Letter to a Lawyer

Dear Attorney,

Good day! I am seeking your advice regarding loans I incurred through an online platform. Upon reviewing the charges, I noticed that the interest and fees appear to be excessive, possibly exceeding what the law allows. My primary concern is whether I can approach the Small Claims Court to rectify this situation and whether they have the authority to intervene if the charges imposed are beyond what is legally permissible.

Additionally, I would like to understand what the allowable interest rates and other charges are under Philippine law. Your assistance in clarifying my legal rights and options would be immensely helpful.

Thank you very much for your time and response.

Sincerely,
A Concerned Borrower

Legal Remedies for Excessive Interest and Fees on Online Loans in the Philippines

The rise of online lending platforms has provided convenience to borrowers, but it has also resulted in numerous cases of abusive lending practices. Excessive interest rates, exorbitant penalties, and hidden fees are common complaints, often leading borrowers to financial hardship. This article addresses the legal remedies available under Philippine law, the role of the Small Claims Court, and the limits on interest and fees that lending entities must observe.

I. Legal Framework Governing Loan Agreements

Loan agreements, whether formalized through written contracts or electronically via online lending platforms, are governed by a combination of laws and regulations:

The Civil Code of the Philippines (Republic Act No. 386)
Articles 1956 to 1961 of the Civil Code regulate interest on loans and prohibit usury unless explicitly agreed upon in writing. However, it gives wide latitude for parties to set their terms, provided these are not contrary to law, morals, good customs, public order, or public policy.
Bangko Sentral ng Pilipinas (BSP) Regulations
BSP Circular No. 799 (Series of 2013) removed the ceiling on interest rates, effectively repealing the Usury Law's interest cap. Despite this, BSP requires all lending institutions to act responsibly, ensuring terms are transparent and not predatory.
Republic Act No. 3765 (Truth in Lending Act)
This law mandates full disclosure of loan terms, including interest rates, fees, and penalties. Borrowers should be informed of the total cost of borrowing (Effective Interest Rate or EIR), enabling them to make informed decisions.
Republic Act No. 11765 (Financial Products and Services Consumer Protection Act)
Signed into law in 2022, this Act strengthens the rights of financial consumers. It penalizes unfair, abusive, or deceptive practices by financial institutions, including online lending platforms.
Republic Act No. 10173 (Data Privacy Act)
Online lenders that harass borrowers, such as by exposing their debts to unauthorized third parties, may face legal consequences under this law.
Revised Penal Code (RPC)
If a lender's practices border on criminal acts (e.g., fraud or coercion), the RPC may apply.

II. Role of the Small Claims Court

Small Claims Courts in the Philippines are part of the Metropolitan and Municipal Trial Courts and handle cases involving monetary claims not exceeding ₱400,000 (outside Metro Manila) or ₱500,000 (within Metro Manila). These courts are designed to provide a simple, fast, and inexpensive means of resolving disputes.

Authority of Small Claims Courts
Small Claims Courts can decide disputes arising from loan agreements, including cases where borrowers allege excessive interest or illegal fees. If the charges imposed by an online lending platform exceed what is legally permissible, the court can invalidate such terms and order the lender to repay any amounts collected unlawfully.
Limits of Authority
Small Claims Courts are limited to monetary claims and do not issue injunctions or declaratory judgments. However, they can enforce rights under existing laws, such as refunding excessive interest or invalidating penalties that violate public policy.
Procedure in Small Claims Courts
Filing a claim in a Small Claims Court involves minimal procedural requirements. Representation by a lawyer is not required, although consulting an attorney before filing is advisable. Borrowers must provide evidence of the loan agreement, payment history, and the disputed charges.

III. Limits on Interest and Charges

Though the Usury Law has been effectively repealed, interest rates and fees must still adhere to principles of fairness and equity. The following regulations and principles apply:

Unconscionable Interest Rates
Philippine jurisprudence (e.g., Medel v. Court of Appeals and Reyes v. Angeles) has consistently ruled that interest rates may be voided for being unconscionable. Courts generally consider rates exceeding 24% per annum as excessive, although this depends on the circumstances.
Penalty Charges
Penalty charges for late payment must not exceed the principal obligation, as held in Ruiz v. Court of Appeals. Excessive penalties are deemed contrary to law and public policy.
BSP Consumer Protection Standards
BSP Circular No. 1048 (Series of 2019) mandates lending entities to disclose:
- Nominal and effective interest rates;
- Total cost of borrowing;
- Fees and other charges.
Non-compliance can result in administrative sanctions.
Cap on Fees for Online Lending Platforms
The Securities and Exchange Commission (SEC), which regulates online lenders, has imposed caps on interest rates and fees. Under SEC Memorandum Circular No. 3 (Series of 2023), lending companies and financing firms cannot charge more than 6% per month (or 0.2% per day) for unsecured loans, inclusive of interest, fees, and other charges.

IV. Legal Remedies for Borrowers

Filing a Complaint with the SEC
Borrowers can file complaints with the SEC for violations of lending rules, such as charging excessive interest or failing to disclose terms. The SEC has the authority to penalize erring entities and even revoke their licenses.
Pursuing Civil Action in Court
Borrowers may file a case in a Small Claims Court or a regular court to recover overpayments or invalidate oppressive terms. The court may also order restitution for damages caused by unlawful lending practices.
Invoking Consumer Protection Laws
Borrowers can report abusive practices to the BSP or the Department of Trade and Industry (DTI) under the Financial Products and Services Consumer Protection Act.
Filing Criminal Complaints
If a lender’s actions constitute harassment, cyberlibel, or unauthorized disclosure of personal information, borrowers may file criminal complaints under the Revised Penal Code or the Data Privacy Act.

V. Preventive Measures for Borrowers

Understand Loan Terms
Before accepting a loan, borrowers must scrutinize the terms, including the interest rate, penalties, and fees. Comparing offers from different lenders is advisable.
Document Transactions
Borrowers should retain copies of all agreements, receipts, and communications with the lender, which can serve as evidence in disputes.
Know Your Rights
Familiarity with applicable laws and regulations empowers borrowers to recognize and challenge abusive practices.

Conclusion

Borrowers who suspect that their loans from online platforms involve excessive interest or illegal charges have various remedies under Philippine law. Small Claims Courts are a viable forum for seeking redress, provided the claims fall within their jurisdiction. Additionally, regulatory agencies such as the SEC and BSP offer avenues for enforcement and consumer protection. By asserting their rights and seeking legal recourse, borrowers can combat predatory lending practices and restore fairness in financial transactions.

It is advisable to consult a legal expert for tailored guidance, especially when navigating complex disputes with online lending platforms.