In the Philippines, the credit landscape is governed by a mix of consumer protection laws, central bank regulations, and judicial precedents. While the "Usury Law" has been legally suspended for decades, this does not grant lenders carte blanche to impose unconscionable rates or deceptive upfront deductions.
This article outlines the legal framework and available remedies for borrowers facing predatory lending practices.
1. The Myth of "No Interest Cap"
Since the suspension of the Usury Law via Central Bank Circular No. 905 in 1982, many believe there is no limit to interest rates in the Philippines. However, the Supreme Court has consistently ruled that "freedom of contract" is not absolute.
The Doctrine of Unconscionable Interest
Even if a borrower signs a contract agreeing to a high interest rate, the court can strike it down if it is deemed "iniquitous, unconscionable, or contrary to morals."
- Standard Ruling: Generally, the Supreme Court frequently reduces interest rates that exceed 12% to 24% per annum (or 1% to 2% per month) if they find them excessive.
- Legal Consequence: If a court finds an interest rate unconscionable, the rate is declared void. The court typically replaces the illegal rate with the prevailing legal interest rate (currently 6% per annum per BSP Circular No. 799).
2. Upfront Deductions and the Truth in Lending Act
One of the most common complaints involves "service fees" or "administrative costs" deducted before the loan reaches the borrower. This is governed by Republic Act No. 3765, or the Truth in Lending Act.
Transparency Requirements
Lenders are legally required to provide a Disclosure Statement before the consummation of the transaction. This statement must clearly show:
- The cash price or actual amount of the loan.
- All charges, individually itemized (service fees, processing fees, insurance).
- The Effective Interest Rate (EIR), which accounts for those upfront deductions.
Note: If a lender fails to provide this disclosure or hides deductions, they are in violation of the law. The borrower may be entitled to recover the hidden charges or even pay zero interest in specific circumstances of total non-disclosure.
3. Regulatory Oversight: BSP and SEC
The legal remedy often depends on the type of lender involved:
Banks and Financing Companies (BSP)
The Bangko Sentral ng Pilipinas (BSP) issues circulars regarding "fair lending" practices. Under BSP Circular No. 1133, there are specific ceilings on interest rates and penalties for Small Value Loans (often applied to payday loans or micro-loans).
- Ceiling Example: For certain covered loans, the interest is capped at 6% per month and penalties at 1% per month.
Online Lending Apps (SEC)
The Securities and Exchange Commission (SEC) regulates Online Lending Applications (OLAs).
- SEC Memorandum Circular No. 10 (2019): Requires all lending companies to disclose their corporate names and registration numbers.
- Unfair Collection Practices: Under SEC MC No. 18 (2019), lenders are prohibited from using threats, harassment, or "shaming" (contacting people in your phone's contact list) to collect debt.
4. Summary of Legal Remedies
If you are trapped in an unfair loan, the following table summarizes your path to relief:
| Problem | Legal Basis | Action / Remedy |
|---|---|---|
| Excessive Interest (e.g., 10% per month) | Supreme Court Jurisprudence | File a petition to declare the interest rate void and reduce it to the legal rate (6% p.a.). |
| Hidden Fees / No Disclosure | Truth in Lending Act (RA 3765) | File a complaint for damages; the lender may face a fine equal to the finance charge. |
| Harassment / Contacting Friends | SEC MC No. 18 | File a formal complaint with the SEC's Corporate Governance and Finance Department. |
| Illegal Deductions | Consumer Act (RA 7394) | File a complaint with the DTI (Department of Trade and Industry) or the BSP. |
5. How to Take Action
- Demand a Disclosure Statement: If you didn't receive one, demand it in writing. This is your primary evidence of "upfront deductions."
- Cease and Desist: If the interest is clearly unconscionable, you can formally inform the lender that you are willing to pay the principal plus legal interest, but not the predatory rates.
- File a Formal Complaint:
- For Banks: Email the BSP Consumer Protection Department (consumeraffairs@bsp.gov.ph).
- For Lending Apps/Companies: Use the SEC i-Message portal.
- Legal Defense: If the lender sues you for collection, use the "Unconscionable Interest" doctrine as a defense to have the amount reduced by the court.
Next Steps
Would you like me to draft a template for a Formal Demand Letter to a lender questioning unconscionable interest rates and requesting a proper Disclosure Statement?