Letter of Inquiry

Dear Attorney,

I hope this letter finds you well. I am writing to seek your legal guidance on a matter that has been troubling me. There is a person who lends money to individuals without having a registered company or formal lending business. They charge a monthly interest rate of 10% on the loaned amount and impose an additional 10% penalty for delayed payments.

My concern is whether such a practice is legal under Philippine law and what laws, rules, or regulations govern this kind of transaction. Specifically, I would like to know the rights and remedies available to borrowers in such situations, as well as the potential liabilities of the lender.

I look forward to your advice on this matter. Thank you for your assistance.

Sincerely,
A Concerned Citizen

Legal Article: Unregistered Lending and Usurious Interest Rates in the Philippines

Introduction
Money lending is a common practice in the Philippines, especially in communities where access to formal banking services may be limited. However, the lending of money without proper registration and with exorbitant interest rates raises significant legal and ethical concerns. This article delves into the laws governing such transactions, highlighting the rights and remedies available to borrowers, the obligations and liabilities of lenders, and the potential penalties for non-compliance with applicable laws.

I. Legal Framework for Lending Activities in the Philippines

Regulatory Oversight: The Lending Company Regulation Act of 2007 (R.A. 9474)
- Republic Act No. 9474, also known as the Lending Company Regulation Act of 2007, governs the establishment and operation of lending companies in the Philippines.
- Section 3 of the law mandates that any individual or entity engaging in the business of lending money must register with the Securities and Exchange Commission (SEC).
- The law defines "lending company" as a corporation that provides loans from its own capital funds or from funds sourced from not more than 19 persons.
- Failure to register as a lending company constitutes a violation of R.A. 9474, subjecting the lender to administrative penalties and criminal liability.
Usury and Interest Rates: The Usury Law and BSP Circular No. 799
- Although the Usury Law (Act No. 2655) historically capped interest rates, the Bangko Sentral ng Pilipinas (BSP) has since lifted interest rate ceilings under BSP Circular No. 799. This provides parties with the freedom to stipulate interest rates in their contracts.
- However, interest rates that are deemed "unconscionable" may still be voided under Article 1306 and Article 1229 of the Civil Code of the Philippines.
Small Claims and Civil Code Provisions
- Loan agreements, even informal ones, are contracts governed by the Civil Code. Articles 1159 and 1305 emphasize that contracts must be complied with in good faith, provided they are not contrary to law, morals, or public policy.
- The Supreme Court has consistently held that interest rates exceeding 12% per annum may be considered excessive, unless justified by extraordinary circumstances (e.g., Medel v. Court of Appeals, 299 SCRA 481).

II. Analysis of the Practice Described in the Query

Unregistered Lending Activity
- A person lending money without registering as a lending company is in direct violation of R.A. 9474.
- If the lender is found to be engaging in habitual lending for profit, the SEC may impose administrative sanctions, and the individual could face imprisonment of up to six (6) months or a fine ranging from ₱10,000 to ₱50,000, or both.
Usurious and Unconscionable Interest Rates
- A monthly interest rate of 10% translates to an annualized rate of 120%, which could be deemed excessive and unconscionable.
- The penalty of an additional 10% for delayed payments further exacerbates the borrower’s burden, violating the principle of equity and fairness in contractual obligations.
- Courts may reduce or void such interest rates under Article 1229 of the Civil Code if they find them excessive.
Criminal Implications
- Lending without registration may also lead to criminal charges under R.A. 9474.
- If the lender uses threats or coercion to enforce repayment, they may be prosecuted for other crimes, such as grave threats (Article 282 of the Revised Penal Code) or estafa (Article 315 of the Revised Penal Code) if there is fraudulent intent.

III. Remedies and Recourse for Borrowers

Civil Remedies
- Borrowers may file a civil case to nullify the unconscionable interest rates under Articles 1306 and 1229 of the Civil Code.
- The borrower may also seek to declare the entire contract void if it is contrary to public policy or entered into through fraud or duress.
Criminal and Administrative Complaints
- Borrowers can report unregistered lenders to the SEC for violation of R.A. 9474.
- Complaints may also be filed with local authorities or the Department of Trade and Industry (DTI) for fraudulent or abusive lending practices.
Regulatory Oversight
- The SEC, in coordination with the Anti-Money Laundering Council (AMLC), may investigate unregistered lenders for possible violations of anti-money laundering laws, especially if the funds come from illicit sources.

IV. Practical Considerations for Borrowers

Due Diligence Before Borrowing
- Borrowers should verify whether the lender is registered with the SEC and compliant with R.A. 9474.
- They should also carefully review loan agreements and seek legal advice if terms appear burdensome or unclear.
Alternative Lending Options
- Instead of turning to informal lenders, borrowers should explore microfinance institutions, cooperatives, and government-backed loan programs offering reasonable terms.

V. Recommendations for Lenders

Compliance with Registration Requirements
- Individuals intending to lend money as a business must register with the SEC and comply with reporting and capitalization requirements.
- Adherence to legal and ethical lending practices ensures sustainability and avoids legal repercussions.
Transparency in Loan Agreements
- Clearly stipulate terms and conditions, including interest rates and penalties, in a written contract.
Reasonable Interest Rates
- Set interest rates that are justifiable and in line with market practices to avoid being challenged for unconscionability.

Conclusion
Lending money without proper registration and imposing excessive interest rates are practices fraught with legal risks in the Philippines. Borrowers subjected to such transactions have numerous remedies under Philippine law, including the nullification of unconscionable terms and the filing of complaints with regulatory bodies. Lenders, on the other hand, are advised to comply strictly with applicable laws to avoid administrative, civil, and criminal liabilities.

The principles of fairness, transparency, and compliance with regulatory requirements are paramount in fostering a lending environment that benefits both borrowers and lenders. By adhering to these standards, parties can ensure mutually beneficial and legally sound financial transactions.