Usury

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It is defined as: "Contracting for or receiving something in excess of the amount allowed by law for the forbearance of money, goods or things in action. Under the Usury Law (Act 2655, as amended by P.D. 116), which is now no longer in effect, the legal rate of interest for the loan or forbearance of any money, goods or credits, where such loan or renewal or forbearance is secured in whole or in part by a mortgage upon real estate the title to which is duly registered, in the absence of express contract as to such rate of interest, shall be 12% per annum. Any amount of interest paid or stipulated to be paid in excess of that fixed by law is considered usurious, therefore unlawful."[1]

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Usury Law

The Usury Law is Act 2655, as amended by Presidential Decree No. 116, which provides, among others, that the legal rate of interest for the loan or forbearance of any money, goods or credits, where such loan or renewal or forbearance is secured in whole or in part by a mortgage upon real estate the title to which is duly registered, in the absence of express contract as to such rate of interest, shall be 12% per annum. Any amount of interest paid or stipulated to be paid in excess of that fixed by law is considered usurious, therefore unlawful.[2] However, pursuant to Central Bank Circular No. 905, adopted on 22 December 1982, the Supreme Court declared that the Usury law is now "legally inexistent".[3] It should be clarified that CB Circular No. 905 did not repeal nor in anyway amend the Usury Law but simply suspended the latter's effectivity.[4] Usury has been legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon.[5]

Excessive and unconscionable interest rates

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. The striking down of unconscionable interest is based on Article 1409 of the Civil Code, which considers certain contracts as inexistent and void from the beginning, including: "Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy".

In a recent case[6], 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 determine the reasonableness of interest rates. Stipulated interest rates of 21%, 23%[7] 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.[8] The SC also voided the stipulated interest of 5.5% per month (or 66% per annum),[9] 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,[10] 6% per month (or 72% per annum),[11] and 10% and 8% per month.[12] In these instances, the SC imposed the legal interest of 12%.

Just to be clear, “legal interest” doesn’t 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.[13]

Source

References

  1. Spouses Puerto vs. CA, G.R. No. 138210, 6 June 2002
  2. Spouses Puerto vs. CA, G.R. No. 138210, 6 June 2002
  3. Liam Law vs. Olympic Sawmill Co., G.R. No. L-30771, 28 May 1984
  4. Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61, G.R. No. 113926, 23 October 1996
  5. Medel vs. Court of Appeals, G.R. No. 131622, 27 November 1998
  6. Trade & Investment Development Corporation of the Philippines vs. Roblett Industrial Construction Corporation, G.R. No. 139290, 9 May 2006
  7. Security Bank and Trust Company vs. RTC Makati, G.R. No. 113926, 23 October 1996
  8. Development Bank of the Philippines vs. Court of Appeals, G.R. No. 137557, 30 October 2000
  9. Medel vs. Court of Appeals, G.R. No. 131622, 27 November 1998
  10. Ruiz vs. Court of Appeals, G.R. No. 146942, 22 April 2003]
  11. Spouses Solangon vs. Salazar, G.R. No. 125944, 29 June 2001
  12. Cuaton vs. Salud, G.R. No. 158382, 27 January 2004
  13. Eastern Shipping vs. Court of Appeals, G.R. No. 97412 July 12, 1994
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