The Legitimacy of a Lending Corporation in Philippine Law
(A practitioner‑oriented survey, April 2025)
Disclaimer: This overview is for general information only and is not a substitute for independent legal advice or for official guidance from the Securities and Exchange Commission (SEC), Bangko Sentral ng Pilipinas (BSP) or other regulators.
1 Statutory and Regulatory Framework
| Instrument | Key Points for Lending Companies |
|---|---|
| Republic Act (RA) 9474 — Lending Company Regulation Act of 2007 | Foundational charter. Creates the “lending company” (LC) as a corporation engaged in granting loans from its own capital funds. Requires a Certificate of Authority (CA) from the SEC, imposes conduct rules, criminalizes unlicensed lending (₱10 000–₱500 000 fine and/or 6 mo–10 yr imprisonment). |
| RA 5980 (as amended by RA 8556) — Financing Company Act | Separate but often confused category. Higher minimum paid‑up capital and broader activities (e.g., leasing). A firm may not hold both a financing‑ and a lending‑company CA simultaneously. |
| Revised Corporation Code, RA 11232 | Governs incorporation, capital structuring, corporate governance, dissolution, and foreign equity ceilings (no constitutional nationality restriction for LCs; 100 % foreign ownership allowed, subject to reciprocity and stricter SEC scrutiny). |
| BSP Circular 1133 (2022) | Sets an interest‑rate cap for unsecured consumer loans originated by LCs and financing companies: 6 % nominal per month (0.2 % per day) on outstanding principal plus a one‑time processing fee not exceeding ₱500 or 5 % of loan amount, whichever is lower. |
| Financial Products and Services Consumer Protection Act, RA 11765 (2022) | Gives BSP and SEC visitorial and adjudicatory powers; codifies “twin peaks” consumer‑protection approach; introduces administrative sanctions and restitution orders for abusive lending conduct. |
| Truth‑in‑Lending Act, RA 3765, BSP Manual of Regulations for Non‑Bank Financial Institutions (MORNBFI), SEC Memorandum Circular (MC) 19‑2019 on Disclosure | Requires full, simple, written disclosure of finance charges and effective interest rate before consummation. |
| SEC MC 18‑2019 (Prohibition on Unfair Debt Collection) | Outlaws threats, profane language, disclosure to third parties, unauthorized contact using phonebook data scraping, etc.; sets complaint procedures and penalty matrix. |
| Data Privacy Act, RA 10173, NPC Circular 16‑01 | Limits app permissions, mandates lawful consent and proportional data processing for digital lenders. |
| Anti‑Money Laundering Act, RA 9160 (as amended) & BSP AML regulations | LCs are “covered persons” once their single cash transaction hits ₱500 000 (or lower, per risk‑based SEC guidance). Requires KYC, reports to AMLC and training. |
2 Defining a Legitimate Lending Corporation
A corporation is legitimate if all of the following are true:
- Incorporated under the RCC with the exclusive corporate purpose “to operate a lending company” (or words of identical import).
- Holds an SEC‑issued Certificate of Incorporation and a separate Certificate of Authority to Operate as a Lending Company (CA‑LC). Both numbers must appear on every advertisement, contract or receipt (RA 9474, s. 6).
- Capitalization:
- Metro Manila/head‑office in first‑class city — minimum ₱1 000 000 paid‑up capital.
- Elsewhere — ₱500 000.
- If 100 % foreign‑owned, the SEC typically requires ₱10 000 000 to show “financial capacity,” although this is policy‑based, not statutory.
- Own‑capital funding only. LCs cannot (a) accept deposits, (b) issue quasi‑deposit instruments, or (c) borrow more than twice their net worth without prior SEC approval.
- Compliant with ongoing obligations:
- General Information Sheet (GIS) within 30 days of annual meeting.
- Audited Financial Statements (AFS) within 120 days from fiscal year‑end, encoded in the SEC’s OST.
- AMLC registration and STR/CTR filing.
- Posting of schedules of fees and rates in all offices/online platforms.
- SEC yearly renewal of Surety Bond (20 % of paid‑up, capped at ₱1 000 000).
- No final adverse SEC/BSP/NPC order suspending or revoking the CA.
3 Formation and Licensing Steps
- Name Verification — reserve a name that includes “Lending Company” or “Lending Corp.” (RA 9474 disallows “lending investor”).
- Articles of Incorporation — indicate primary purpose limited to lending; list Filipino and foreign shareholdings; declare paid‑up capital.
- Pre‑processing clearance — submit Anti‑Domestic Violence Affidavit, AML compliance undertaking, sworn statements on beneficial ownership.
- Payment of Filing Fees — ½ of 1 % of authorized capital stock + ₱2,020 SEC filing fee (standard corporation rates).
- Issuance of Certificate of Incorporation under RCC.
- Application for Certificate of Authority — separate form, including:
- Business plan and projected financials for three years;
- NBI or PNP clearances and BI visas for foreign directors/officers;
- Proof of minimum paid‑up capital (bank certificate);
- Surety bond.
- Pre‑licensing on‑site inspection (discretionary).
- CACO (Certificate of Authority Compliance Order) — final step; validity is perpetual unless revoked.
4 Operational Restrictions and Conduct Rules
| Area | Main Rule | Practical Tips |
|---|---|---|
| Interest / Fees | Subject to BSP Circular 1133 cap; all extra charges are void. | Structure pricing around APR, not flat‑rate, to satisfy Truth‑in‑Lending. |
| Collateral | Chattel mortgages must be registered with the Registry of Chattel Mortgages within 30 days. | Never retain ATM cards or government IDs as de‑facto collateral (SEC MC 18‑2019 considers this unfair practice). |
| Debt Collection | Contact hours limited to 8 am–9 pm; max 3 contact attempts per week per borrower; no publication of debt. | Keep call logs, scripts and audio recordings for possible SEC audit. |
| Advertising | Must display corporate and CA numbers; misrepresentation is a fraudulent practice under Sec. 5, RA 9474. | For digital ads, put these in the first scroll or landing page. |
| AML / KYC | Verify identity for loans ≥ ₱25 000; keep records for 5 years after account closure. | Adopt risk‑based CDD for repeat micro‑borrowers. |
| Data Privacy | Obtain informed, freely given, specific consent for each data category; no “take‑all” permissions. | Provide an offline loan‑processing option for data‑privacy‑concerned clients. |
| Reporting | Submit Quarterly Report on Lending Operations (QRLO) to SEC within 15 days of quarter‑end. | Use XBRL‑compliant templates to avoid tagging errors. |
5 Liability for Illegitimate Lending
| Violation | Penalty Source | Exposure |
|---|---|---|
| Operating w/o CA | §12, RA 9474 | Fine ₱10 k–₱500 k + 6 mo–10 yr imprisonment; directors, officers and control persons personally liable. |
| Excessive interest post‑2022 cap | BSP Circular 1133 + Art. 1956 Civil Code | Contract void as to excess; borrower may recover interest paid + damages; SEC may suspend CA. |
| Harassment / Doxing | SEC MC 18‑2019 + RA 10175 (Cybercrime) | Administrative fine up to ₱1 M per act; cyber‑libel or grave threats charges; NPC administrative penalties for privacy breaches. |
| Pyramid / “5‑6” schemes | Securities Regulation Code §26; Revised Penal Code usury‑adjacent fraud | Syndicated estafa (life imprisonment) if ≥ 20 victims or ₱10 M amount. |
| AML non‑compliance | RA 9160 §14 | ₱50 k–₱500 k per violation + possible dissolution; directors may face criminal charges. |
6 Digital‑Only and App‑Based Lenders
SEC MC 10‑2021 created the “FinTech Loans and Financing Companies” category:
- Must have at least ₱10 M paid‑up capital.
- Mandatory on‑site cybersecurity audit every two years.
- Submit App Privacy Scorecards and “algorithmic transparency” report describing credit‑scoring model inputs.
BSP’s Open Finance Framework (Circular 1122, 2021) allows LCs to integrate via API with banks for account‑level data, subject to customer consent and accreditation as a Partner Participant.
Common pitfalls: scraping all phone contacts, disabling screenshot blocking, and lack of structured dispute‑resolution mechanisms — each draws rapid SEC show‑cause orders.
7 Recent Jurisprudence and Key SEC Opinions
| Case / Opinion | Gist | Year |
|---|---|---|
| SEC vs. Orient Lending Corp. (EN Banc Res. No. 03‑23) | CA revoked for unaudited AI‑credit scoring that produced racially biased outputs — first application of AI‑ethics principles. | 2023 |
| People vs. Go (G.R. 204855, unrep.) | Criminal conviction for unlicensed “5‑6” operation upheld; consent of borrowers does not excuse absence of CA. | 2021 |
| SEC Opinion (26 Aug 2022) | “Profit‑sharing agreements” with investors may constitute investment contracts (Howey test) and require an SEC permit; cannot be bundled with lending activity. | 2022 |
| NPC Advisory Opinion No. 2023‑05 | Collecting device identifiers (IMEI) without purpose limitation violates DPA; LC fined. | 2023 |
(Full‑text copies available through the SEC or Supreme Court E‑Library.)
8 Best‑Practice Checklist for Prospective or Existing LCs
- Corporate Hygiene – annual SEC reportorial filings, updated books, track ultimate beneficial ownership.
- Consumer‑Centric Loan Agreements – plain‑language Filipino/English versions; provide amortization schedule and total cost of credit.
- Robust Compliance Function – designate a Compliance Officer who is not the Chief Finance Officer; adopt a three‑lines‑of‑defense model.
- Fair & Secure Tech – privacy‑by‑design, explainable AI credit scoring, third‑party penetration tests.
- Transparent Pricing & Collections – publish rate matrix, give SMS reminders 3 days before due date, adopt graduated collection scripts.
- Stakeholder Engagement – join industry associations (e.g., Credit Management Association of the Philippines) for collective self‑regulation.
- Exit Strategy – board‑approved dissolution, loan portfolio sale (needs SEC “no objection”), settlement of liabilities, publication of notice.
9 Conclusion
Legitimacy in Philippine lending is layered: a corporation must first exist validly, then obtain and keep its SEC Certificate of Authority, and finally conduct itself in a way that honors statutory ceilings on interest, consumer‑protection norms, AML/KYC principles, privacy safeguards and cybersecurity.
Because the SEC wields both licensing and quasi‑judicial powers — and now shares consumer‑protection powers with the BSP under RA 11765 — non‑compliance can swiftly translate into criminal liability, asset freezes, reputational harm and even corporate death. Conversely, a fully compliant lending corporation can lawfully tap an estimated ₱800‑billion consumer‑credit market, partner with banks under open‑finance rules, and legitimately promote financial inclusion.
If you plan to set up or invest in an LC, engage counsel early, build a compliance culture, and budget for ongoing regulatory change — legitimacy is not a one‑time hurdle but a continuing license to operate.