Letter to a Lawyer

Dear Attorney,

Good day. I am writing to seek legal advice regarding a lending application that imposes excessively high interest rates. I am deeply concerned because the rates appear unreasonable and may be causing undue financial strain on borrowers. I believe this practice might not only be unethical but also potentially illegal.

Could you provide insights into whether there are laws in the Philippines regulating the interest rates on loans, especially those issued by lending apps? What legal actions can be taken if these interest rates are found to violate existing laws? Additionally, what remedies are available for borrowers who have already paid excessive interest?

Your guidance would be highly appreciated. Thank you for your time and expertise.

Sincerely,
A Concerned Borrower

Legal Analysis: Predatory Lending and Excessive Interest Rates in the Philippines

Lending practices in the Philippines are governed by various laws designed to protect borrowers from usurious and predatory behaviors. With the rise of digital lending platforms, issues related to excessive interest rates have become increasingly prevalent. This article delves into the legal framework governing interest rates and provides an understanding of the remedies available to borrowers.

1. What Is Predatory Lending?

Predatory lending refers to practices that exploit borrowers by imposing unfair or abusive loan terms, including exorbitant interest rates, hidden fees, and misleading terms. It often targets vulnerable individuals who have limited access to traditional financial services.

In the Philippines, lending practices are regulated under several laws, including:

The Civil Code of the Philippines
Republic Act No. 3765 (Truth in Lending Act)
Republic Act No. 9474 (Lending Company Regulation Act of 2007)
BSP Circular No. 1133 (Guidelines on Interest Rate Limits for Lending and Financing Companies)

2. Legal Limits on Interest Rates

Under the Civil Code of the Philippines, the legal interest rate is set at 6% per annum when no rate is stipulated. However, specific statutes and regulations impose stricter controls over lending companies.

2.1 Usury Law and Its Amendments

Historically, interest rates in the Philippines were capped by the Usury Law (Act No. 2655). However, Presidential Decree No. 1684 allowed the Bangko Sentral ng Pilipinas (BSP) to set interest rate ceilings. In 1983, the usury law ceiling was effectively lifted, allowing parties to agree on interest rates unless deemed "unconscionable."

Recent developments have reintroduced interest rate caps for certain entities:

BSP Circular No. 1133 (2021): This circular sets a maximum interest rate of 15% per month or 0.5% per day for lending and financing companies not supervised by the BSP. The effective annual percentage rate (EAPR) should not exceed 48% for loans not exceeding PHP 10,000 with a repayment term of six months or less.

3. Applicability of the Truth in Lending Act

The Truth in Lending Act (Republic Act No. 3765) ensures that borrowers are provided with clear and accurate information about loan terms, including:

The nominal interest rate
The effective interest rate (EIR)
All other charges and fees associated with the loan

Non-compliance with this law can result in penalties, including fines and imprisonment.

4. Prohibition of Unfair Debt Collection Practices

Lending apps are notorious for harassing borrowers who default on payments. BSP Circular No. 1048 and the Implementing Rules and Regulations (IRR) of RA 9474 prohibit lenders from:

Using abusive, unfair, or deceptive collection practices
Shaming borrowers through public or social media disclosures
Making threats or using obscene language

Borrowers subjected to these practices can file complaints with the National Privacy Commission (NPC) or the Securities and Exchange Commission (SEC).

5. Remedies for Borrowers

5.1 Filing a Complaint

Borrowers can file complaints against lending apps engaging in excessive interest rates or unfair practices with:

The Securities and Exchange Commission (SEC) for violations of RA 9474
The Bangko Sentral ng Pilipinas (BSP) for violations of interest rate ceilings
The National Privacy Commission (NPC) for privacy breaches during debt collection

5.2 Civil Action for Recovery of Excessive Payments

Under Article 1956 of the Civil Code, any payment of interest not agreed upon in writing is illegal. Borrowers can recover payments deemed excessive through civil suits.

5.3 Rescission of Contract

If the loan agreement is found to be grossly one-sided or unconscionable, borrowers may seek the rescission of the contract under Article 1409 of the Civil Code, which declares contracts contrary to public policy as void.

6. Landmark Cases on Excessive Interest

Philippine courts have consistently ruled against unconscionable interest rates. In Medel v. Court of Appeals (G.R. No. 131622, November 27, 1998), the Supreme Court declared that an interest rate of 5.5% per month (or 66% per annum) was "excessive, iniquitous, unconscionable, and exorbitant." Similar rulings emphasize that lenders cannot impose terms that violate public morals and economic fairness.

7. Regulatory Crackdown on Lending Apps

The SEC has aggressively pursued errant lending apps by:

Revoking the licenses of companies found guilty of violating lending laws
Blacklisting and ordering the cessation of unregistered online lending platforms
Imposing administrative sanctions and fines

In 2022, the SEC shut down dozens of lending apps due to complaints about excessive interest rates and harassment of borrowers.

8. What Borrowers Should Do

If you suspect predatory practices by a lending app:

Review the Loan Agreement: Check for transparency regarding interest rates and fees.
Report the Lender: File a complaint with the SEC, BSP, or NPC.
Consult a Lawyer: Seek legal advice to determine the best course of action.
Avoid Further Loans: Avoid refinancing loans with the same or similar lenders.

Conclusion

The Philippine government has implemented stringent laws to regulate lending practices and protect borrowers from predatory behavior. Borrowers should be vigilant, understand their rights, and report any irregularities in loan agreements or debt collection practices. Legal remedies, both administrative and judicial, are available to those who have been victimized by excessive interest rates or harassment. By taking proactive steps, borrowers can stand up against exploitative lenders and secure fair treatment under the law.