Unlicensed Lending With Excessive Interest: Where to Report and How to File a Complaint

Introduction

In the Philippines, the financial sector is heavily regulated to protect consumers from predatory practices such as unlicensed lending and the imposition of excessive interest rates. Unlicensed lending refers to the act of providing loans without the necessary authorization from regulatory bodies, while excessive interest involves charging rates that are unconscionably high, often leading to debt traps for borrowers. These practices are commonly associated with informal lenders, such as those operating "5-6" schemes, where P5 is borrowed and P6 is repaid the next day, equating to exorbitant annualized rates.

This article provides a comprehensive overview of the legal framework governing these issues, the implications for borrowers and lenders, and detailed guidance on reporting violations and filing complaints. It draws from key Philippine laws, including Republic Act No. 9474 (Lending Company Regulation Act of 2007), Republic Act No. 3765 (Truth in Lending Act), and relevant regulations from the Bangko Sentral ng Pilipinas (BSP) and the Securities and Exchange Commission (SEC). Understanding these mechanisms empowers individuals to seek redress and contributes to a fairer financial ecosystem.

Legal Framework on Unlicensed Lending

Definition and Prohibitions

Unlicensed lending occurs when an individual or entity engages in the business of lending money without obtaining the required certificate of authority or registration from the appropriate government agency. Under Republic Act No. 9474, any corporation or partnership intending to operate as a lending company must register with the SEC and comply with capitalization, disclosure, and operational requirements. Sole proprietorships engaging in lending may fall under the jurisdiction of the Department of Trade and Industry (DTI) for business name registration, but large-scale operations typically require SEC oversight.

Banks, quasi-banks, and other financial institutions must secure a license from the BSP under Republic Act No. 8791 (General Banking Law of 2000). Informal lenders, including those offering payday loans or high-interest personal loans without registration, are considered unlicensed and operate illegally. This includes online lending apps that fail to register as lending companies.

Penalties for unlicensed lending include fines ranging from P10,000 to P50,000 for first offenses, imprisonment of up to six months, or both, as stipulated in RA 9474. Repeat violations can lead to revocation of business permits and higher penalties. Additionally, unlicensed operations may constitute violations under the Revised Penal Code, such as estafa (swindling) if deceit is involved.

Related Regulations

• BSP Circulars: The BSP issues guidelines on lending practices, including Manual of Regulations for Non-Bank Financial Institutions (MORNBFI), which mandates fair lending and prohibits deceptive practices.
• SEC Memorandum Circulars: These outline registration processes and ongoing compliance, such as submitting annual reports and maintaining minimum capital.
• Anti-Money Laundering Act (RA 9160, as amended): Unlicensed lenders may inadvertently or intentionally facilitate money laundering, triggering additional scrutiny.

Legal Framework on Excessive Interest Rates

Evolution of Usury Laws

Historically, the Philippines enforced 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 (1982) suspended the usury ceilings, allowing interest rates to be determined by mutual agreement between parties, subject to market forces. Despite this, courts have ruled that interest rates must not be "unconscionable" or "shocking to the conscience," as per Supreme Court decisions like Medel v. Court of Appeals (G.R. No. 131622, 1997), where rates exceeding 5.5% per month were deemed excessive.

In practice, excessive interest is often challenged under the Civil Code (Articles 1956 and 1961), which voids stipulations contrary to morals, good customs, or public policy. For consumer loans, Republic Act No. 3765 requires full disclosure of finance charges, and violations can render excessive interest unenforceable.

Specific Protections for Borrowers

• RA 10623 (Amending RA 3765): Strengthens disclosure requirements and imposes penalties for non-compliance.
• Consumer Act of the Philippines (RA 7394): Protects against unfair trade practices, including predatory lending.
• Online Lending Regulations: SEC Memorandum Circular No. 19 (2019) regulates fintech lending platforms, capping effective interest rates and prohibiting harassment in collections.
• Credit Card Industry Regulation Law (RA 10870): Limits interest and fees for credit card issuers, but similar principles apply broadly.

Borrowers can seek annulment of loan contracts with excessive interest through courts, potentially reducing obligations to principal only or reasonable rates.

Implications for Borrowers and Lenders

For Borrowers

Victims of unlicensed lending and excessive interest often face cycles of debt, harassment, and financial ruin. Legal remedies include:

• Non-payment of excessive interest portions.
• Damages for moral and exemplary harm if collection methods involve threats or violence.
• Criminal charges against lenders for violations like grave threats (Article 282, Revised Penal Code) or unjust vexation.

For Lenders

Engaging in these practices exposes lenders to civil liabilities (e.g., refund of excess payments), administrative sanctions (e.g., business closure), and criminal prosecution. Legitimate lenders must ensure compliance to avoid inadvertent violations, such as failing to renew registrations.

Where to Report Violations

Several government agencies handle reports of unlicensed lending and excessive interest, depending on the nature of the violation:

1. Securities and Exchange Commission (SEC):

   • Primary agency for unregistered lending companies.
   • Report online via the SEC website (www.sec.gov.ph) or in person at SEC offices nationwide.
   • Handles complaints against corporations and partnerships.

2. Bangko Sentral ng Pilipinas (BSP):

   • For issues involving banks, non-bank financial institutions, or pawnshops.
   • Consumer Assistance Mechanism: Email at consumeraffairs@bsp.gov.ph or call the BSP Consumer Assistance Desk (02) 8708-7087.
   • Focuses on monetary and financial stability aspects.

3. Department of Trade and Industry (DTI):

   • For sole proprietorships or small-scale lenders without SEC registration.
   • File complaints through the DTI Fair Trade Enforcement Bureau or regional offices.

4. Philippine National Police (PNP) or National Bureau of Investigation (NBI):

   • If the lending involves criminal elements like estafa, threats, or organized crime.
   • Report to local police stations or NBI offices; for cyber-related issues, contact the PNP Anti-Cybercrime Group.

5. Department of Justice (DOJ):

   • For prosecution of criminal cases arising from these violations.

6. Local Government Units (LGUs):

   • Barangay-level mediation for minor disputes; escalate to municipal or city halls for business permit issues.

For online lending apps, the National Privacy Commission (NPC) may be involved if data privacy violations occur during collections.

How to File a Complaint

Filing a complaint requires gathering evidence and following procedural steps. Here's a step-by-step guide:

Step 1: Gather Evidence

• Loan agreements, promissory notes, or receipts showing interest rates and terms.
• Communication records (e.g., texts, emails) proving harassment or unlicensed status.
• Bank statements or payment proofs.
• Witness statements if applicable.

Step 2: Choose the Appropriate Agency

• SEC for corporate lenders.
• BSP for financial institutions.
• DTI for small businesses.
• PNP/NBI for criminal aspects.

Step 3: Submit the Complaint

• Online Filing: Most agencies offer e-filing portals. For SEC, use the eSPARC system; for BSP, the online consumer complaint form.
• In-Person Filing: Visit the nearest office with original and photocopied documents. Affidavits may be required.
• Include details: Names of parties, loan amounts, interest rates, dates, and specific violations.

Step 4: Verification and Investigation

• Agencies will acknowledge receipt and may require additional information.
• Investigations involve document reviews, interviews, and site visits.
• Timelines vary: SEC aims for resolution within 45 days; BSP within 30 days.

Step 5: Resolution and Remedies

• Possible outcomes: Cease-and-desist orders, fines, contract annulment, or referral to courts.
• If unsatisfied, appeal to higher bodies or file civil/criminal cases in court.

For free legal aid, contact the Integrated Bar of the Philippines (IBP) or Public Attorney's Office (PAO) if indigent.

Preventive Measures and Best Practices

To avoid falling victim:

• Verify lender registration via SEC or BSP websites.
• Read contracts carefully and question high rates.
• Use formal financial institutions or registered apps.
• Report suspicious activities promptly.

For lenders:

• Secure proper registrations and disclose terms transparently.
• Adhere to fair collection practices.

Case Studies and Judicial Precedents

Supreme Court rulings reinforce protections:

• Spouses Lim v. Development Bank of the Philippines (G.R. No. 177050, 2011): Upheld voiding of excessive interest.
• SEC v. Various Online Lenders (recent enforcement actions): Led to shutdowns of apps charging over 100% annual rates.

These cases illustrate the judiciary's stance against predatory lending.

Conclusion

Unlicensed lending with excessive interest undermines financial inclusion and consumer rights in the Philippines. By understanding the legal prohibitions, reporting channels, and complaint processes, individuals can effectively combat these practices. Timely action not only provides personal relief but also deters widespread exploitation, fostering a more equitable lending environment.