In the Philippine credit landscape, the relationship between a borrower and a lender is often perceived as lopsided. However, the law provides a robust mechanism to level the playing field. Central to this protection is Republic Act No. 3765, otherwise known as the Truth in Lending Act (TILA).
The core philosophy of TILA is simple: full disclosure. It is designed to protect citizens from a lack of awareness regarding the true cost of credit by requiring lenders to lay all cards on the table before a transaction is finalized.
I. The Disclosure Requirement
Under Section 4 of the Truth in Lending Act, any creditor is required to furnish the borrower, prior to the consummation of the transaction, a clear statement in writing setting forth the following:
- The Cash Price: The price of the property or service to be acquired (if applicable).
- The Down Payment: Any amount credited as a down payment or trade-in.
- Itemized Charges: A detailed list of amounts to be paid that are incident to the extension of credit but are not part of the finance charge.
- The Total Amount Financed: The actual sum the borrower is borrowing.
- The Finance Charge: The total cost of credit expressed in pesos and centavos. This includes interest, fees, service charges, discounts, and any other amount payable by the borrower as incident to the extension of credit.
- The Percentage Tax: The finance charge expressed as an Effective Annual Percentage Rate (EAPR) on the unpaid balance.
What Constitutes a "Hidden Charge"?
A hidden charge is any fee or cost imposed by the lender that was not explicitly disclosed in the disclosure statement signed by the borrower. Common examples include:
- Unannounced "processing fees" deducted from the loan proceeds.
- Service fees not itemized in the initial agreement.
- Compulsory insurance premiums that were not disclosed as part of the finance charge.
II. Rights of the Borrower
The law grants borrowers specific protections to ensure they are not preyed upon by predatory lending practices.
1. The Right to Prior Information
A borrower has the right to receive the Disclosure Statement before the loan contract is signed. If a lender forces you to sign a promissory note without providing a breakdown of charges, they are in direct violation of the law.
2. The Right to Non-Payment of Undisclosed Charges
If a charge was not included in the written disclosure statement, the borrower is generally not legally obligated to pay it. Jurisprudence, including rulings by the Supreme Court of the Philippines, has consistently held that lenders cannot enforce the collection of interest or charges that were not disclosed in the manner required by TILA.
3. The Right to Penalize the Creditor
If a creditor fails to disclose any information required under the Act, the borrower can sue for damages.
III. Penalties and Consequences of Violations
The Philippine legal system imposes both civil and criminal liabilities on lenders who fail to comply with the Truth in Lending Act.
Civil Liability
Any creditor who violates the disclosure requirements is liable to the borrower in the amount of:
- P100 or double the amount of the finance charge (whichever is greater), provided that the liability shall not exceed P2,000 per transaction.
- Attorney’s fees and court costs incurred by the borrower to enforce their rights.
Note: Even if the lender is penalized, the underlying loan contract remains valid. The borrower must still pay the principal amount, but the lender's right to collect the undisclosed interest or charges is forfeited.
Criminal Liability
Willful violation of the Truth in Lending Act is a criminal offense. A creditor found guilty may face:
- A fine ranging from P1,000 to P5,000.
- Imprisonment for a period of 6 months to 1 year.
Administrative Sanctions
In addition to the Act itself, the Bangko Sentral ng Pilipinas (BSP) imposes strict administrative penalties on banks and non-bank financial institutions. Under BSP Circulars, repeated violations can lead to the suspension or revocation of a lender’s authority to operate.
IV. Jurisprudence: The Supreme Court’s Stance
The Philippine Supreme Court has often sided with borrowers when lenders fail to provide the required Disclosure Statement. In several landmark cases, the Court ruled that:
- A "Promissory Note" is not a substitute for a "Disclosure Statement."
- While the loan itself is valid, the interest rate is reduced to the legal rate (currently 6% per annum) or invalidated entirely if the lender failed to disclose the finance charges properly.
- Lenders cannot "hide" behind fine print; the disclosure must be clear, conspicuous, and provided before the borrower commits.
V. Summary Table: Borrower Protection Checklist
| Requirement | Borrower's Protection |
|---|---|
| Timing | Disclosure must be given before signing the loan. |
| Format | Must be a written statement; oral explanations are insufficient. |
| Content | Must show the Effective Annual Percentage Rate (EAPR). |
| Recourse | Borrower can sue for a penalty of double the finance charge (max P2,000). |
| Integrity | Undisclosed charges are legally unenforceable. |