Understanding Interest Rate Ceilings and Usury Law in the Philippines

G.R. No. 120957, August 22, 1996

Imagine needing a quick loan to keep your business afloat. You find a lender, but the interest rate seems incredibly high. Is this legal? This case clarifies the complexities surrounding interest rates, usury laws, and the power of the Central Bank in the Philippines. It highlights how the removal of interest rate ceilings impacts lender-borrower agreements and the legal obligations arising from them.

Introduction

This case, People of the Philippines vs. Nita V. Dizon, revolves around a series of loans and bounced checks, ultimately raising questions about usury and the enforceability of financial agreements. The accused-appellant, Nita Dizon, was convicted of estafa and violation of Batas Pambansa Blg. 22 (B.P. 22) or the Bouncing Checks Law. The central issue is whether the transactions were usurious, thus negating the accused’s obligation to honor the checks, and the extent to which the Central Bank can regulate interest rates.

Legal Context: Usury Law and Central Bank Authority

Usury, in simple terms, is charging an illegally high interest rate on a loan. The Usury Law (Act No. 2655) previously set ceilings on interest rates to protect borrowers from predatory lending. However, Central Bank Circular No. 905, Series of 1982, effectively removed these ceilings. This circular stated that interest rates, along with other charges, on loans or forbearance of money are no longer subject to the limits prescribed by the Usury Law.

The key provision is Section 1 of Central Bank Circular No. 905:

Section 1. The rate of interest, including commissions, premiums, fees and other charges, on a loan or forbearance of any money, goods, or credits, regardless of maturity and whether secured or unsecured, that may be charged or collected by any person, whether natural or judicial, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as amended.

This means that lenders and borrowers are free to agree on interest rates without being bound by the old Usury Law’s limits. For example, two businesses can agree on a loan with a 20% annual interest rate, as long as both parties consent. The Central Bank’s authority to regulate the monetary and banking system, as outlined in Republic Act No. 265 (the Central Bank Charter), empowers it to issue such circulars. This authority extends to the charging of interest rates, as these are integral to the financial system.

Case Breakdown: The Dizon Case

The case began when Susan Sandejas Gomez, a real estate broker, was introduced to Nita Dizon. Dizon initially expressed interest in purchasing Ayala Alabang lots through Gomez. Subsequently, Dizon requested loans from Gomez, citing urgent needs for her business. Over a short period, Gomez provided Dizon with significant sums of money in exchange for postdated checks. These checks later bounced due to insufficient funds.

• February 14, 1986: Gomez handed Dizon P200,000 in cash and a P50,000 cashier’s check in exchange for two checks totaling P272,000.
• February 18, 1986: Gomez gave Dizon P180,000 in cash for two checks totaling P225,000.
• When the checks became due, Dizon requested deferment, claiming a hold-up incident prevented her from funding the checks.
• The checks were eventually dishonored, leading Gomez to file charges of estafa and violation of B.P. 22.

The trial court convicted Dizon, and the Court of Appeals affirmed the conviction but increased the penalties. Dizon appealed, arguing that the transactions were usurious and that she was not obligated to pay the checks. The Supreme Court upheld the conviction, emphasizing the following points:

“Since the effectivity of Central Bank Circular No. 905, usury has been legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon.”

The Court also addressed Dizon’s claim about the Ayala lots, stating:

“Anent the charges of estafa, the Ayala transaction is not an indispensable element in the commission of the crime of estafa under Article 315, paragraph 2(d), Revised Penal Code…”

The Supreme Court affirmed the lower courts’ decisions, finding Dizon guilty of estafa and violation of B.P. 22. The penalties were modified to reflect the increased amounts involved, leading to significantly harsher sentences.

Practical Implications: What This Means for You

This case underscores the importance of understanding the current legal landscape regarding interest rates and loan agreements. While the Usury Law’s ceilings are no longer in effect, contracts can still be challenged on other grounds, such as fraud or duress. Businesses and individuals entering loan agreements should ensure that all terms are clearly defined and mutually agreed upon.

Key Lessons:

• Freedom to Contract: Lenders and borrowers can agree on interest rates without being limited by the old Usury Law.
• Due Diligence: Ensure all loan agreements are clear, comprehensive, and mutually understood.
• Enforceability of Checks: Issuing checks without sufficient funds can lead to criminal charges under B.P. 22.

For instance, a small business owner seeking a loan must carefully review the interest rate and other charges, understanding that the lender has the freedom to set these terms. Conversely, a lender must ensure that the agreement is transparent and that the borrower fully understands their obligations.

Frequently Asked Questions

Q: Is there still a limit to how much interest a lender can charge in the Philippines?

A: No, Central Bank Circular No. 905 removed the interest rate ceilings previously imposed by the Usury Law. Lenders and borrowers are now free to agree on interest rates.

Q: Can a loan agreement with a very high interest rate be considered illegal?

A: While there are no specific interest rate ceilings, a loan agreement can still be challenged if there is evidence of fraud, duress, or unconscionability.

Q: What is B.P. 22, and how does it relate to loan agreements?

A: B.P. 22, or the Bouncing Checks Law, penalizes the act of issuing checks without sufficient funds. If a borrower issues a check as payment for a loan and the check bounces, they can be held liable under B.P. 22.

Q: What is estafa, and how does it relate to loan agreements?

A: Estafa is a form of fraud under the Revised Penal Code. In the context of loan agreements, it can involve deceit or misrepresentation used to obtain a loan, with no intention of paying it back.

Q: What role does the Central Bank play in regulating loan agreements?

A: The Central Bank is responsible for administering the monetary and banking system in the Philippines. It has the authority to issue circulars and regulations that affect interest rates and other aspects of financial transactions.

Q: What should I do if I think I’ve been charged an unfairly high interest rate on a loan?

A: Consult with a qualified lawyer to review the loan agreement and assess your legal options. While there are no interest rate ceilings, you may have grounds to challenge the agreement based on other legal principles.

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