The Supreme Court ruled that interest rates of 7% and 5% per month on loans are excessive, iniquitous, unconscionable, and exorbitant, even if the Usury Law’s interest ceilings were removed. This decision protects borrowers from predatory lending practices by setting a legal limit on what constitutes a fair interest rate, ensuring that lenders do not impose terms that lead to financial exploitation. Borrowers who have been subjected to such excessive rates are entitled to a refund of the excess interest paid.

The Loan Shark’s Sting: When Agreed Interest Becomes Legal Extortion

In February and March 1999, Salvador and Violeta Chua extended several loans to Rodrigo, Ma. Lynn, and Lydia Timan, totaling various amounts and evidenced by promissory notes. Initially, the loans carried a hefty interest rate of 7% per month, which was later reduced to 5% per month. As security for these loans, the Timans issued postdated checks. However, disputes arose when the Timans attempted to settle the principal amounts, but the Chuas insisted on a higher total, leading to a legal battle over the validity of the stipulated interest rates. This case ultimately questioned whether these high interest rates were legally permissible, given the removal of interest ceilings under Philippine law.

The heart of the controversy lay in whether the agreed-upon interest rates were unconscionable. The Chuas argued that because Central Bank (C.B.) Circular No. 905-82 had removed the interest ceilings prescribed by the Usury Law, the rates could not be considered usurious. This circular, issued in 1982, effectively deregulated interest rates, allowing lenders and borrowers to agree on terms without the constraints of the Usury Law. However, this deregulation did not grant lenders unbridled power to impose exploitative rates.

The Timans, on the other hand, contended that the stipulated rates were excessive, iniquitous, unconscionable, and exorbitant, citing the case of Medel v. Court of Appeals to support their claim. They sought a refund of the excessive interest they had paid. The Regional Trial Court (RTC) agreed with the Timans, ruling that the interest rates were indeed excessive and ordering the Chuas to refund the excess payments. The Court of Appeals (CA) affirmed this decision, leading to the Chuas’ appeal to the Supreme Court.

The Supreme Court, in its analysis, reiterated the principle that while C.B. Circular No. 905-82 removed the ceiling on interest rates, it did not authorize lenders to impose rates that would enslave borrowers or lead to a hemorrhaging of their assets. The Court emphasized that stipulations on interest rates must not be contrary to morals or against the law. The Court referenced several precedents where interest rates of 3% per month and higher were deemed excessive, iniquitous, unconscionable, and exorbitant.

The Supreme Court cited Medel v. Court of Appeals, emphasizing that while the Usury Law is legally inexistent due to CB Circular 905, it does not give lenders free rein to charge excessive interest. As the Court stated:

We agree … that the stipulated rate of interest at 5.5% per month on the P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant. However, we can not consider the rate “usurious” because this Court has consistently held that Circular No. 905 of the Central Bank, adopted on December 22, 1982, has expressly removed the interest ceilings prescribed by the Usury Law and that the Usury Law is now “legally inexistent.”

The Court distinguished between the absence of usury laws and the principle that interest rates should not be unconscionable. The removal of usury ceilings does not mean that any interest rate, no matter how high, is permissible. The courts still have the power to strike down interest rates that are deemed morally or legally unacceptable.

The petitioners’ defense of in pari delicto, arguing that the respondents were equally at fault since they agreed to the stipulated interest rates, was also rejected. The Court noted that this defense was not raised in the RTC and could not be raised for the first time on appeal. Furthermore, the defense of good faith was deemed a question of fact, which is not reviewable in a petition under Rule 45 of the Rules of Civil Procedure.

In conclusion, the Supreme Court denied the petition and affirmed the decision of the Court of Appeals. The stipulated interest rates of 7% and 5% per month were equitably reduced to 1% per month or 12% per annum. This ruling reinforces the principle that the removal of usury ceilings does not give lenders the right to impose unconscionable interest rates, and borrowers are protected from such exploitative practices.

FAQs

What was the key issue in this case?	The central issue was whether the stipulated interest rates of 7% and 5% per month on the loans were unconscionable and excessive, warranting a reduction and a refund of the excess interest paid.
Did the removal of usury ceilings mean lenders could charge any interest rate?	No, while C.B. Circular No. 905-82 removed the ceiling on interest rates, it did not authorize lenders to impose rates that would enslave borrowers or lead to a hemorrhaging of their assets.
What interest rate did the court deem acceptable?	The court reduced the stipulated interest rates of 7% and 5% per month to a fair and reasonable rate of 1% per month or 12% per annum.
What is the legal basis for reducing the interest rate?	The legal basis is that excessively high interest rates are considered contrary to morals (contra bonos mores) and can be deemed void, even if the Usury Law is legally inexistent.
What does “in pari delicto” mean, and why was it not applicable here?	In pari delicto means “in equal fault.” The defense was not applicable because it was raised for the first time on appeal, and questions raised on appeal are confined to the issues framed by the parties in the lower courts.
What was the effect of Central Bank Circular No. 905-82?	Central Bank Circular No. 905-82 removed the ceiling on interest rates for both secured and unsecured loans, regardless of maturity, effectively suspending the effectivity of the Usury Law.
Can a borrower claim a refund for interest paid above the legal rate?	Yes, if the stipulated interest rates are deemed excessive, iniquitous, unconscionable, and exorbitant, the borrower is entitled to a refund of the interest payments exceeding the legal rate.
Is good faith a valid defense for charging excessive interest rates?	No, the defense of good faith is a factual issue that may not be properly raised in a petition for review under Rule 45 of the Rules of Civil Procedure, which allows only questions of law.

This case serves as a crucial reminder that while market forces play a role in determining interest rates, there are legal and ethical limits to protect borrowers from predatory lending practices. The Supreme Court’s decision underscores the judiciary’s role in ensuring fairness and equity in financial transactions.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Salvador Chua and Violeta Chua v. Rodrigo Timan, G.R. No. 170452, August 13, 2008