Rights Against Unlicensed Lenders Charging Excessive Interest
Philippine Legal Framework & Remedies
1. Why the Problem Exists
- Credit‐access gap. A large informal sector and scant collateral push many Filipinos toward “5‑6,” salary‑advance apps or neighborhood financiers.
- Regulatory arbitrage. The 1982 repeal of statutory interest ceilings (Central Bank Circular 905) erased automatic usury limits, leaving courts to police rates case‑by‑case.
- Digital shift. Hundreds of unregistered mobile lending platforms (OLPs) have appeared since 2017, some operating without the Securities and Exchange Commission (SEC) licence required by law.
2. What Counts as an Unlicensed Lender
| Governing law | Who must register | Penalty for non‑registration |
|---|---|---|
| R.A. 9474 – Lending Company Regulation Act of 2007 | Any person/entity “in the business of granting loans” not classified as a bank, pawnshop or cooperative | Fine ₱10 000–₱50 000 and/or 6 mos–1 yr imprisonment (₱20 000–₱100 000 & 1–5 yrs if a corporation) |
| BSP charter & banking laws | Banks, quasi‑banks, financing companies | Monetary penalties, cancellation of authority, criminal prosecution |
| SEC Memorandum Circular 10‑22 (and earlier MC 18 & 19‑19) | Online Lending Platforms (OLPs) | Certificate of Authority (CA) is mandatory; apps without one are summarily ordered to shut down |
Key test: If the lender regularly extends credit for profit and is not a bank/co‑op/pawnshop and lacks an SEC Certificate of Authority, it is prima facie unlicensed.
3. Where the Interest‑Rate Limit Comes From
Civil Code (Art. 1956): interest must be “expressly stipulated in writing” or it is not recoverable.
Civil Code (Art. 1229 & 1355): courts may reduce or annul “unconscionable or iniquitous” stipulations.
Supreme Court jurisprudence
- Medel v. Court of Appeals, G.R. 131622 (1998) – 5.5 % per month reduced to 12 % per annum.
- Spouses Abellera v. Teachers Publications, G.R. 164164 (2009) – 7 % p.m. cut to 12 % p.a.
- Nacar v. Gallery Frames, G.R. 189871 (2013) – reset legal interest to 6 % p.a. (both on forbearance & judgment obligations).
Financial Consumer Protection Act (R.A. 11765, 2022) – empowers BSP, SEC, IC, and the Cooperative Development Authority to cap or prohibit abusive charges; BSP has since:
- Mem. No. M‑2022‑053 – caps payday‑loan interest at 15 % p.m. and penalties to 0.5 % per day starting 03 Nov 2022.
4. Borrower Rights & Remedies
A. Regulatory Complaints
| Forum | Who may file | Typical Outcomes |
|---|---|---|
| SEC Financing & Lending Division | Any borrower harmed by a non‑bank lender | Cease‑and‑desist order; revocation of CA; administrative fines; criminal referral |
| BSP Consumer Assistance Mechanism (CAM) | Borrowers of banks, quasi‑banks, OLPs already under BSP license | Restitution; directive to modify terms; sanctions |
| DTI‑Consumer Policy & Advocacy Bureau (R.A. 7394) | Consumer‑goods or services credit | Mediation; fines for deceptive or unconscionable acts |
| National Privacy Commission | If app scrapes contacts/photos or doxes borrower | Stop‑processing order; penalty up to ₱5 million |
| NBI / PNP‑ACG | Harassment, threats, cyber‑libel, or unfair debt collection | Arrest & prosecution under RPC, Cybercrime Act, Safe Spaces Act |
Tip: Keep screenshots, SMS, call recordings, app screenshots and proof of payment—the SEC or court will need them.
B. Judicial Action
Civil suit to:
- annul or reform the loan;
- recover interest already paid in excess of 6 % p.a.;
- claim damages for moral shock, lost income, or data‑privacy breach.
Defense in collection case: plead illegality (unlicensed lender) and unconscionability; ask court to void interest clause or dismiss suit for lack of cause.
Provisional relief: seek preliminary injunction against harassing calls or app notifications.
C. Criminal Prosecution
- R.A. 9474 §16‑17 – filing by SEC’s Enforcement & Investor Protection Department; conviction leads to fine & jail.
- Unlicensed lenders that “willfully” violate SEC orders may face Direct Contempt and RPC‑based estafa if fraudulent.
5. How Courts Decide “Unconscionable”
| Factor | Typical Indicators | Result |
|---|---|---|
| Interest magnitude | > 3 % per month (36 % p.a.) almost always slashed; 20 % p.a. sometimes upheld if commercial | Rate reduced to 6–12 % p.a. |
| Borrower sophistication | Pensioner, farmer, minimum‑wage earner → stricter scrutiny | Court voids interest |
| Period & penalties | 10 % penalty + 5 % monthly interest already excessive | Penalty voided, interest reset |
| Manner of collection | Threats, FB shaming, contact‑list spamming | Damages, injunction, privacy penalties |
Rule of thumb: Philippine courts allow freedom to contract, but once interest “shocks the conscience,” they impose the statutory 6 % p.a. default.
6. Recent Enforcement Highlights
- 2019‑2024: The SEC has revoked > 2 000 online lending apps and secured 13 criminal convictions for unlicensed lending.
- 2022: BSP caps on payday loans (₱10 000 & below): 15 % monthly; covers salary‑advance apps integrated with InstaPay/ PESONet.
- 2023: Senate Bill 1635 proposes revival of usury ceilings at 36 % p.a.; still pending.
- 2024: First convictions for doxxing‑based harassment under the Safe Spaces Act in debt‑collection context.
7. Practical Checklist for Borrowers
- Verify licence – search SEC Lending/Financing Companies List or consult BSP’s “List of BSP‑Supervised OLPs.”
- Demand full disclosure – under Truth‑in‑Lending Act (R.A. 3765), the lender must show APR, service fees, penalties.
- Document everything – screenshots, emails, receipts.
- Complain early – file with SEC and BSP if unsure which has jurisdiction.
- Pay principal only when interest is manifestly unconscionable; deposit via consignation in court or the bank to avoid default interest.
- Seek legal aid – PAO offers free representation for income under ₱14 000 (Metro Manila) / ₱12 000 (outside MM).
8. Key Statutes & Doctrines (Quick Reference)
- Constitution, Art. XII §11 – regulation of financing industry for public welfare
- Civil Code arts. 1956, 1229, 1306, 1355
- Central Bank Circular 905 (Usury Law ceilings lifted, 1982)
- R.A. 9474 – Lending Company Regulation Act
- R.A. 11765 – Financial Consumer Protection Act (2022)
- R.A. 7394 – Consumer Act (credit provisions)
- R.A. 3765 – Truth in Lending
- Data Privacy Act (R.A. 10173)
- Cybercrime Prevention Act (R.A. 10175)
- Anti‑Violence & Safe Spaces Acts for harassment
- BSP Mem. M‑2022‑053 – interest cap on small‑value short‑term consumer loans
Conclusion
Even without a statutory interest‑rate ceiling, Philippine law arms borrowers with powerful remedies: administrative complaints, civil actions to reduce or nullify interest, and criminal prosecution of unlicensed lenders. The touch‑stone is reasonableness—when a charge crosses from profit into exploitation, courts and regulators will step in. Armed with documentary proof and timely complaints, borrowers can recover excessive payments, stop harassment, and help purge predatory lending from the market.