Liability for Defaulting on an Online-Lending-App Loan that Is Already Under a Securities and Exchange Commission (SEC) Cease-and-Desist Order (CDO)
Philippine legal perspective – updated to 7 May 2025
1. Why the Question Matters
Thousands of Filipinos have borrowed from smartphone “instant cash” apps whose operators were later slapped with SEC cease-and-desist orders (CDOs) for operating without a licence or for abusive practices. Borrowers frequently ask:
“If I stop paying, can they sue me or have me jailed?”
“Do I still owe anything at all?”
“What penalties does the lender face?”
This article gathers, in one place, every relevant rule, statute, circular, and doctrinal principle that answers those questions.
2. Governing Laws and Regulations
| Instrument | Core points for online lending |
|---|---|
| Republic Act (R.A.) 9474 – Lending Company Regulation Act of 2007 | Requires a Secondary Licence (Certificate of Authority, CA) from the SEC; Sec. 23 sets fines ₱50 000 – ₱500 000 and/or 6 months – 10 years’ imprisonment for unlicensed lending. |
| R.A. 5980 / 8556 – Financing Company Act | Parallel regime for “financing companies.” |
| SEC Memorandum Circular (MC) No. 19-2019 | Registration requirements for online platforms and the mandatory disclosure of app details. |
| SEC MC No. 18-2019 | Prohibits abusive collection (public shaming, obscene language, harassment); solidary liability extends to directors, officers, employees, and even third-party collection agents. |
| SEC MC No. 28-2020 & 10-2021 | Requires official e-mail and website domain registration; many rogue apps failed to comply, triggering CDOs. |
| R.A. 11765 – Financial Products and Services Consumer Protection Act (2022) | Explicit civil liability and SEC punitive damages for abusive practices; private right of action for consumers. |
| R.A. 10173 – Data Privacy Act of 2012 | Illegal harvest or disclosure of a borrower’s phone contacts invokes fines up to ₱5 million and imprisonment up to 7 years. |
| R.A. 8484 – Access Devices Regulation Act | Criminalises fraudulent use of IDs or e-wallet accounts when borrowing. |
| Civil Code Arts. 5, 1306, 1409 (1), 1411-1412, 2154-2155 | Declare a contract void if the object or cause is “contrary to law”; govern restitution of money paid under a void agreement. |
| SEC Rules of Procedure 2023 | Authorise ex parte issuance of a CDO to stop ongoing violations; penalties accrue daily until compliance. |
3. What Exactly Does a Cease-and-Desist Order Do?
Stops All New Lending and All Collection Activities – The CDO directs the company, its owners, officers, agents, and “all persons acting for and in its behalf” to immediately cease:
- Offering or granting new loans;
- Collecting, advertising, threatening, or harassing for existing loans;
- Processing personal data or making further disclosures.
Freezes Bank and E-money Accounts – The SEC routinely coordinates with Bangko Sentral ng Pilipinas (BSP) and payment gateways (e.g., G-Cash, Maya) to put a hold on corporate wallets traceable to the app.
Civil Service† Effect – While a CDO is administrative, refusal to obey constitutes contempt punishable by fine or imprisonment under Sec. 5.1, Securities Regulation Code (R.A. 8799).
It Is Not a Revocation—Yet – A CDO is interim. If violations persist, the SEC may revoke the certificate of authority or dissolve the corporation altogether.
4. Status of the Loan Contract After the CDO
4.1 Is the Contract Void or Merely Unenforceable?
- If the lender never had a CA: The loan is void ab initio (Civil Code Art. 1409[1]) because the “cause” (lending without statutory authority) is illegal.
- If the lender had a CA but violated SEC MC 18 or MC 19, triggering a CDO:
- Contracts entered after the CDO date are void (Art. 5 Civil Code – acts executed against a prohibition by law).
- Contracts entered before the CDO remain valid but are now subject to a legal supervening impossibility—the lender is barred from collecting until the CDO is lifted.
4.2 Borrower’s Monetary Liability
| Item | Liability rule |
|---|---|
| Principal | Considered a natural obligation. The borrower may pay but cannot be forced to do so if the lender sues—courts will dismiss for lack of cause of action (Art. 1411; jurisprudence in Spouses Abella v. CA, G.R. 149622, 12 Apr 2006). |
| Interest, penalties, “processing fees,” and in-app “collection fees” | Unrecoverable. All stipulations for interest or penalties in a void contract also fall (Art. 1420). If the borrower already paid, he may sue for restitution of excess under Art. 2154 (solutio indebiti). |
| Credit bureau reporting | The Credit Information Corporation’s rules recognise void contract disputes as a legitimate basis for contesting a negative report. |
| Criminal exposure for simple non-payment | None. Non-payment of debt is not a crime (1987 Const., Art. III sec. 20). The lender’s threat of “imprisonment” is false and itself actionable under SEC MC 18. |
4.3 Borrower’s Possible Criminal or Civil Exposure Unrelated to Default
| Scenario | Governing law | Exposure |
|---|---|---|
| Falsifying payslips, IDs, or selfies to obtain the loan | R.A. 10591 (falsification) or Art. 315 (2)(a) RPC (estafa) | 6 months-20 years imprisonment |
| Using a stolen e-wallet / credit card | R.A. 8484 | 6-20 years + fine up to triple the amount. |
5. Lender-Side Liability After Default + CDO
| Liability tier | Statute / rule | Range of penalties |
|---|---|---|
| Administrative | R.A. 9474 §23; SEC Rules of Procedure | Fine per violation plus ₱1 000/day while CDO ignored; possible revocation of CA; disqualification of directors. |
| Criminal | R.A. 9474 (unlicensed lending); R.A. 11765 §22 (consumer abuse); R.A. 10173 §25 (unlawful processing); Art. 287 RPC (acts of lasciviousness if threats include sexualised messages) | Fines ₱50 000-₱ 5 million; 6 months-10 years’ imprisonment per count; solidary liability extends to officers and third-party collectors. |
| Civil | Arts. 19-20 Civil Code (abuse of rights, quasi-delict); Art. 33 (moral damages) | Actual, moral, exemplary damages; attorney’s fees; temporary restraining order vs. harassment. |
Solidary liability of collections service providers. SEC MC 18-2019 defines “agent” broadly; the collection agency or even a freelance caller who continues to harass borrowers after a CDO can be fined and imprisoned on the same footing as the lending company.
6. Data-Privacy Breaches During Collection
Most complaints involve mass-text shaming (“Tell your friend X to pay or we will post her HIV result!”). Each message can violate:
- R.A. 10173, Sec. 25 – Unauthorized Processing (fines up to ₱500 000 per act and 3-6 years’ imprisonment).
- R.A. 10175 – Cyber-libel (prision mayor or ₱1 million+ fine).
- NPC Circular 16-01 – Rights to data-subject access, correction, and damages.
Borrowers may file parallel complaints with the National Privacy Commission and the SEC.
7. Enforcement Pathways for the Borrower
| Forum | Relief obtainable | Timelines / cost |
|---|---|---|
| SEC Financing and Lending Companies Division / Enforcement and Investor Protection Department (EIPD) | Administrative fines, suspension or revocation of CA, contempt, referral for prosecution | File online; no filing fee; resolution within 60-90 days (CDO stage) |
| National Privacy Commission | Cease-and-desist on data processing, damages, blacklisting of app from Play Store | 15-day resolution for summary CDO; full decision ~180 days |
| Regional Trial Court (civil) | Declaration of nullity of loan; refund of interest paid; damages for harassment | Filing fees based on claim; can apply for a TRO within 24 hours |
| Regional Trial Court (criminal) | Estafa, Data-privacy crimes vs. company officers & agents | Prosecutor evaluation: 15-60 days; warrant issuance on probable cause |
8. Practical Guidance for Borrowers Facing a Default
- Secure Proof of the CDO. Download the SEC Order (usually a PDF on the SEC website).
- Write a demand to cease collection. Cite the CDO number, attach government ID, and warn that further harassment will be reported.
- Record all calls and messages. Under R.A. 4200 (Anti-Wiretap Law) you may record your own phone calls without the other party’s consent.
- Do not uninstall the app immediately. Screenshot your transaction history first; you will need it to compute principal vs. excess charges.
- Evaluate moral obligation to pay principal. If you wish to pay, use instruments that create a paper trail (bank transfer, store receipts). Indicate the payment is for principal only.
- Contest negative credit bureau entries. Under CIC Dispute Resolution Rules, file an online dispute citing the void status of the contract.
- Report repeat harassment. Use the SEC online complaint form (requires at least three screenshots). Harassment after a CDO is a contemptuous act punishable with immediate arrest under Sec. 5.1 R.A. 8799.
9. Special Cases and Nuances
| Situation | How liability shifts |
|---|---|
| CDO later lifted | Collections may resume prospectively, but interest/penalties that accrued during the CDO period are permanently extinguished (doctrine of fortuitous impossibility). |
| Borrower made partial payments after the CDO but under threat | Money may be recovered with legal interest of 6 % per annum (Art. 2155 Civil Code; Bangko Sentral ng Pilipinas-Monetary Board Circular 799-2013 for rate). |
| Borrower filed bankruptcy (FRIA 2010) | The void loan is listed as a contingent claim with zero enforceable amount; lender cannot vote in rehabilitation proceedings. |
| Corporate borrower or sole proprietor | Still protected; R.A. 9474 and consumer-protection statutes do not distinguish natural vs. juridical persons for unlicensed lending. |
| CDO issued against Platform A, but the loan was later assigned to Platform B | Assignment after the CDO is void; Platform B inherits none of the rights and all of the liabilities (Art. 1624 Civil Code). |
10. For Lenders, Developers, and Third-Party Collectors: Compliance Checklist After Receipt of a CDO
- Shut down the app on Google Play and Apple App Store within 24 hours.
- Send push notification to all users: “Operations suspended pursuant to SEC CDO dated __.”
- Freeze all disbursement and collection accounts; advise payment partners.
- File a verified answer or petition to lift CDO within 5 days (SEC Rules).
- Begin data-privacy purge – delete harvested contacts, location logs, and intrusive permissions.
- Reserve funds for restitution of illegally collected interest and penalties.
11. Conclusion
- Borrowers are never criminally liable for mere non-payment, and after a CDO the lender legally loses the ability to sue or even to demand payment. The borrower’s only exposure is a natural moral duty to return the principal if financially able.
- Lenders, officers, and collection agents face a tri-fold threat: SEC contempt and revocation, criminal prosecution under multiple statutes, and civil suits for damages.
- Data-privacy abuses and harassment magnify the lender’s liability and can turn a purely administrative infraction into a multi-million-peso criminal case.
Understanding these rules equips Filipino consumers to defend themselves—and gives legitimate fintech players a roadmap for compliance.
This article is for informational purposes only and does not constitute legal advice. For case-specific guidance, consult a Philippine lawyer or the SEC Financing and Lending Companies Division.