Commercial Laws 1: Usury Law

USURY LAW

• Justice Malcolm observed that: "the taking of excessive interest for the loan of money has been regarded with abhorrence from the earliest times. Usury, as such unlawful profits were known, was prohibited by the ancient laws of the Chinese and the Hindus, by t he Mosaic Law of the Jews, by the Koran, by the Athenians and by the Romans, and has been frowned upon by distinguished publicists throughout all the ages."
• Unfortunately, usury continued and "money lenders did not alone pursue their calling in old Judea. The Sbylocks have not merely strutted or skulked on the Shakespearian stage. The Philippines abound with such who exact their pound of flesh - and for these the law was intended and for these shall be enforced."

1. Usury Law.

• The law that governs usury in the Philippines is Act No. 2655 as amended.
• It has been observed that the illegality of usury is now wholly a creature of legislation.
• Without the Usury Law or any law or regulation that imposes a limit on the imposable rate of interest, the agreement on the interest rate cannot be considered usurious.
• However, although the interest rate agreed upon may not be declared void for being usurious in the absence of a Usury Law or if no ceiling on interest is prescribed, an interest rate that is unconscionable or grossly excessive may be declared void under Article 1306 of the New Civil Code for being contrary to morals, good customs and public policy.
• It has been acknowledged that: "interest rate, together with other monetary and credit policy instruments, performs a vital role in mobilizing domestic savings and attracting capital resources into preferred areas of investment."
• However, the monetary authorities have recognized the need "to allow for more flexible interest rate ceilings that would be more responsive to the requirements of changing economic conditions." 
• This is important because "the availability of adequate capital resources is, among other factors, a decisive element in the achievement of the declared objective of accelerating the growth of the national economy."

2. Usury is Legally Non-existent.

• The Supreme Court has consistently held that Circular No. 905 of the Central Bank (now the Bangko Sentral ng Pilipinas or BSP), adopted on December 22, 1982, has expressly removed the interest ceilings prescribed by the Usury Law.
• Consequently, usury is now legally inexistent. 
• Interest can now be charged as lender and borrower may agree upon.
• CB Circular No. 905 did not repeal nor in anyway amend the Usury Law but simply suspended the latter's effectivity. 
• A Central Bank Circular cannot repeal a law. 
• Only a law can repeal another law.
• It should be noted that the power of the BSP is expressly conferred by the Usury Law. 
• Hence, in a sense the suspension of the Usury Law is only insofar as the rate of interest is concerned;  the other provisions of the Usury Law are still being enforced considering that the source of power of the BSP is the Usury Law itself. 

2.01. Statutory Basis of CB Circular.

• CB Circular 905 was issued by the Central Bank's Monetary Board pursuant to Presidential Decree No. 1684 which inserted Section 1-a to the Usury Law empowering the Monetary Board to prescribe the maximum rates of interest for loans and certain forbearances.
• Section 1-a provides: 
• Sec.1-a. The Monetary Board is hereby authorized to prescribe the maximum rate of Interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions: Provided, That changes In such rate or rates may be effected gradually on scheduled dates announced In advance. In the exercise of the authority herein granted, the Monetary Board may prescribe higher maximum rates for loans of low priority, such as consumer loans or renewals thereof as well as such loans made by pawnshops, finance companies and other similar credit institutions although the rates prescribed for these institutions need not necessarily be uniform. The Monetary Board is also authorized to prescribe different maximum rate or rates for different types of borrowings, including deposits and deposit substitutes, or loans of f inancial intermediaries.
• In addition, Section 4-a and 4-b of the Usury Law provides: 
• Sec. 4-a. The Monetary Board may eliminate, exempt from, or suspend the effectivity of, interest rate ceilings on certain types of loans or renewals thereof or forbearances of money, goods, or credit, whenever warranted by prevailing economic and social conditions. 
• Sec. 4-b. In the exercise of its authority to fix the maximum rate or rates of interest under this Act, the Monetary Board shall be guided by the following:
1. The existing economic conditions in the country and the general requirements of the national economy; 
2. The supply of and demand for credit; 
3. The rate of increase in the price levels; and
4. Such other relevant criteria as the Monetary Board may adopt.
• The Usury Law was not repealed by the New Central Bank Act (NCBA) or Republic Act No. 7653, as amended. 
• The NCBA merely supplemented the Usury Law insofar as the latter law concerns loans by banks and other financial institutions.
• Had Republic Act No. 7653 been intended to repeal Section 1-a of Act No. 2655, it would have so stated in unequivocal terms.

2.02. General Banking Law.

• A related provision is Section 43 of the General Banking Law, which provides:
• Sec. 43. Authority to Prescribe Terms and Conditions of Loans and Other Credit Accommodations. The Monetary Board, may, similarly in accordance with the authority granted to it in Section 106 of the New Central Bank Act, and taking into account the requirements of the economy for the effective utilization of long-term funds, prescribe the maturities, as well as related terms and conditions for various types of bank loans and other credit accommodations. Any change by the Board in the maximum maturities, as well as related terms and conditions for various types of bank loans and other credit accommodations. Any change by the Board in the maximum maturities shall apply only to loans and other credit accommodations made after the date of such action. 
•  The Monetary Board shall regulate the interest imposed on micro finance borrowers by lending investors and similar lenders such as, but not limited to, the unconscionable rates of interest collected on salary loans and similar credit accommodations. 
• On the other hand, Section 63 of the New Central Bank Act as amended by Republic Act No. 11211 provides that whenever abnormal movements in the prices endanger the stability of the Philippine economy or important sectors thereof, the Monetary Board shall take such remedial measures as are appropriate. Section 63, as amended, provides in part as follows: 
• Sec. 63. Action When Abnormal Movements Occur In the Price Level. - Whenever abnormal movements In the prices endanger the stability of the Philippine economy or important sectors thereof, the Monetary Board shall:
• (a) take such remedial measures as are appropriate and within the powers granted to the Monetary Board and the Bangko Sentral under the provisions of this Act.

2.03. MORB. 

• The present Manual of Regulations for Banks (MORB) is consistent or substantially the same as the provisions of CB Circular No. 905. Section X306 of the MORB provides: 
• Sec. X305 Interest and Other Charges. The rate of interest, including commissions, premiums, fees and other charges, on any loan, or forbearance of any money, goods or credits regardless of maturity and whether secured or unsecured shall not be subject to any regulatory ceiling.

2.04. Pawnshop. 

• The law that regulates the operation of pawnshops, Presidential Decree No. 114, provides that the Usury Law is applicable to rates of interest imposed by pawnshops: 
• Section 10. Rates of interest. No pawnshop shall directly or indirectly stipulate, charge, demand, take or receive any higher rate or greater sum or value for any loan or forbearance than the rate allowed by the Usury Law for such transactions. It shall be unlawful for a pawnshop to divide the pawn offered by a pawner in order to collect greater Interest and/or to require the pawner to pay an additional charge as insurance premium for the safekeeping and conservation of the article pawned. 
• In addition to Interest charges, pawnshops may impose a maximum service charge of five pesos (P5.00), but in no case to exceed one per cent (1%) of the principal loan.

2.05. Financing Companies. 

• For loans granted by lending companies, Section 7 of Republic Act No. 9474 othewise known as the Lending Company Regulation Act of 2007 provides that the Monetary Board can prescribe interest rates: 
• SEC. 7. Amount and Charges on Loans. - A lending company may grant loans in such amounts and reasonable interest rates and charges as may be agreed upon between the lending company and the debtor: Provided, That the agreement shall be in compliance with the provisions of Republic Act No. 3765, other wise known as the "Truth in Lending Act" and Republic Act 7394, otherwise known as the "Consumer Act of the Philippines": Provided, further, That the Monetary Board, in consultation with the SEC and the industry, may prescribe such interest rate as may be warranted by prevailing economic and social conditions.

3. Agreement Necessary. 

• Nevertheless, the rate of interest and any increase thereof must be agreed upon by the parties. 
• A party cannot unilaterally impose the obligation to pay interest or any increase in the rate previously agreed upon.
• P. D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits. 
• In fine, they can agree to adjust, upward or downward, the interest previously stipulated."" 

4. Principal Obligation Valid.

• If the BSP reinstates the ceiling on interest rates, only the obligation to pay the usurious interest would be invalid.
• In usurious loans, the entire obligation does not become void because of an agreement for usurious interest; the unpaid principal debt still stands and remains valid but the stipulation as to the usurious interest is void, consequently, the debt is to be considered without stipulation as to the interest.
• Thus, the nullity of the stipulation on the usurious interest does not affect the lender's right to receive back the principal amount of the loan. 
• With respect to the debtor, the amount paid as interest under a usurious agreement is recoverable by him, since the payment is deemed to have been made under restraint, rather than voluntarily.
• In addition, Article 1413 of the New Civil Code expressly provides that "interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with interest thereon from the date of the payment." 
• Sanchez v. Buenviaje:
• It is now well-settled that: "the Usury Law (Act No. 2655), by its letter and spirit, does not deprive the lender of his right to recover of the borrower the money actually loaned -this only in the case that the interest collected is usurious. The law, as it is now, does not provide for the forfeiture of the capital in favor of the debtor in usurious contract ... "  
• True it is that in Briones v. Cammayo, L-23559, Oct. 4, 1971; 41 SCRA 404, Chief Justice Concepcion and now Chief Justice Fernando concurred with Justice Castro who opined that both loan and usurious interest are void. However, it must be emphasized that eight other justices maintained that only the usurious interest is void but not the principal obligation." 
• Advocates for Truth in Lending, Inc. v. Bangko Sentral Monetary Board:
• Nullity of the stipulation of usurious interest does not affect the lender's right to recover the principal of a loan, nor affect the other terms thereof. 
• Thus, in a usurious loan with mortgage, the right to foreclose the mortgage subsists, and this right can be exercised by the creditor upon failure by the debtor to pay the debt due. The debt due is considered as without the stipulated excessive interest, and a legal interest of 12% (now 6%) per annum will be added in place of the excessive interest formerly imposed. 
• Angel Jose Warehousing Company, Inc. v. Chelda Enterprises: 
• The in pari delicto rule does not apply.
• We do not agree with such reasoning. Article 1411 of the New Civil Code is not new; it is the same ae Article 1305 of the Old Civil Code. Therefore, said provision is no warrant for departing from previous interpretation that, as provided in the Usury Law (Act No. 2656, as amended), a loan with usurious interest is not totally void but void only ae to the interest. 
• True, as stated in Article 1411 of the New Civil Code, the rule of pari delicto applies where a contract's nullity proceeds from illegality of the cause or object of said contract. However, appellants fail to consider that a contract of loan with usurious interest consists of principal and accessory stipulations; the principal one is to pay the debt; the accessory stipulation is to pay interest thereon. 
•  And said two stipulations are divisible in the sense that the former can still stand without the latter. Article 1273, Civil Code, attests to this: ''The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter shall leave the former in force." 
• The question therefore to resolve is whether the illegal terms as to payment of interest likewise render a nullity the legal terms as to payments of the principal debt. Article 1420 of the New Civil Code provides in this regard: ''In case of a divisible contract, if the illegal terms can be separated f rom the legal ones, the latter may be enforced." 
• In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies only as to the prestation to pay the stipulated interest; hence, being separable, the latter only should be deemed void, since it is the only one that is illegal. 
• Neither is there a conflict between the New Civil Code and the Usury Law. Under the latter, in Section 6, any person who for a loan shall have paid a higher rate or greater sum or value than is allowed in said law, may r e c over the whole interest paid. The New Civil Code, in Article 1413 states: "Interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with interest thereon from the date of payment." Article 1413, in speaking of ''interest paid in excess of the interest allowed by the usury laws" means the whole usurious interest; that is, in a loan of P1,000.00, with interest of 20% per annum or P200.00 per year, if the borrower pays said P200.00, the whole P200.00 is the usurious interest, not just that part thereof in excess of the interest allowed by law. It is in this case that the law does not allow division.. The whole stipulation as to interest is void, since payment of said interest is the cause or object and said interest is illegal. The only change effected, therefore, by Article 1413, New Civil Code, is not to provide for the recovery of the interest paid in excess of that allowed by law, which the Usury Law already provided for, but to add that the same can be recovered "with interest thereon from the date of payment." 
• The foregoing interpretation is reached with the philosophy of usury legislation in mind; to discourage stipulations on usurious interest, said stipulations are treated as wholly void, so that the loan becomes one without stipulation as to payment of interest. It should not, however, be interpreted to mean forfeiture even of the principal, for this would unjustly enrich the borrower at the expense of the lender. Furthermore, penal sanctions are available against a usurious lender, as a further deterrence to usury. 
• The principal debt remaining without stipulation for payment of interest can thus be recovered by judicial action. And in case of such demand, and the debtor incurs in delay, the debt earns interest from the date of the demand (in this case from the filing of the complaint). Such interest is not due to stipulation, for there was none, the same being void. Rather, it is due to the general provision of law that in obligations to pay money, where the debtor incurs in delay, he has to pay interest by way of damages (Article 2209, Civil Code). The court a quo therefore, did not err in ordering defendants to pay the principal debt with interest thereon at the legal rate, from the date of filing of the complaint.

5. What Contracts are Covered. 

• The Usury Law covers interests on: 

1. Loans; and 
2. Forbearance of any money, goods, or credits. 

• It does not apply to a:
• ❌contract of sale 
• ❌contract to sell

• Forbearance.
• It is a contractual obligation of lender or creditor to refrain during a given period of time, from requiring the borrower or debtor to repay a loan or debt then due and payable.
• However, the phrase "forbearance of money, goods or credits" is meant to have a separate meaning from a loan, otherwise there would have been no need to add that phrase as a loan is already sufficiently defined in the Civil Code. 
• Forbearance of money, goods or credits
• It refers to arrangements other than loan agreements, where a person acquiesces to the temporary use of his money, goods or credits pending happening of certain events or fulfillment of certain conditions.

• Creditors. 
• The Usury Law covers loans extended by:
• banks
• pawnshops
• finance companies
• other financial institutions
• private individuals
• However, loans extended by different institutions are subject to different maximum limits prescribed by the BSP.23 
• Compounded Interest.
• If compounding of interest is agreed upon, the effective rate of interest charged by the creditor shall not exceed the maximum rate prescribed by the BSP. 
• Similarly, whenever interest rate is paid in advance, the effective rate of interest charged by the creditor shall not exceed the prescribed maximum rate.
• Separate Agreement. 
• An apparently lawful loan is usurious when it is intended that additional compensation for the loan be disguised by an ostensibly unrelated contract providing for payment by the borrower for the lender's services which are of little value or which are not in fact to be rendered, such as in the instant case.
• The Usury Law was therefore made to apply to an Underwriting Agreement that provided for the payment of the supervision and consultancy fees that was set for a period of four years, which coincided ultimately with the term of the Loan Agreement. 
• Payment in Property. 
• Verzosa u. Bucag: 
• The agreement stated that the lender was supposed to receive an agreed portion of the products of the land involved in the case, the value of which did not exceed the maximum rate of interest. However, the Court ruled that the agreement is still valid even if the actual selling price exceeded the interest provided by law. 
• The Court explained:
• But even if the value of the actual selling price of one-third exceeded the 14% interest provided for by law, the excess in the case at bar would not be palpable as to show a corrupt intent to violate and evade the Usury Law. This principle was established by us in the case of Toquera, et. al., u. V illegas, et al., 40 O.G. No. 15, p. 10, wherein we said "In view, however, of the rule that a creditor's return need not be limited to the statutory rate when it is affected by a contingency putting whole of it at hazard, a contract is ordinarily not usurious under which the creditor is to receive, consideration of his loan or forbearance, property or services of uncertain value, even though probable value is greater than lawful interest unless the excess is so palpable as to show a corrupt intent t o violate and evade the usury laws, or unless the contract is made for the purpose of such violation or evasion." 
• So an agreement that instead, of interest the lender of money would receive the rents and profits of certain land for a term of years, is not usurious where no intention to evade the statute is shown; and the fact that such rents and profits happen to amount to more than lawful interest does not render the contract usurious.

5.01. Time-Price Differential. 

• It follows that the Usury Law does not apply to legitimate sale on installment even if time price differential is imposed. 
• Emata u. Hon. Intermediate Appellate Court:
• Nevertheless, the records of this case reveal that the Usury Law, Act No. 2666, is not applicable thereto. The amount added to the cash price of the car is what is commonly known as the "time price differential" and not interest within the meaning of the Usury Law. The law is applicable only m case of a loan or forbearance of money, goods or credit which is not the case here. The transaction involved here being admittedly a conditional sale based on an installment plan and not a loan, it has been held that the alleged increase in the price of the article sold cannot be considered a mere pretext to cover a usurious loan. The increase in price, when the sale is on credit serves not only to cover the expenses generally entailed by such transactions on credit, but also to encourage cash sales, so useful t o commerce. It is up to the purchaser to decide which price he prefers in making the purchase if on the contrary, he prefers to buy on credit, he cannot complain of the increase of the price demanded by the vendor.
• Neither is the Usury Law applicable to the assignment of indebtedness to Filinvest and to private respondent. The Financing Company Act provides for the rate of the purchase discount that may be availed of by a financing company. The purchase discount is defined as the "difference between the value of the receivable purchased or credit assigned, and the net amount paid by the finance company for such purchase or assignment, exclusive of f ees, service charges, interest and other charges incident to the extension of the credit." 
• Similarly, the increase in the price for a sale on credit does not constitute interest within the meaning of the Usury Law. 
• The increase of the price, when the sale is on credit, serves not only to cover the expenses generally entailed by such transactions on credit, but also to encourage cash sales, so useful to commerce. 
• It is up to the purchaser to decide which price he prefers in making the purchase. 
• If he prefers to purchase for cash, he obtains reduction of the price. 
• If, on the contrary, he prefers to buy on credit, he cannot complain of the increase of the price demanded by the vendor.

5.02. Loans on Bottomry or Respondentia. 

• The Usury Law does not apply to loans on bottomry or respondentia. 
• The interest may be higher because of the nature of the contracts. 
• Article 719 of the Code of Commerce provides that a loan in which under any condition whatever, the repayment of the sum loaned and of the premium stipulated depends upon the safe arrival in port of the goods on which it is made, or of the price they may receive in case of accident, shall be considered a loan on bottomry or respondentia.

6. Circumvention. 

• Article 1957 of the New Civil Code provides that contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against usury shall be void and in such cases, the borrower may recover in accordance with the laws on usury. 
• This provision "is necessary, to defeat the cunning devices of usurers."
• Article 1957 is meant to make usury harder to perpetrate.

7. Stipulation on Attorney's Fees.

• Justice Malcolm explained that the law in this jurisdiction does not forbid stipulations in negotiable instruments for the payment of collection and attorney's fees. 
• The lender may without violating the Usury Law provide in a note for an attorney's fee to cover the cost of collection.
• The purpose of a stipulation in a note for reasonable attorney's fees is not to give the lender a larger compensation for the loan than the law allows, but is to safeguard the lender against future loss or damage by being compelled to retain counsel to institute judicial proceedings to collect his debt.

8. Charges and Penalties.

• Penalties, charges and liquidated damages are likewise not covered by the Usury Law. 
• However, penalties, liquidated damages and attorney's fees that are excessive, iniquitous and unconscionable and revolting to the conscience may be invalidated. 
• For instance, the stipulated penalties, liquidated damages and attorney's fees can be declared void if the same hardly allow the borrower any chance of survival in case of default.