Dear Attorney,

I am reaching out to ask if it is legal for a lending company to charge interest rates that seem excessively high within a short period, like two weeks. For instance, can a lender impose interest equivalent to 30% of the principal amount over such a brief period? Is this lawful, or could this be classified as an unlawful rate? I would appreciate guidance on whether such practices are regulated in the Philippines.

Sincerely, Concerned Borrower

Insights

Understanding Usury Law in the Philippines

The issue of excessively high interest rates touches upon the concept of usury, which is regulated in the Philippines through various laws, including the Usury Law (Act No. 2655, as amended) and guidelines set by the Bangko Sentral ng Pilipinas (BSP). While the Usury Law itself remains, the limits on interest rates have been effectively removed since 1983 through Central Bank Circular No. 905, which deregulated interest rates. However, this deregulation does not mean lenders have unchecked power to impose exorbitant rates.

What is Usury?

Usury refers to the practice of charging an interest rate that is considered excessive or unreasonable. Historically, laws were enacted to protect borrowers from predatory lending practices where lenders took advantage of people in need by imposing unduly high interest. In the Philippines, the Usury Law was created to set ceilings on interest rates that could be charged by lenders. However, as noted earlier, since 1983, the specific interest caps under the Usury Law have been suspended.

The Effect of Deregulation on Interest Rates

The deregulation of interest rates under Circular No. 905 essentially gave lending institutions more freedom in determining the rates they can charge. This was done to encourage the growth of credit facilities and increase the availability of loans to various sectors of the economy. Despite this, lending institutions are still expected to comply with general principles of fairness and reasonableness.

It is crucial to note that just because the Usury Law's interest rate caps were lifted does not mean that borrowers have no recourse if they face predatory lending practices. Lenders are still required to act in good faith, and the imposition of rates that can be considered unconscionable or oppressive can be challenged under existing legal doctrines.

Consumer Protection in Lending

Even though there is no specific cap on interest rates, various laws and regulations provide consumer protections against unfair lending practices. The Truth in Lending Act (Republic Act No. 3765) mandates lenders to disclose in full the terms and conditions of loans, including the interest rate, so that borrowers can make informed decisions. Failure to disclose these terms can expose the lender to penalties and give the borrower grounds for filing complaints.

Additionally, Republic Act No. 7394, also known as the Consumer Act of the Philippines, provides broader protections for consumers, including those availing of financial services. Under this law, lending practices that are found to be unfair, deceptive, or exploitative can be grounds for administrative or civil actions.

Legal Recourse for Unconscionable Interest Rates

If a borrower believes that a lender is imposing an unconscionable interest rate, several options are available:

Filing a complaint with the Bangko Sentral ng Pilipinas (BSP): The BSP monitors financial institutions and lending companies, and borrowers may report any perceived abusive lending practices.
Filing a civil case in court: Under Article 1306 of the Civil Code, while parties to a contract have the freedom to stipulate terms, these terms must not be contrary to law, morals, good customs, public order, or public policy. An unconscionable interest rate could be deemed contrary to public policy and, therefore, void or subject to judicial reduction.
Department of Trade and Industry (DTI): The DTI is responsible for the enforcement of the Consumer Act and handles complaints involving violations of consumer rights, including those related to lending practices.

Unconscionability and the Civil Code

Article 1229 of the Civil Code of the Philippines grants courts the power to reduce a penalty if it is found to be iniquitous or unconscionable. Though this article generally refers to penalties in contracts, it has been used as a basis for questioning excessive interest rates as well. For instance, if a court finds that the interest rate charged by a lender is shockingly high and oppressive, it can reduce the amount to a more equitable level. This is typically seen in cases where lenders impose "penalty interest rates" that far exceed the original terms of the loan.

In determining whether an interest rate is unconscionable, courts look at the circumstances of the contract, the relationship between the lender and borrower, and whether there was a lack of negotiation or undue influence involved in setting the rate.

Central Bank and Lending Regulation

While the BSP does not directly impose limits on interest rates due to the deregulation, it has guidelines for financial institutions, ensuring that they operate in a sound and ethical manner. Lending companies are required to act responsibly and fairly. If a borrower finds the interest rate unreasonable, they can file a complaint with the BSP's Financial Consumer Protection Department.

Additionally, Republic Act No. 9474, or the Lending Company Regulation Act of 2007, regulates lending companies. It requires them to be registered and comply with rules set by the SEC, including fair and transparent lending practices. The SEC, through its authority over non-bank financial institutions, can sanction or penalize lenders found to be engaging in unfair practices.

Conclusion

While interest rates are no longer capped in the Philippines, they are still subject to principles of fairness and consumer protection. A borrower subjected to an excessively high interest rate, especially if it seems unreasonable for the loan period, may have recourse through complaints to the BSP, SEC, or by filing a case in court. The imposition of excessive rates can be seen as a violation of the general principle that contracts, including loan agreements, should be fair and not oppressive.

In the end, while lenders have flexibility in determining interest rates, they must operate within the bounds of good faith, and any oppressive rates can be challenged under various consumer protection laws. Borrowers are encouraged to carefully review the terms of any loan agreement and seek legal advice when necessary to avoid falling into predatory lending traps.