. on ₱100,000, payable in 12 equal installments

Even with a 24% “nominal” rate, the EIR is higher because the borrower effectively uses ₱95,750, not ₱100,000. Lawful if disclosed; problematic if only the nominal rate is shown.

Good-faith practices:

Show both nominal rate and EIR/APR.
Provide an amortization schedule and a fee breakdown on the face of the disclosure.
For prepayment, specify whether upfront fees are refundable (usually not) and how unearned interest is handled.

Special notes by product type

Salary/Payroll loans: Employer-facilitated net-off must mirror borrower consent; deductions must be contractual and itemized.
Vehicle/Appliance loans: Watch for duplicated charges (dealer “processing” + lender “processing”). Avoid charging both unless the services differ and are disclosed.
Digital/online lending: SEC has repeatedly sanctioned entities for hidden fees and misstated rates. Online disclosures must be as prominent as paper contracts; the final screen before acceptance should show the EIR, total fees, and net proceeds.
Microfinance: Flat monthly “service charge” deducted upfront is common; still, the EIR must be disclosed, and the total cost must not be unconscionable.

Documentation & compliance checklist (for lenders)

Pre-contract disclosure statement with: nominal rate, EIR/APR, total finance charge, all itemized fees, net proceeds, amortization table.
Loan agreement clause expressly authorizing deduction of specified fees/taxes at release.
Official receipts for every peso deducted; BIR-compliant receipts for taxes/notarial fees.
Policies prohibiting: hidden fees, duplicate charges, and mislabeling.
Customer journey artifacts (screen captures/acknowledgments) proving digital disclosure.
Complaints handling process that can refund improper deductions promptly.
Board-approved pricing framework documenting how fees are set and periodically reviewed for reasonableness.

Borrower remedies & defenses

Regulatory complaints: SEC (for lending/financing companies), BSP (for banks/NBMFIs), IC (if insurance is bundled), DTI/LGU for unfair trade practices where applicable.
Civil action: for nullity or reformation of unconscionable terms; recovery of improperly deducted amounts; damages for bad-faith practices.
Defensive relief: courts may reduce penalties/interest and disallow unreasonable fees; strict construction against the drafter applies to ambiguities.

Practical drafting tips (to stay enforceable)

Name the fee (what it pays for), state the amount, and say you will deduct it at release.
Avoid buckets like “miscellaneous”—split them or delete them.
State the net cash out (e.g., “We will release ₱95,750 after deducting the following…”).
Prominently disclose EIR/APR; don’t bury it in footnotes.
Cap penalties (e.g., late charges) to reasonable levels and disclose the basis (per day/per month).
Make optional add-ons (e.g., credit-life insurance) truly optional with a separate consent box.

Frequently asked questions

1) Can we legally deduct “processing fees” from proceeds? Yes—if expressly authorized, fully disclosed, included in the EIR, and reasonable.

2) Are there caps on fees or rates? The Usury Law ceilings were suspended, but regulators and courts can invalidate/reduce unconscionable rates/fees. Treat total charges conservatively.

3) Must we refund the processing fee if the borrower prepays early? Generally no (it’s a one-time charge for services rendered), unless your contract or policy says otherwise or the fee was improperly collected.

4) Can we deduct DST and notarial fees? Yes, commonly done; ensure accuracy and issue receipts. Misstated or padded “taxes” are sanctionable.

5) What if the borrower never saw the fee schedule? Non-disclosure risks regulatory penalties and civil exposure; the deduction can be ordered refunded and terms reformed.

Bottom line

Deducting processing fees at disbursement is lawful in the Philippines only when it is transparent, authorized, accurately itemized, and reflected in the true cost of credit (EIR). Treat anything that inflates yield “through the back door” as a legal and reputational hazard—because regulators and courts will, too.

If you want, I can turn this into a contract-ready clause pack (disclosure statement + fee authorization + prepayment & refund language) tailored to (a) a lending company under the SEC, (b) a BSP-supervised lender, or (c) a digital lending platform—just tell me which one and the typical loan amounts/terms.