Fraternal Order of Utopia THE USURY LAW (Act No.

2655, as amended) An act fixing rates of interest upon loans and declaring the effect of receiving or taking usurious rates and declaring the effect of receiving or taking usurious rates, and for other purposes. Central Bank Resolution No. 224 (promulgated Jan 1, 1983) a. The rate of interest [] shall not be subject to any ceiling prescribes under the Usury Law b. The rate of interest for loan or forbearance of any money [] shall continue to be 12% per annum c. Loans denominated in foreign currency shall continue to be subject to CB regulations on foreign borrowings. (C.B. Circular No. 905) -Usury became legally non-existent as lender and the borrower may legally agree on any interest that may be charged on the loan -This circular was given retroactive effect. But in the event that interest rate ceiling on loads are restored by MB, Usury law would again apply -The circular did not repeal nor in any way amend the Usury Law but simply suspended the latters effectivity C.B. 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 juridical, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as amended. SECTION 2. The rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall continue to be twelve per cent (12%) per annum. SECTION 3. Loans denominated or payable in a foreign currency shall continue to be subject to Central Bank regulations on foreign borrowings. 1

Legality of; C.B. Circular No. 905 is issued by CBs Monetary Board pursuant to PD 1684 empowering it to prescribe the maximum rates of interest for loans and certain forbearances. The Circular no more than allow contracting parties to stipulate freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money [etc.]. It does not authorize either party to unilaterally raise or lower the interest rate without the others consent. 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. The Monetary Board id authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credit and to change such rate or rates whenever warranted by prevailing economic conditions. CB Circular No. 905 is of doubtful legality because it appears to be in excess of the authority granted to the Monetary Board which is only to prescribe the ceiling of interest rates and not to abolish or remove such ceilings. Elements of Usury: 1. a loan or forbearance 2. an understanding between parties that the loan shall or may be returned 3. an unlawful intent to take more than the legal rate for the use of money or its equivalent 4. the taking or aggregating to take for the use of the loan of something in excess of what is allowed by law. LOAN within the purview of the Usury Law is synonymous to mutuum FORBEARANCE signifies the contractual obligation of the creditor to forbear during a given period to require the debtor, payment of an existing debt then due and payable. Where there is no loan or forbearance, there can be no usury. Thus, a contract to pay compensation for the past use of money, although amounting to more than the lawful rate of interest for the period of the

Fraternal Order of Utopia loan, is NOT usury, which relates to compensation for the future use of money. Construction of the law a. Usury provisions which are penal in nature are to be strictly construed. b. Prospective or retrospective operation usury statues will be construed to be prospective only, and not retrospective. Contracts which were not usurious under the law in effect at the time it was executed cannot be rendered usurious by a subsequent change in the law. HOWEVER, usury statutes which do not impair the obligation of contracts by making contracts legal which were illegal at their inception may constitutionally be made retrospectively.
Section 1. The rate of interest for the loan or forbearance of any money goods, or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall be six per centum per annum or such rate as may be prescribed by the Monetary Board of the Central Bank of the Philippines for that purpose in accordance with the authority hereby granted. Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions. In the exercise of the authority herein granted, the Monetary Board may prescribe higher maximum rates for loans of low priority, such as consumer loans or renewals thereof as well as such loans made by pawnshops finance companies and other similar credit institutions although the rates prescribed for these institutions need not necessarily be uniform. The Monetary Board is also authorized to prescribe different maximum rate or rates for different types of borrowings, including deposits and deposit substitutes, or loans of financial intermediaries. Sec. 2. No person or corporation shall directly or indirectly take or receive in money or other property, real or personal, or choses in action, a higher rate of interest or greater sum or value, including commissions, premiums, fines and penalties, for the loan or renewal thereof or forbearance of 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, or by any document conveying such real estate or an interest therein, than twelve per centum per annum or the maximum rate prescribed by the Monetary Board and in force at the time the loan or renewal thereof or forbearance is granted: Provided, That the rate of interest under this section or the maximum rate of interest that may be prescribed by the Monetary Board under this section may likewise apply to loans secured by other types of security as may be specified by the Monetary Board. Sec. 3. No person or corporation shall directly or indirectly demand, take, receive or agree to charge in money or other property, real or personal, a higher rate or greater sum or value for the loan or forbearance of money, goods, or credits where such loan or forbearance is not secured as provided in Section two hereof, than fourteen per centum per annum or the maximum rate or rates prescribed by the Monetary Board and in force at the time the loan or forbearance is granted.

Interest defined. It is the compensation allowed by law or fixed by the parties for the loan or forbearance of money, goods or credits. Kinds of interest 1. Simple interest: I = PRT that for which is paid for the principal at a certain fixed or stipulated by the parties 2. Compound interest: ( ) that which is imposed upon interest due and unpaid. The accrued interest is added to the principal sum and the whole is treated as a new principal upon which the interest for the next period is calculated. 3. Legal Interest: 6% per annum or 12% per annum that which the law directs to be charged in the absence of any agreement as to the rate between the parties 6% per annum applies when: payment of indemnities as damages in form of interest at 6% per annum, in connection to delay in performance of the 2

Fraternal Order of Utopia obligation arising therefrom other than those involving loan or forbearance of money, goods or credit (Art. 2209) 12% per annum applies when: 1) loans, 2) forbearance of any money, goods or credit, 3) judgments involving such loans or forbearance, in the absence of express agreement as to such rate of interest 4. Lawful interest that which is the law allows or does not prohibit rates within the maximum prescribed by law 5. Unlawful or usurious interest That which is paid or stipulated to be paid beyond the maximum rate fixed by law NOTE: The legal rate of interest for the loan or forbearance of any money, goods or credit and the rate allowed in judgments, in the absence of express contract as to such rate, shall be 12% per annum. Judgments in litigation involving loans or forbearance of any money, goods or credit, or to cases where money is transferred from one person to another and the obligation to return the same or a portion thereof is adjudged. *Any other kind of monetary judgments which has nothing to do with nor involving loans of forbearance of any money does not fall within the coverage of the UL. Cases beyond the scope of CB Circular 416 are governed by Art 2209 which considers interest a form of indemnity for the delay in the performance of an obligation. Interest Rates; Under the Usury Law: 1. Legal rate 12% per year 2. Maximum rate a. 12% per year, if loan is secured, in whole or in part, by a mortgage upon a real estate with a Torrens Title; or any agreement conveying such real estate or an interest therein. b. 14% per year, if loan is not secured c. that prescribed by the Monetary Board of Central Bank Under CB Circular No. 817 (promulgated July 21, 1981): 1. not exceeding 16% per annum, including commissions, premium, fees and other charges for secured loans of 365 days or less 2. not exceeding 18% per year, if such loans are unsecured 3. if the maturity of the loan is more than 365 days, the interest shall not be subject to any ceiling Determination of existence of usury. 1. corrupt agreement must be present 2. Where consideration of loan is property of service of uncertain value 3. Form of contract not conclusive When UL not applicable 1. the rental in contract of lease 2. a bona fide sale 3. the increase in price of the things old as a result of a sale on credit 4. a bona fide pacto de retro venta
Sec. 4. No pawnbroker or pawnbroker's agent shall directly or indirectly stipulate, charge, demand, take or receive any higher rate or greater sum or value for any loan or forbearance than two and one-half per centum per month when the sum lent is less than one hundred pesos; two per centum per month when the sum lent is one hundred pesos or more, but not exceeding five hundred pesos; and fourteen per centum per annum when it is more than the amount last mentioned; or the maximum rate or rates prescribed by the Monetary Board and in force at the time the loan or forbearance is granted. A pawnbroker or pawnbroker's agent shall be considered such, for the benefits of this Act, only if he be duly licensed and has an establishment open to the public. It shall be unlawful for a pawnbroker or pawnbroker's agent to divide the pawn offered by a person into two or more fractions in order to collect greater interest

Fraternal Order of Utopia

than the permitted by this section. It shall also be unlawful for a pawnbroker or pawnbroker's agent to require the pawner to pay an additional charge as insurance premium for the safekeeping and conservation of the article pawned. of the maximum rate prescribed by the Monetary Board, or, in default thereof, whenever the debt is judicially claimed, in which last case it shall draw six per centum per annum interest or such rate as may be prescribed by the Monetary Board. No person or corporation shall require interest to be paid in advance for a period of more than one year: Provided, however, That whenever interest is paid in advance, the effective rate of interest charged by the creditor shall not exceed the equivalent of the maximum rate prescribed by the Monetary Board.

Interest that can be charged by a pawnshop 1. 2 per month when the sum lent is not more than 2000 2. 18% per year when the sum lent is more than 2,000 In addition to interest charges, pawnshops may impose a maximum service charge of P5.00, but in no case to exceed 1% of the principal loan. Dividing pawn in several fractions is now allowed The purpose is to prevent the collection of interest in excess of the rate permitted by Sec 4 of UL
Sec. 4-a. The Monetary Board may eliminate, exempt from, or suspend the effectivity of, interest rate ceilings on certain types of loans or renewals thereof or forbearances of money, goods, or credit, whenever warranted by prevailing economic and social conditions. Sec. 4-b. In the exercise of its authority to fix the maximum rate or rates of interest under this Act, the Monetary Board shall be guided by the following: 1. The existing economic conditions in the country and the general requirements of the national economy; 2. The supply of and demand for credit; 3. The rate of increase in the price levels; and 4. Such other relevant criteria as the Monetary Board may adopt. Sec. 5. In computing the interest on any obligation, promissory note or other instrument or contract, compound interest shall not be reckoned, except by agreement: Provided, That whenever compound interest is agreed upon, the effective rate of interest charged by the creditor shall not exceed the equivalent

Compound interest is allowed in 2 cases: 1. when there is express written stipulation to that effect or, in default thereof 2. upon judicial demand and this is so even if the contract be silent upon this point. The debtor is not liable to pay compound interest even after judicial demand where there is no stipulation for the payment of interest The compounding may be made annually, semi-annually, or monthly depending on the agreement Demandability of compound interest 1. Agreement to charge interest in interest 2. Judicial demand to pay debt with interest stipulated in contract Right of creditor to charge advance 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 may be. The contract is usurious because by deducting or paying in advance the interest at the time of the loan, the principal sum is thereby reduced with the result that the lender is compensated for the use of the amount which he has not loaned and so the borrower pays a rate greater than that allowed by law on the sum that he actually receives. 2. more than one year essentially usurious. However, the interest may be taken in advance for more than one year as long as the effective rate of interest charged by the credit shall not exceed the equivalent of the maximum rate prescribed by the MB. 4

Fraternal Order of Utopia Where interest added to principal but not paid Usurious interest not paid but simply added to the capital cannot be regarded as taken or received by the lender. 1. the right to recovery is given only to a borrower who shall have paid or delivered a higher rate on interest than is allowed 2. the right to recover attorneys fees cannot be exercised unless usurious interest has actually been taken or received.
Sec. 7. All covenants and stipulations contained in conveyances, mortgages, bonds, bills, notes, and other contracts or evidences of debts, and all deposits of goods or other things, whereupon or whereby there shall be stipulated, charged, demanded, reserved, secured, taken, or received, directly or indirectly, a higher rate or greater sum or value for the loan or renewal or forbearance of money, goods, or credits than is hereinbefore allowed, shall be void: Provided, however, That no merely clerical error in the computation of interest, made without intent to evade any of the provisions of this Act, shall render a contract void: Provided, further, That parties to a loan agreement, the proceeds of which may be availed of partially or fully at some future time, may stipulate that the rate of interest agreed upon at the time the loan agreement is entered into, which rate shall not exceed the maximum allowed by law, shall prevail notwithstanding subsequent changes in the maximum rates that may be made by the Monetary Board: And Provided, finally, That nothing herein contained shall be construed to prevent the purchase by an innocent purchaser of a negotiable mercantile paper, usurious or otherwise, for valuable consideration before maturity, when there has been no intention on the part of said purchaser to evade the provisions of this Act and said purchase was not a part of the original usurious transaction. In any case, however, the maker of said note shall have the right to recover from said original holder the whole interest paid by him thereon and, in case of litigation, also the costs and such attorney's fees as may be allowed by the court.

Test of usury if interest if charged in advance for more than one year: Whether the amount taken or deducted as interest exceeds the lawful maximum rate upon the money actually received and retained by the borrower, being the difference between the face amount of the amount and the amount so deducted.
Sec. 6. Any person or corporation who, for any such loan or renewal thereof or forbearance, shall have paid or delivered a higher rate or greater sum or value than is hereinbefore allowed to be taken or received, may recover the whole interest, commissions, premiums penalties and surcharges paid or delivered with costs and attorneys' fees in such sum as may be allowed by the court in an action against the person or corporation who took or received them if such action is brought within two years after such payment or delivery: Provided, however, That the creditor shall not be obliged to return the interest, commissions and premiums for a period of not more than one year collected by him in advance when the debtor shall have paid the obligation before it is due, provided such interest, and commissions and premiums do not exceed the rates fixed in this Act.

Borrowers right to recover usurious interest paid A borrower who has paid or delivered usurious interest may recover the entire interest he paid with the costs and attorneys 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. Pari delicto rule not applicable in usury charges In allowing the recovery of usurious interest paid, the law does not consider the debtor in pari delicto with the creditor on the theory that the payment has not been made voluntarily. The lender in usury is regarded as the criminal and the borrower as the injured party. Ignorance of the Usury Law is no defense even where the lender acted in honestly. To apply pari delicto rule in usurious contracts would run counter to the avowed public policy to discourage usury. The law fixes the period of 2 years after payment or delivery within which civil actions to recover usurious interest paid must be brought. 5

Usurious load void only with respect to interest The loan is to be considered without stipulation as to interest. Usurious negotiable instruments, whenever acquired in good faith by a third person so that the usurious contract which is void is not absolutely void, but perfectly valid under certain circumstances. Effect of clerical error in computation of interest

Fraternal Order of Utopia Clerical error in computation of interest, made without intent to evade any provisions of the UL shall not render a contract void. Mistakes in calculation made in good faith, resulting in the lenders unintentionally charging or receiving interest in excess of what is allowed by law, negate the existence of the unlawful intent necessary to constitute usury.

It therefore follows that the right to recover interest of creditor in a usurious loan is forfeited.
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credit may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased by law or by the Monetary board; Provided, That such stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board; Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate or interest.

Userers right to recover principal loaned A usurious loan is void but this does not mean that the debtor may keep the principal receives by him as loan. The creditor has no right of action for the recovery of the stipulated interest, although he may seek for the recovery of the principal loaned by judicial action. The law does not provide for the forfeiture of the capital in favor of the debtor in usurious contracts. However, it has been held by CA that a usurious loan is wholly null and void not only as to the loan but also as to the usurious interest because it is inconsistent with Arts. 1352 and 1409(1) of the Civil Code (contrary to law or public policy, both debtor and creditor have no action against each other, respectively) (Sebastian v. Bausista, Torres v. Joco) Nevertheless, the principal may still be recovered in view of the following: 1. A usurious loan is not a complete nullity but only with respect to the agreed interest. The nullity of extinguishment of the accessory obligation does not carry with it that of the principal obligation. 2. In a loan contract, the cause is, as to the borrower, the acquisition of the thing and as to the lender, the right to demand its return or its equivalent and not exactly the stipulated interest. If payment of interest may be considered as a motive of the lender, which is different from the cause thereof. 3. The prestation to pay the interest is separable from that to pay the principal debt 4. To deny the lender the right to recover the principal would be to unjustly enrich the borrower at the lenders expense. 6

Escalation clause in a loan agreement The unilateral determination and imposition of increased interest by the lender will be violative of the principle of mutuality of contracts under Art. 1308 of Civil Code. 1. Escalation clause must not be solely potestative Escalation clauses are valid stipulations in commercial contracts, however, the enforcement of such stipulations are subject to certain conditions. a. Escalation clauses are valid so long as they are not solely potestative but based on reasonable and valid grounds. b. to give the lender unbridled right to unilaterally upwardly adjust the interest on a loan, would completely take away from the borrower the right to assent to an important modification on their agreement and would negate the element of mutuality of contracts 2. De-escalation clause also stipulated An escalation clause can only be valid if it also includes a de-escalation clause or a stipulation that the rate of interest agreed upon shall be reduced in the event that the maximum rate of interest is reduced by law or by the Monetary Board. The adjustment shall take effect on or after the effectivity of the increase of decrease in the maximum rate of interest.

Fraternal Order of Utopia 3. Increase or reduction of interest effected by law or the Monetary board A contract which embodied an escalation clause authorizing automatic increase in interest rate in the event a law increasing the rates of interest that maybe charged is passed, does not include a Central Bank Circular which, although having the force and effect of law, is not strictly a statue or law. Interest to be based in the prevailing market rate Where the clause authorizes the creditor to correspondingly increase the rate of interest in the event of changes in prevailing market rates, it cannot be said to be dependent solely on the will of the creditor as it is also dependent on the prevailing market rates. The fluctuation in the market rate is beyond the control on the creditor.
Sec. 8. All loans under which payment is to be made in agricultural products or seed or in any other kind of commodities shall also be null and void unless they provide that such products or seed or other commodities shall 6e appraised at the time when the obligation falls due at the current local market price: Provided, That unless otherwise stated in a document written in a language or dialect intelligible to the debtor and subscribed in the presence of not less than two witnesses, any contract advancing money to be repaid later in agricultural products or seed or any other kind of commodities shall be understood to be a loan, and any person or corporation having paid otherwise shall be entitled in case action is brought within two years after such payment or delivery to recover all the products or seed delivered as interest, or the value thereof, together with the costs and attorney's fees in such sum as may be allowed by the court. Nothing contained in this section shall be construed to prevent the lender from taking interest for the money lent, provided such interest be not in excess of the rates herein fixed.

1. When usurious- If the value of the medium when so ascertained is more than the lawful rate upon the debt upon which the interest is paid, it amounts to the collection of usury. e.g. A contract of loan or forbearance which is made payable in specified commodity at a lower price or value than its current local market price is usurious if the difference between the agreed price and the actual price exceed lawful interest upon the principal sum, except where the debtor is given the option of discharging his obligation by paying the sum lawfully due from him within specified time. 2. When not usurious the transaction is not usurious if the money equivalent of the goods delivered in payment does not exceed lawful interest on the principal sum, even where a loan of contract specifies a usurious rate of interest, provided that the interest is made payable in a specified quantity of goods.
Sec. 9. The person or corporation sued shall file its answer in writing under oath to any complaint brought or filed against said person or corporation before a competent court to recover the money or other personal or real property, seeds or agricultural products, charged or received in violation of the provisions of this Act. The lack of taking an oath to an answer to a complaint will mean the admission of the facts contained in the latter. Sec. 9-a. The Monetary Board shall promulgate such rules and regulations as may be necessary to implement effectively the provisions of this Act.

Determination of interest where loan of money payable in kind Where interest for a loan or forbearance is paid in a medium other than money, the means of ascertaining whether the payment exceeds the rate allowed by law is to whether the payment exceeds the rate allowed by law is to reduce the medium of payment to its equivalent in pesos at the time the obligation falls due at the current local market price 7

Effect of failure of defendant to make denial of usury under oath When an action for recovery of usurious interest in instituted, Sec 9 requires the person against whom the action is filed, to file his answer in writing under oath. If allegations of usury are not denied specifically under oath, they are deemed admitted. But the only thing admitted is the allegation that the interest charges I usurious, not the contract entered into is a loan which is something that must be proved independently of the admission.

Fraternal Order of Utopia sufficiently establish usury so as to relieve the borrower of the burden of proof. 3. Where there is no allegation or evidence to exact usurious interest, the contract of loan cannot be considered as a usurious contract. Note: Usury law is now legally non-existent. Interest can be charged as lender and borrower may agree upon.
Sec. 10. Without prejudice to the proper civil action violation of this Act and the implementing rules and regulations promulgated by the Monetary Board shall be subject to criminal prosecution and the guilty person shall, upon conviction, be sentenced to a fine of not less than fifty pesos nor more than five hundred pesos, or to imprisonment for not less than thirty days nor more than one year, or both, in the discretion of the court, and to return the entire sum received as interest from the party aggrieved, and in the case of non-payment, to suffer subsidiary imprisonment at the rate of one day for every two pesos: Provided, That in case of corporations, associations, societies, or companies the manager, administrator or gerent or the person who has charge of the management or administration of the business shall be criminally responsible for any violation of this Act.

Sec 9 is applicable only if the action is brought to recover the money [] charged or received in violation of the provisions of the UL. If the person sued shall not file its answer under oath denying the allegation of usury by the plaintiff (debtor), the defendant (creditor) shall be deemed to have admitted usury. The provision does not apply to a case where it is the debtor, not the creditor in an action by the latter for collection, who is alleging usury,

Rule subject to waiver The rule is procedural one which is subject to waiver. The failure of the creditor to make a denial of usury under oath is not deemed an admission where the debtor has been declared in default for failure to appear at the pre-trial. In such case, the defendant-debtor is deemed to have waived his right to consider the lack of oath as an admission and to object to the reception of plaintiff-creditors evidence establishing his cause of action and negating the charge of usury Presumptions and burden of proof 1. Generally, usury will not be presumed and the party who alleges or asserts that at transaction usurious has the burden of proving such assertion. If neither party intends it and they both act bona fide, the law will not infer a corrupt agreement. However, a usurious intent will be presumed where the instrument or transaction is usurious on its face, or where there was an intentional doing of what is forbidden by the Act intentional charging, of more that the legal interest rate; and the payment or receipt of usurious interest raises a presumption that it was made in pursuance of a prior usurious agreement. 2. Evidence introduced may be such as to cast on the lender the burden of introducing explanatory evidence; and lenders own evidence may 8

Prescription of criminal offense The crime of usury prescribes 4 years from its commission. The prescriptive period is to be counted from the date of the last payment of usurious interest. The rule is that when usurious interest has been paid but the action to recover has already prescribed, such interest cannot be credited against and deducted from the principal. In a series of crimes, the period of prescription runs from the occurrence of each offense. It is also held that in a series of usurious transactions, it cannot be said that as the transactions are linked together, the period of prescription must begin from the last transaction.

Fraternal Order of Utopia Sec. 11. All Acts and parts of Acts inconsistent with the provisions of this Act are hereby repealed. Sec. 12. This Act shall take effect on the first day of May, nineteen hundred and sixteen. ENACTED, February 24, 1916.