Multi-Tiered Interest Rates: Power of The Monetary Board Under Section 1-A Paragraph 2

Multi-tiered interest rates
Power of the Monetary Board under Section 1-a

paragraph 2
Circular No. 1098: Monetary Board Resolution
No. 1185 dated September 17, 2020
 Ceiling on Interest or Finance Charges for Credit Card

Receivables
 Notification at least 90 calendar days
 Not to exceed annual interest rate of 24%, except credit
card installment loans which shall be subject to monthly
add-on rate not exceeding 1%.
 Effectivity November 3, 2020
Section 2 and Section 3
 In section 2, the taking or receiving (not mere agreeing)

of usurious interest is the act penalized, while in
Section 3, the mere demanding or agreeing to charge
excessive interest is also punishable;
 In Section 2, the loan or forbearance is secured by a

registered real estate, while in Section 3, it is not so
secured or there may be no security at all;
Section 2 and Section 3
 In section 2, the maximum rate of interest allowed is

12% per annum, while in Section 3, 14% per annum;
 In Section 2, commissions, premiums, fines, and

penalties are included in the computation of interest,
while in Section 3, they are not considered.
 Under both sections, it is only the creditor who is

criminally liable.
Validity of stipulation to pay in case obligation
not fulfilled
 Where a borrower has agreed to pay a rate of interest

not forbidden by law, but has stipulated that, in the
event of his not making payment at the time specified,
the obligation shall bear a higher rate of interest, either
from default or from the date of its execution, or that
some specific sum shall be paid in addition to the
principal and interest contracted for, the increased rate
is generally regarded as penalty.
Attorney's fees to cover costs of collection not
interest
 Stipulations in negotiable instruments for the payment

of collection as attorney’s fees are not forbidden by law
in our jurisprudence. The lender may without violating
the Usury Law provide in a note for an attorney’s fee to
cover the cost of collection.
Where attorney's fees stipulated excessive
 If the amount of attorney’s fees stipulated is excessive,

the same is subject to equitable reduction.
New Sampaguita Builders Const. Inc. v. PNB
GR No. 148753, July 30, 2004
 Facts: New Sampaguita obtained a loan from PNB. They executed an

Agreement whereby PNB was authorized to unilaterally increase rates of
interest without informing New Sampaguita.
 Issue: WON PNB could unilaterally increase interest rates.
 Ruling: NO. The “unilateral determination and imposition” of increased rates
is “violative of the principle of mutuality of contracts ordained in Article 1308
of the Civil Code.” Although escalation clauses are valid in maintaining fiscal
stability and retaining the value of money on long-term contracts, giving
respondent an unbridled right to adjust the interest independently and
upwardly would completely take away from petitioners the “right to assent to
an important modification in their agreement” and would also negate the
element of mutuality in their contracts.
Determination of existence of usury
 (1) Corrupt agreement must be present.
 (2) Where consideration of loan is property or services

of uncertain value.
 (3) Form of contract not conclusive.

B borrowed from L P1,000.00 with interest at 24% per
annum or P240.00. The interest, let suppose, is
usurious. To hide the usurious transaction, the contract
entered into by the parties is called pacto de retro (sale
with the right to repurchase) whereby B sells his land to L
for P1,000.00 with right to repurchase the same within a
fixed period.
It is stipulated that B shall continue in possession as
lessee and pay a fixed rental of P240.00 a year.
Here, the real intention of the parties is that the
pretended purchase price is the money loaned and the
simulated rent is the interest. The courts have held this
form of agreement as a mere cloak or device to
circumvent the Usury Law.
Usury Law not applicable in ordinary contracts
when entered into in good faith
(1) The rental in contract of lease where the relation

between the contractors is that of landlord and tenant
(2) A bona fide sale
(3) The increase in price of thing sold as a result of a sale

on credit, over its cash sales price
(4) A bona fide pacto de retro sale

Effect where principal not absolutely payable
 The usury statutes are intended to prevent the charging

of an excessive rate of interest from lending of money.
It is essential, therefore, to constitute usury that the
principal sum be payable absolutely and at all events.
Interest that can be charged by a pawnshop
 The Monetary Board has raised the basis of interest for

pawnshops effective February 29, 1980, as follows:
(1) 2 ½% per month. – when the sum lent is not more

than P2,000.00; and
(2) 18% per annum. – when the sum lent is more than
P2,000.
Dividing pawn in several fractions not allowed
in order to earn higher interest
 Under Section 4, a pawnbroker is not allowed to divide

the pawn (object) into several fractions in order to
collect greater interest than that permitted nor to
require additional charge as insurance premiums for
safekeeping of the article pawned. The purpose is to
prevent the collection of interest in excess of the rate
permitted by said section.
When compound interest allowed
 Compound interest (which is interest on interest) is

allowed only in two cases:
(1) When there is an express written stipulation to that

effect;
(2) Upon judicial demand.

Problem
 B borrowed from L P10,000.00 payable in two years. It was agreed in writing
that interest would be 14% per annum and that interest due and unpaid shall
earn interest compounded annually. At the end of two years, B must pay?
 (1) P10,000.00 – principal loan

 (2) P2,800.00 – interest on principal loan
 (3) P196.00 – interest on the accrued interest for the first year
 Sum total of P12,996.00

Demandability of compound interest
(1) Agreement to charge interest on interest.
(2) Judicial demand to pay debt with interest

stipulated in contract.
Right of creditor to charge advance interest
(1) One year or less. – it is permissible for the creditor

to charge interest in advance corresponding to not
more than one year whatever the duration of the
loan may be.
(2) More than one year. – as long as the interest shall

not exceed the maximum rate prescribed.
Problem: Principal Loan - P10,000.00; Interest
Rate - 20% p.a.; Term – 1 year
 Scenario 1: Advance interest is P1,000.00

Test for validity: Advance interest divided by principal
1,000/10,000 equals 10% is VALID debtor cannot recover the interest

2,000/10,000 equals 20% is USURIOUS debtor can recover the interest
Problem: Principal Loan - P10,000.00; Interest
Rate - 14% p.a.; Terms – 5 years

1,400/10,000 equals 14% is VALID

2,800/10,000 equals 28% is USURIOUS
Borrower's right to recover usurious interest
paid Borrower's right to recover costs and
attorney's fees
 As provided in Section 6, a borrower who has paid or
delivered usurious interest may recover the entire
interest he paid with costs and attorney’s fees. Thus, if
the interest given is 20%, the whole 20% may be
recovered and not merely 8% or 6%, the interest in
excess of 12% or 14% as the case may be.
Right under the Civil Code
 Article 1413 of the Civil Code, reads as follows:
“Interest paid in excess of the interest allowed by the

Usury Law may be recovered by the debtor, with interest
thereon from the date of the payment.”
Angel Jose Merchandising v. Chelda Ent.
GR No. L-25704, April 24, 1968
 Facts: Chelda Ent. Obtained four loans from Angel Jose with an
interest rates of 2% and 2.5% per month.
 Issue: WON Chelda Ent. May recover the interest paid to Angel Jose.
 Ruling: Yes. Supreme Court ruled that the person paying usurious interest
can recover not only the interest in excess of 12% or 14%, as the case may be,
but the entire interest paid. Since a stipulation for the payment of usurious
interest is void. The effect is the same as if there is no stipulation as to
interest. Attorney’s fees are not recoverable in the absence of stipulation,
unless it falls under Article 2208 of the New Civil Code.

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Multi-tiered interest rates

Power of the Monetary Board under Section 1-a

 Ceiling on Interest or Finance Charges for Credit Card

 In section 2, the taking or receiving (not mere agreeing)

 In Section 2, the loan or forbearance is secured by a

 In section 2, the maximum rate of interest allowed is

 In Section 2, commissions, premiums, fines, and

 Under both sections, it is only the creditor who is

 Where a borrower has agreed to pay a rate of interest

 Stipulations in negotiable instruments for the payment

 If the amount of attorney’s fees stipulated is excessive,

 Facts: New Sampaguita obtained a loan from PNB. They executed an

 (1) Corrupt agreement must be present.

 (2) Where consideration of loan is property or services

 (3) Form of contract not conclusive.

(1) The rental in contract of lease where the relation

(2) A bona fide sale

(3) The increase in price of thing sold as a result of a sale

(4) A bona fide pacto de retro sale

 The usury statutes are intended to prevent the charging

 The Monetary Board has raised the basis of interest for

(1) 2 ½% per month. – when the sum lent is not more

 Under Section 4, a pawnbroker is not allowed to divide

 Compound interest (which is interest on interest) is

(1) When there is an express written stipulation to that

(2) Upon judicial demand.

 (1) P10,000.00 – principal loan

 Sum total of P12,996.00

(1) Agreement to charge interest on interest.

(2) Judicial demand to pay debt with interest

(1) One year or less. – it is permissible for the creditor

(2) More than one year. – as long as the interest shall

 Scenario 1: Advance interest is P1,000.00

 Scenario 2: Advance interest is P2,000.00

 Scenario 1: Advance interest is P1,400.00

 Scenario 2: Advance interest is P2,800.00

 Article 1413 of the Civil Code, reads as follows:

“Interest paid in excess of the interest allowed by the

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