Usury and Unconscionable Interest Rates

By: Atty.Fred | September 19, 2006 in Banking, Corporate and Investments

39 Replies | Related posts at the bottom of article

With the suspension of the Usury Law and the removal of interest ceilings, the parties are
generally free to stipulate the interest rates to be imposed on monetary obligations. As a rule, the
interest rate agreed by the creditor and the debtor is binding upon them. This rule, however, is
not absolute.

In a recent case, the SC again dealt with the validity of interest agreed by the parties, stating that:

Stipulated interest rates are illegal if they are unconscionable and the Court is allowed to temper
interest rates when necessary. In exercising this vested power to determine what is iniquitous and
unconscionable, the Court must consider the circumstances of each case. What may be iniquitous
and unconscionable in one case, may be just in another.

In that case, the SC reduced the interest rate from 18% to 12% per annum, noting, among others,
that the amount involved has ballooned to an outrageous amount four times the principal debt.

Indeed, there is no hard and fast rule to determne the reasonableness of interest rates. Stipulated
interest rates of 21%, 23% and 24% per annum had been sustained in certain cases.

On the other hand, there are plenty of cases when the SC equitably reduced the stipulated interest
rates; for instance, from 18% to 10% per annum. The SC also voided the stipulated interest of
5.5% per month (or 66% per annum), for being excessive, iniquitous, unconscionable and
exorbitant, hence, contrary to morals (contra bonos mores), if not against the law. The
same is true with cases involving 36% per annum, 6% per month (or 72% per annum), and 10%
and 8% per month. In these instances, the SC imposed the legal interest of 12%.

Just to be clear, legal interest doesnt mean that anything beyond 12% is illegal. It simply
means that in a loan or forbearance of money, the interest due should be that stipulated in
writing, and in the absence thereof, the rate shall be 12% per annum.

Sources: Trade & Investment Development Corporation of the Philippines vs. Roblett Industrial
Construction Corporation (G.R. No. 139290, 9 May 2006); Development Bank of the Philippines
vs. Court of Appeal; Garcia vs. Court of Appeals; Medel vs. Court of Appeals; Security Bank and
Trust Company vs. RTC Makati; Spouses Solangon vs. Salazar; Cuaton vs. Salud; Ruiz vs. CA;
Eastern Shipping vs. Court of Appeals, G.R. No. 97412 July 12, 1994.
The Supreme Court, while agreeing with the Court of Appeals that the
Usury Law is legally inexistent with the issuance of CB Circular 905, and
that interest can now be charged as lender and borrower may agree upon,
nevertheless found the stipulated interest iniquitous, unconscionable, and
contrary to morals:

Court of appeals

Leticia and Rafael v Veronica and Danilo,

Court of Appeals. According to them, the Promissory Note is the law between the
parties. CB Circular 416 imposing legal interest is applicable only when there is no
stipulated interest between the parties.

Its not illegal [to charge high rates], but thats unconscionable and we cannot
accept that kind of interest anymore, Aguirre said.

The Lending Company Regulation Act of 2007 (Republic Act 9474) stipulates that a
lending company not otherwise regulated by law (such as a bank, savings and loan
association, or pawnshop) may only be a corporation, and must be granted
authority to operate by the Securities and Exchange Commission. The Truth in
Lending Act (RA 3765) covers any creditor, and requires that information regarding
the total amount to be financed, and the interest to be paid both in terms of a
simple annual percentage and in pesos be furnished to the borrower in a clear
statement in writing.

Philippines did have a Usury Law, but in 1982 the then-Central Bank suspended
enforcement of the law, effectively removing interest rate ceilings and leaving it to
the courts to decide whether excessive interest was being charged on a case-by-
case basis. In a number of decisions by the Supreme Court or the Court of Appeals,
does not mean a higher interest rate would not be allowed by the courts in case of a
dispute, but it would have to be justified by the lender.