Online Lending “Extension Fees” and Harassment: Illegal Interest and Collection Practices in the Philippines

Introduction

In the digital age, online lending platforms have proliferated in the Philippines, offering quick access to credit through mobile apps and websites. These services, often marketed as convenient solutions for urgent financial needs, have raised significant concerns regarding exploitative practices. Among the most prevalent issues are the imposition of "extension fees" that effectively disguise usurious interest rates and aggressive collection tactics that border on harassment. This article examines these practices within the Philippine legal framework, exploring their illegality, regulatory oversight, judicial interpretations, and available remedies for affected borrowers. Drawing from statutory provisions, regulatory issuances, and case law, it underscores the need for consumer protection in an increasingly digitized financial landscape.

Regulatory Framework Governing Online Lending

Online lending in the Philippines falls under the jurisdiction of multiple regulatory bodies, primarily the Securities and Exchange Commission (SEC) and the Bangko Sentral ng Pilipinas (BSP). The SEC regulates financing companies, including those operating online, pursuant to Republic Act No. 9474 (Lending Company Regulation Act of 2007) and its implementing rules. Under SEC Memorandum Circular No. 19, Series of 2019, online lending platforms must register as financing companies or lending companies and comply with disclosure requirements.

The BSP, through Circular No. 1133, Series of 2021, addresses fair lending practices and prohibits unfair collection methods. Additionally, Republic Act No. 3765 (Truth in Lending Act) mandates full disclosure of finance charges, interest rates, and other fees prior to loan consummation. Violations of these laws can render contracts void or unenforceable, exposing lenders to administrative sanctions, fines, and civil liabilities.

Extension fees, often charged for deferring loan repayments, are scrutinized under these regulations. If such fees result in an effective interest rate exceeding the legal thresholds or are not transparently disclosed, they may be deemed illegal.

Illegal Interest Rates and Extension Fees

Concept of Usurious Interest

Historically, the Philippines adhered to the Usury Law (Act No. 2655), which capped interest rates at 12% per annum for secured loans and 14% for unsecured ones. However, Central Bank Circular No. 905, Series of 1982, suspended the usury ceiling, allowing market-determined rates. Despite this deregulation, interest rates must remain reasonable and conscionable. The Supreme Court, in cases like Spouses Silos v. Philippine National Bank (G.R. No. 181045, 2011), has ruled that stipulations authorizing excessive interest are void for being contrary to morals and public policy under Article 1306 of the Civil Code.

In online lending, extension fees are frequently structured as flat charges (e.g., 5-10% of the principal per extension period) rather than explicit interest. These fees, when compounded over multiple extensions, can inflate the effective annual percentage rate (APR) to 100-500%, far exceeding reasonable levels. The Truth in Lending Act requires lenders to disclose the effective interest rate, including all fees, in a clear manner. Failure to do so, as seen in Development Bank of the Philippines v. Family Foods Manufacturing Co., Ltd. (G.R. No. 165828, 2009), allows borrowers to recover penalties and renders undisclosed charges unenforceable.

Extension Fees as Disguised Interest

Extension fees are often marketed as administrative costs for processing deferrals, but in practice, they function as additional interest. SEC Memorandum Circular No. 3, Series of 2020, specifically addresses online lending apps (OLAs) and prohibits the imposition of fees that circumvent interest rate regulations. If an extension fee is not justified by actual costs and instead serves to penalize or profit from delays, it may violate Article 1956 of the Civil Code, which prohibits interest on interest unless expressly stipulated and reasonable.

Moreover, under BSP Circular No. 941, Series of 2017, on the Manual of Regulations for Non-Bank Financial Institutions, lending companies must cap penalty fees at 5% per month on overdue amounts. Extension fees exceeding this or applied retroactively can be challenged as unconscionable. In Advincula v. Advincula (G.R. No. 190628, 2014), the Court voided a loan agreement with compounded penalties that effectively doubled the principal within months.

Borrowers should note that online lenders often use algorithms to automate fee accruals, leading to rapid debt escalation. This practice contravenes the Consumer Act of the Philippines (Republic Act No. 7394), which protects against deceptive and unfair sales acts.

Harassment and Unfair Collection Practices

Legal Prohibitions on Harassment

Aggressive collection tactics by online lenders, including incessant calls, threatening messages, public shaming on social media, and contacting third parties, constitute harassment under Philippine law. The Data Privacy Act of 2012 (Republic Act No. 10173) safeguards personal information, prohibiting unauthorized processing or disclosure. Online lenders often violate this by accessing borrowers' contact lists without consent and using them for shaming tactics, as highlighted in National Privacy Commission (NPC) Advisory Opinion No. 2020-002.

BSP Circular No. 1133 explicitly bans unfair collection practices, such as:

• Use of threats, intimidation, or profane language.
• Public disclosure of debts to embarrass the debtor.
• Contacting borrowers at unreasonable hours (e.g., before 8 AM or after 8 PM).
• Misrepresentation as law enforcement or government officials.

Violations can lead to suspension of operations or revocation of licenses. In severe cases, these acts may fall under Republic Act No. 10175 (Cybercrime Prevention Act of 2012), particularly if involving online libel, threats, or unjust vexation.

Judicial and Administrative Remedies for Harassment

The Supreme Court has addressed collection harassment in Sps. Cacayorin v. Armed Forces and Police Savings and Loan Association, Inc. (G.R. No. 179035, 2013), ruling that psychological distress from abusive tactics entitles borrowers to moral damages. Borrowers can file complaints with the SEC for administrative sanctions or pursue civil actions for damages under Articles 19, 20, and 21 of the Civil Code, which penalize abuse of rights.

Criminal liability may arise under Article 285 of the Revised Penal Code for other light threats or Article 287 for unjust vexation. The NPC has handled numerous complaints against OLAs, imposing fines up to PHP 1 million for data privacy breaches, as in the case of several apps delisted by the SEC in 2020-2021 for non-compliance.

Case Studies and Enforcement Actions

Enforcement has intensified in recent years. In 2019, the SEC issued a moratorium on new OLA registrations and cracked down on unregistered entities, leading to the shutdown of over 2,000 apps. Notable cases include the SEC's cease-and-desist orders against apps like "Cashwagon" and "Fast Cash" for charging exorbitant fees and harassing borrowers.

In People v. Online Lending Operators (various RTC cases), prosecutors have pursued charges for estafa under Article 315 of the Revised Penal Code when loans involve deceitful terms. Borrowers have successfully petitioned courts to annul loan contracts with illegal fees, as in regional trial court decisions ordering refunds of overcharges.

The Department of Trade and Industry (DTI), under the Fair Trade Enforcement Bureau, has also intervened, classifying predatory lending as unfair trade practices.

Remedies and Protections for Borrowers

Administrative Complaints

Borrowers can file complaints with the SEC's Enforcement and Investor Protection Department or the BSP's Consumer Protection Department. These bodies offer mediation and can impose sanctions, including fee refunds and license revocations.

Civil Actions

Under the Rules of Court, borrowers may seek injunctions to halt collection efforts, annulment of contracts, and damages. The Small Claims Court handles disputes up to PHP 400,000 without need for lawyers, making it accessible for typical online loans.

Criminal Prosecutions

For harassment involving cyber elements, complaints can be lodged with the National Bureau of Investigation's Cybercrime Division or the Philippine National Police's Anti-Cybercrime Group.

Preventive Measures

Borrowers should verify lender registration via the SEC website, review loan terms meticulously, and report suspicious apps. The Credit Information Corporation promotes credit reporting to discourage predatory lending.

Challenges and Future Directions

Despite robust laws, enforcement challenges persist due to the borderless nature of online platforms, many of which operate offshore. The rise of fintech necessitates ongoing regulatory updates, such as proposed amendments to the Lending Company Regulation Act to impose stricter fee caps and enhance digital oversight.

Consumer education is crucial, with initiatives from the BSP and SEC promoting financial literacy. Ultimately, balancing innovation in lending with protection against exploitation remains a key policy goal.

In conclusion, extension fees and harassment in online lending violate core principles of fairness and transparency under Philippine law. Borrowers are empowered to seek redress, while regulators continue to adapt to emerging threats in the digital economy.