Introduction

In the Philippines, the rapid proliferation of online lending platforms has provided convenient access to credit for many Filipinos, particularly those underserved by traditional banks. However, this convenience often comes at a steep price, with some lenders imposing interest rates and fees that border on exploitative. While the concept of "usury" – traditionally defined as charging excessive interest – has evolved in Philippine jurisprudence, borrowers can still challenge such practices if the rates are deemed unconscionable. This article explores the legal framework surrounding usurious and unconscionable interest rates imposed by online lenders, the grounds for challenging them, procedural steps in court, relevant case law, and practical considerations for borrowers seeking relief.

Historical and Legal Evolution of Usury in the Philippines

The regulation of interest rates in the Philippines has undergone significant changes. Historically, Act No. 2655, known as the Usury Law, capped legal interest at 12% per annum for secured loans and 14% for unsecured ones. Violations could lead to criminal penalties and contract nullification. However, in 1982, the Central Bank (now Bangko Sentral ng Pilipinas or BSP) issued Circular No. 905, which effectively suspended the Usury Law by removing interest rate ceilings. This deregulation aimed to align with market-driven economics, allowing lenders to set rates based on prevailing conditions.

Despite this, the Civil Code of the Philippines (Republic Act No. 386) provides safeguards. Article 1956 states that no interest shall be due unless expressly stipulated in writing. More critically, Article 1961 allows courts to intervene if interest rates are "iniquitous or unconscionable," rendering such stipulations void. The Supreme Court has consistently held that while there is no fixed ceiling, rates must not be so excessive as to shock the conscience or violate public policy.

For online lenders, additional layers of regulation apply. Many operate as financing companies under the Lending Company Regulation Act of 2007 (Republic Act No. 9474), supervised by the Securities and Exchange Commission (SEC). The Truth in Lending Act (Republic Act No. 3765) mandates full disclosure of finance charges, including interest, fees, and effective interest rates (EIR). Violations can lead to penalties and contract invalidity. Furthermore, the Consumer Protection Act (Republic Act No. 7394) and the Data Privacy Act (Republic Act No. 10173) address predatory practices, such as harassment in collection or misuse of personal data.

In recent years, the BSP and SEC have issued guidelines to curb abusive online lending. For instance, SEC Memorandum Circular No. 19, series of 2019, requires online lenders to register and prohibits unfair collection practices. The BSP's Circular No. 1105, series of 2020, imposes caps on credit card interest at 2% per month (24% annually) and total fees at 3% monthly, but this does not directly apply to non-bank online lenders. Nonetheless, unconscionability remains a key judicial tool.

Defining Usurious and Unconscionable Interest

Usury vs. Unconscionability

Post-deregulation, "usury" is no longer a criminal offense per se, but excessive interest can be challenged as unconscionable. The Supreme Court in cases like Spouses Almeda v. Court of Appeals (G.R. No. 113412, 1996) clarified that usury refers to interest exceeding legal limits, but since limits were lifted, the focus shifted to unconscionability.

Unconscionable interest is that which is "grossly excessive" or "shocking to the moral senses." There is no numerical threshold; it depends on circumstances such as the borrower's bargaining power, economic conditions, and loan purpose. Courts have struck down rates as low as 3% monthly (36% annually) in some contexts, while upholding higher rates in high-risk, short-term loans.

Common Practices by Online Lenders

Online lenders often disguise high costs through:

Daily or Weekly Interest: Rates like 1% per day compound to over 365% annually.
Upfront Fees: Processing fees deducted from the principal, inflating the EIR.
Penalty Charges: Excessive late fees, sometimes doubling the principal quickly.
Hidden Charges: Non-disclosure of total cost, violating the Truth in Lending Act.
Rollover Loans: Encouraging refinancing with new fees, trapping borrowers in debt cycles.

These practices disproportionately affect low-income borrowers, leading to debt bondage akin to modern usury.

Grounds for Challenging Unconscionable Interest

Borrowers can challenge on several grounds:

Violation of Public Policy: Under Article 1306 of the Civil Code, contracts against morals or public policy are void.
Lack of Consent or Vitiated Consent: If rates were not clearly disclosed, consent may be absent (Article 1330).
Lesion or Gross Inequality: Article 1381 allows rescission if the contract is lesionary, i.e., one party exploits the other's necessity.
Non-Compliance with Disclosure Requirements: Failure to provide a disclosure statement under the Truth in Lending Act renders the interest unenforceable.
Unfair Collection Practices: Harassment via calls, texts, or social media shaming may invalidate the entire loan under consumer protection laws.
Unregistered Lenders: If the lender is not SEC-registered, the contract may be void ab initio.

Procedural Steps to Challenge in Court

Challenging unconscionable interest typically occurs in two scenarios: as a defense in a collection suit filed by the lender or as an affirmative action by the borrower.

1. Pre-Litigation Steps

Demand Letter: Send a formal letter to the lender demanding rate reduction or contract reformation, citing legal grounds.
Administrative Complaints: File with the SEC for unregistered lenders or the BSP/SEC for disclosure violations. The National Privacy Commission (NPC) handles data privacy breaches.
Mediation: Attempt barangay conciliation for small claims (under P400,000) or alternative dispute resolution.

2. Filing a Court Action

Jurisdiction: For amounts up to P2,000,000, Metropolitan Trial Courts (MeTC) or Municipal Trial Courts (MTC) handle small claims or regular civil actions. Higher amounts go to Regional Trial Courts (RTC).
Types of Actions:
- Annulment or Reformation of Contract: File a complaint under Rule 47 of the Rules of Court to declare the interest clause void and reform the contract to reasonable terms.
- Declaratory Relief: Seek a court declaration on the contract's validity before breach.
- Damages and Injunction: Sue for moral damages due to harassment and seek a temporary restraining order (TRO) against collection.
- Counterclaim: In a lender's collection suit, raise unconscionability as a defense and counterclaim for overpayments.
Pleadings and Evidence:
- Complaint must detail the loan terms, rates, payments made, and why rates are unconscionable.
- Evidence includes loan agreements, disclosure statements (or lack thereof), payment receipts, communication records, and expert testimony on market rates.
- Compute the EIR using the formula: EIR = (Total Finance Charges / Principal) x (365 / Term in Days).
Burden of Proof: The borrower must prove unconscionability, but courts are liberal in consumer cases.

3. Court Proceedings

Summons and Answer: Lender responds within 15-30 days.
Pre-Trial: Discovery, mediation attempts.
Trial: Presentation of evidence; expert witnesses may testify on reasonable rates.
Judgment: Court may void the interest, reduce it (e.g., to 12% legal rate under Article 2209), or order refunds.
Appeal: To Court of Appeals, then Supreme Court.

For small claims (under P1,000,000 as of 2023 amendments), proceedings are summary: no lawyers needed, decision within 30 days.

Relevant Jurisprudence

Philippine courts have built a robust body of case law:

Medel v. Court of Appeals (G.R. No. 131622, 1998): Struck down 5.5% monthly interest (66% annually) as unconscionable.
Spouses Silos v. Philippine National Bank (G.R. No. 181045, 2011): Upheld reduction of rates from 3% monthly to 1% in light of borrower's distress.
Advocates for Truth in Lending, Inc. v. Bangko Sentral (G.R. No. 192986, 2013): Reaffirmed no fixed ceiling but emphasized judicial scrutiny.
Macalinao v. Bank of the Philippine Islands (G.R. No. 175490, 2009): Penalized non-disclosure under Truth in Lending Act, awarding damages.
Recent cases involving online lenders, such as those handled by the SEC, have led to cease-and-desist orders against apps like "Cashwagon" for excessive rates.

Courts consider factors like inflation (around 4-6% in recent years), prime rates (5-8%), and the borrower's sophistication.

Practical Considerations and Remedies

Refunds and Restitution: Successful challengers may recover excess payments with 6% legal interest.
Class Actions: Multiple borrowers can file collectively if patterns of abuse exist.
Legal Aid: Indigent borrowers can seek help from the Public Attorney's Office (PAO) or NGOs like the Integrated Bar of the Philippines.
Preventive Measures: Borrowers should verify lender registration on SEC/BSP websites, read terms carefully, and use apps with transparent EIR calculators.
Challenges: Proving unconscionability requires evidence; lenders may argue high rates justify risk. Delays in courts (average 2-5 years) and costs (filing fees 1-2% of claim) are hurdles.
Emerging Trends: With the rise of fintech, proposed bills like the Internet Transactions Act aim to strengthen protections. The SEC's 2023 crackdown on unregistered lenders signals stricter enforcement.

Conclusion

While deregulation has liberalized interest rates, Philippine law empowers borrowers to combat usurious and unconscionable practices by online lenders through judicial intervention. By understanding the legal grounds, gathering evidence, and navigating court procedures, victims of predatory lending can seek justice and contribute to a fairer credit landscape. Borrowers are encouraged to act promptly, as prescription periods (4-10 years) apply. Ultimately, informed borrowing and regulatory vigilance are key to preventing exploitation in the digital lending era.