Introduction

In the Philippines, the financial sector is heavily regulated to protect consumers, ensure fair practices, and maintain economic stability. One critical aspect of this regulation pertains to lending activities conducted by corporations. The Securities and Exchange Commission (SEC) plays a pivotal role in overseeing non-bank lending entities through the requirement of a secondary license, formally known as a Certificate of Authority (CA) to operate as a lending company. This article explores the legality of loan operations by companies that do not possess this SEC secondary license, examining the regulatory framework, legal requirements, prohibitions, enforcement mechanisms, potential liabilities, exceptions, and broader implications for businesses and borrowers. The discussion is grounded in Philippine laws, including Republic Act No. 9474 (Lending Company Regulation Act of 2007), SEC issuances, and related jurisprudence.

Regulatory Framework Governing Lending Activities

The Philippine financial system distinguishes between banking and non-banking institutions. Banks fall under the jurisdiction of the Bangko Sentral ng Pilipinas (BSP) pursuant to Republic Act No. 8791 (General Banking Law of 2000) and Republic Act No. 7653 (New Central Bank Act). Non-bank financial institutions, including lending companies, are primarily regulated by the SEC under Republic Act No. 11232 (Revised Corporation Code of the Philippines) and specific laws like RA 9474.

RA 9474 defines a "lending company" as a corporation engaged in granting loans from its own capital funds or from funds sourced from not more than 19 persons. This excludes banking institutions, quasi-banks, pawnshops, and other entities regulated by separate laws. The law mandates that no entity shall engage in the business of lending without first obtaining a CA from the SEC. This secondary license is distinct from the primary corporate registration, which all corporations must secure upon incorporation.

The SEC's authority stems from its mandate to regulate securities and corporate activities, ensuring that lending operations do not constitute unauthorized public offerings or violate anti-usury and consumer protection laws. Complementary regulations include the Truth in Lending Act (Republic Act No. 3765), which requires full disclosure of loan terms, and the Consumer Act of the Philippines (Republic Act No. 7394), which safeguards borrowers from unfair practices.

Requirements for Obtaining an SEC Secondary License

To legally operate as a lending company, an entity must comply with stringent prerequisites outlined in RA 9474 and SEC Memorandum Circular No. 19, Series of 2019 (Guidelines on the Registration of Lending and Financing Companies), as amended.

Key requirements include:

Corporate Structure: The company must be registered as a stock corporation with a minimum paid-up capital of PHP 1,000,000 (or higher for foreign-owned entities). At least 51% of the capital stock must be owned by Filipino citizens, unless otherwise allowed under foreign investment laws.
Application Process: Submission of an application to the SEC, including articles of incorporation, by-laws, financial statements, business plan, and proof of compliance with anti-money laundering (AML) rules under Republic Act No. 9160 (Anti-Money Laundering Act of 2001, as amended).
Operational Standards: Demonstration of sound financial practices, including risk management policies, internal controls, and adherence to interest rate ceilings set by the BSP (e.g., under Circular No. 799, Series of 2013, which caps effective interest rates at reasonable levels to prevent usury).
Ongoing Compliance: Licensed companies must submit annual reports, audited financial statements, and comply with SEC inspections. They are also required to register with the Credit Information Corporation (CIC) under Republic Act No. 9510 (Credit Information System Act) to share borrower data.

Failure to meet these standards results in denial of the CA, rendering any lending activities illegal.

Prohibitions and Illegality of Unlicensed Operations

Operating a lending business without an SEC secondary license is expressly prohibited under Section 4 of RA 9474, which states that "no person shall engage in the business of a lending company without first obtaining a certificate of authority from the SEC." This prohibition extends to all forms of loan granting, including personal loans, salary loans, microfinance, and online lending platforms.

Unlicensed operations are considered void ab initio (invalid from the beginning) under civil law principles. Loans issued by such entities may be unenforceable in court, as per Article 1409 of the Civil Code, which deems contracts contrary to law as inexistent. Borrowers could potentially argue that such loans are null and void, though courts have sometimes upheld repayment obligations on equitable grounds to prevent unjust enrichment (e.g., in cases like Philippine National Bank v. Court of Appeals, G.R. No. 107569, November 8, 1994).

Moreover, unlicensed lending often intersects with illegal practices such as usury (excessive interest rates violating Republic Act No. 2655, the Usury Law, as amended) or 5-6 lending schemes, which are predatory and target vulnerable populations. The rise of online lending apps has amplified this issue, leading to SEC crackdowns on unregistered fintech firms.

Enforcement Mechanisms and Penalties

The SEC enforces compliance through various mechanisms:

Cease and Desist Orders (CDOs): Under Section 6 of RA 9474, the SEC can issue CDOs to halt operations of unlicensed lenders. Violations of CDOs incur fines up to PHP 100,000 per day.
Administrative Sanctions: Fines ranging from PHP 10,000 to PHP 100,000 for first offenses, escalating for repeats. The SEC may also revoke corporate registration under the Revised Corporation Code.
Criminal Liabilities: Section 10 of RA 9474 imposes imprisonment of six months to ten years and/or fines from PHP 50,000 to PHP 200,000 upon conviction. Directors, officers, and employees knowingly involved can face personal liability. Prosecutions are handled by the Department of Justice (DOJ), often in coordination with the National Bureau of Investigation (NBI).
Civil Remedies: Aggrieved borrowers can file complaints with the SEC or pursue civil actions for damages. The SEC's Corporate Governance and Finance Department (CGFD) handles investigations.

In recent years, the SEC has intensified enforcement, particularly against illegal online lenders. For instance, through Memorandum Circular No. 18, Series of 2019, the SEC required all lending companies to register their online platforms, leading to the shutdown of numerous unregistered apps.

Exceptions and Special Cases

Certain entities are exempt from the SEC secondary license requirement:

Banks and Quasi-Banks: Regulated exclusively by the BSP, these institutions can lend without SEC approval.
Pawnshops: Governed by Presidential Decree No. 114 (Pawnshop Regulation Act) and BSP oversight.
Microfinance NGOs: Some non-stock, non-profit organizations may operate under Department of Finance (DOF) or Cooperative Development Authority (CDA) regulations, but they must still comply with RA 9474 if engaging in commercial lending.
Intra-Company Loans: Loans between affiliated corporations or to employees may not require a license if not conducted as a business.
One-Time Lenders: Isolated loan transactions do not constitute a "lending business," but habitual lending triggers the requirement.

Foreign companies must navigate additional restrictions under the Foreign Investments Act (Republic Act No. 7042, as amended), which limits foreign ownership in lending firms.

Jurisprudence and Case Studies

Philippine courts have consistently upheld the necessity of SEC licensing. In SEC v. Prosperity.Com, Inc., G.R. No. 164197, January 25, 2012, the Supreme Court ruled that an unlicensed entity's investment schemes disguised as loans were illegal, affirming the SEC's authority to impose sanctions.

Another landmark case is SEC v. Performance Foreign Exchange Corporation, G.R. No. 154131, July 20, 2006, where the Court voided contracts of an unlicensed forex trading firm engaging in margin lending, emphasizing consumer protection.

In the context of fintech, the SEC's 2020-2025 enforcement actions against apps like "Cashwagon" and "Fast Cash" illustrate the crackdown on unlicensed online lending, resulting in fines and permanent injunctions.

Broader Implications for Businesses and Consumers

Unlicensed lending undermines financial inclusion efforts, exposes borrowers to exploitation, and distorts market competition. For businesses, operating without a license risks not only legal penalties but also reputational damage and loss of investor confidence. Legitimate lenders benefit from a level playing field, while consumers gain from regulated interest rates, transparent terms, and recourse mechanisms.

The COVID-19 pandemic and economic shifts up to 2026 have heightened reliance on credit, prompting the SEC to issue guidelines like Memorandum Circular No. 3, Series of 2021, on moratoriums and digital lending, but these reinforce the licensing mandate.

To mitigate risks, companies considering lending activities should consult legal experts, conduct due diligence, and apply for the necessary licenses promptly. Borrowers are advised to verify a lender's SEC registration via the commission's online database before engaging.

Conclusion

The legality of loan operations in the Philippines hinges on compliance with SEC licensing requirements under RA 9474. Companies lacking a secondary license engage in prohibited activities, facing severe administrative, civil, and criminal consequences. While exceptions exist for regulated entities, the overarching principle is to protect the public from unregulated financial risks. As the financial landscape evolves with technology and economic pressures, adherence to these regulations remains essential for sustainable and ethical lending practices.