The Supreme Court ruled that banks cannot unilaterally increase interest rates on loans without the express consent of the borrower. This decision reinforces the principle of mutuality of contracts, ensuring that both parties agree to any changes in the loan terms. The ruling also addresses issues related to foreclosure proceedings and the requirements for valid publication of auction notices, protecting borrowers from unfair banking practices.

Loan Agreements: When Banks Overstep with Unilateral Interest Hikes

This case revolves around a loan obtained by Spouses Florante and Luzviminda Jonsay, along with Momarco Import Co., Inc., from Solidbank Corporation (now Metropolitan Bank and Trust Company). The Spouses Jonsay secured loans for Momarco, a business engaged in importing and distributing animal health products, using a blanket mortgage on their properties. Initially, the interest rate was set at 18.75% per annum, but Solidbank unilaterally increased it up to 30% per annum. The core legal question is whether Solidbank’s unilateral increase of the interest rates, without the borrowers’ consent, is permissible under Philippine law.

Momarco religiously paid the monthly interests until financial difficulties arose, leading to unsuccessful negotiations for a moratorium. Subsequently, Solidbank initiated extrajudicial foreclosure proceedings on the mortgaged properties. The petitioners filed a complaint, arguing that the total loan indebtedness was inflated due to illegal interest charges and defective foreclosure proceedings. The Regional Trial Court (RTC) initially ruled in favor of the petitioners, nullifying the foreclosure and reducing the interest rate to 12% per annum.

On appeal, the Court of Appeals (CA) initially affirmed the RTC’s decision but later reversed it, finding the foreclosure proceedings valid. The CA’s amended decision upheld the validity of the mortgage contract but still reduced the interest rates on the petitioners’ indebtedness to the legal rate of 12% per annum. Dissatisfied, the petitioners elevated the case to the Supreme Court, questioning the CA’s conflicting decisions and the application of laws on extrajudicial foreclosure, damages, and contracts of adhesion.

The Supreme Court addressed the issue of conflicting decisions by the CA, clarifying that a court can correct its errors upon a timely motion for reconsideration. The Court cited Sections 1, 2, and 3 of Rule 37 of the Rules of Court, emphasizing that a motion for reconsideration allows a party to request a second look at the judgment and correct any errors. This procedural clarification underscores the judiciary’s commitment to rectifying mistakes and ensuring justice.

Regarding the publication requirement for extrajudicial foreclosure, the Court referred to Section 3 of Act No. 3135, which mandates the publication of auction notices in a newspaper of general circulation in the municipality or city where the property is located. The petitioners argued that the Morning Chronicle, the newspaper used by Solidbank, was not a newspaper of general circulation in Calamba City. However, the Court emphasized that foreclosure proceedings enjoy a presumption of regularity, placing the burden on the mortgagor to prove any irregularities.

In Philippine Savings Bank v. Spouses Geronimo, the Court stressed the importance of complying with statutory requirements for foreclosure:

While the law recognizes the right of a bank to foreclose a mortgage upon the mortgagor’s failure to pay his obligation, it is imperative that such right be exercised according to its clear mandate. Each and every requirement of the law must be complied with, lest, the valid exercise of the right would end. It must be remembered that the exercise of a right ends when the right disappears, and it disappears when it is abused especially to the prejudice of others.

While the petitioners argued that the Morning Chronicle was not a newspaper of general circulation, the Court noted the affidavit of publication by the publisher and the certification by the Clerk of Court of RTC-Calamba City accrediting the newspaper for legal notices. The Court stated that when the RTC accredited the Morning Chronicle, it can be presumed that the RTC had made a prior determination that the said newspaper had met the requisites for valid publication of legal notices in the said locality.

On the matter of dacion en pago, the Court affirmed that Solidbank’s refusal to accept the petitioners’ offer did not constitute bad faith. According to the Court, no malice can be imputed on Solidbank’s refusal to accept the petitioners’ offer of dacion en pago, since it was duly authorized under the parties’ mortgage contract to extrajudicially foreclose on the mortgage in the event that Momarco defaulted in its interest payments.

However, the Court highlighted the issue of the escalation clause in the loan agreement. The Court declared void any escalation clause granting the lending bank the authority to unilaterally increase the interest rate without prior notice to and consent of the borrower. The Court emphasized that contract changes must be made with the consent of the contracting parties, and the rate of interest is a vital component of loan contracts.

As the Supreme Court held in Philippine National Bank v. CA:

It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the parties. If this assent is wanting on the part of one who contracts, his act has no more efficacy than if it had been done under duress or by a person of unsound mind… Similarly, contract changes must be made with the consent of the contracting parties.

The Court then recomputed the petitioners’ total loan indebtedness based on the stipulated interest rate of 18.75% per annum, excluding penalties and reducing attorney’s fees to 1% of the loan obligation. This recomputation revealed an excess in the auction proceeds, which the Court ordered Solidbank to pay to the petitioners, plus interest at six percent (6%) per annum from the date of filing the complaint up to finality.

In its analysis, the Court also addressed the issue of attorney’s fees. It reduced the attorney’s fees charged by Solidbank, emphasizing that these fees do not form an integral part of the cost of borrowing but arise only when collecting upon the notes or loans becomes necessary. The Court has the power to determine the reasonableness of attorney’s fees based on quantum meruit and to reduce the amount thereof if excessive.

The Court’s decision underscores the necessity for transparency and mutual consent in loan agreements. Banks are cautioned against unilaterally imposing interest rate increases, and borrowers are afforded protection against unfair banking practices. This ruling aims to promote fairness and equity in financial transactions, ensuring that both lenders and borrowers are treated justly.

FAQs

What was the key issue in this case?	The key issue was whether the bank could unilaterally increase interest rates on the loan without the borrower’s consent. The Supreme Court ruled against such unilateral increases, reinforcing the principle of mutuality of contracts.
What is the principle of mutuality of contracts?	The principle of mutuality of contracts means that a contract must bind both parties, and its validity or compliance cannot be left to the will of only one party. Any changes to the contract, such as interest rate adjustments, must be mutually agreed upon.
What did the Court say about the publication of foreclosure notices?	The Court emphasized that foreclosure proceedings enjoy a presumption of regularity, placing the burden on the mortgagor to prove any irregularities in the publication of notices. The newspaper used must be of general circulation in the area where the property is located.
Can a bank refuse a dacion en pago offer?	Yes, a bank can refuse a dacion en pago offer without it automatically being considered bad faith. The bank has the right to foreclose on the mortgage if the borrower defaults, as long as they are exercising their contractual rights.
What happens if the auction proceeds exceed the loan obligation?	If the auction proceeds exceed the total loan obligation, the bank must return the excess amount to the borrower. The Supreme Court ordered Solidbank to pay the petitioners the excess amount plus interest.
What is the legal interest rate if there is no written agreement?	In the absence of a written agreement specifying the interest rate, the legal interest rate for loans or forbearance of money is currently 6% per annum, as per Monetary Board Circular No. 799.
How does the Truth in Lending Act relate to interest rates?	To fully enforce the Truth in Lending Act, only the initially stipulated interest rates in the promissory notes may be imposed. Any subsequent increases without the borrower’s consent are void.
How are attorney’s fees determined in foreclosure cases?	Attorney’s fees are not an integral part of the borrowing cost but arise when collection becomes necessary. Courts determine their reasonableness based on quantum meruit, and can reduce excessive amounts.

This ruling reaffirms the importance of mutual agreement in contractual obligations, particularly in loan agreements. It serves as a reminder that banks cannot unilaterally change the terms of a loan without the borrower’s consent, and it provides clarity on the requirements for valid foreclosure proceedings, protecting borrowers from potential abuses.

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: Spouses Florante E. Jonsay and Luzviminda L. Jonsay and Momarco Import Co., Inc. vs. Solidbank Corporation, G.R. No. 206459, April 06, 2016