On interest due on housing loans

“Debt certainly isn’t always a bad thing,” said personal finance columnist Jean Chatzky. “A mortgage can help you afford a home. Student loans can be a necessity in getting a good job.”

“Both are investments worth making, and both come with fairly low interest rates.”

Unsurprisingly, housing loans account for a bulk of outstanding consumer loans in the Philippines. In a study conducted by the Bangko Sentral ng Pilipinas in June 2020, the total amount of residential real estate loans (RREL) is the highest with P772 billion out of the P10.6 trillion, which was the total loan portfolio for consumer loans, including, among others, motor vehicle loans, credit card receivables and salary-based general-purpose consumption loans, under the Philippine banking system.

Nevertheless, nonperforming RREL—that is, where the borrower is usually 90 days past due in making any scheduled payments of principal or interest thereon—account for the highest percentage of nonperforming consumer loans (NPL) at P26.77 billion out of the total NPL of P232 billion.

Meanwhile, the nonperforming RREL account for 3.47 percent of the total RREL.

Settling a nonperforming RREL usually means paying the interest due. Take note, however, that under the Civil Code, interest shall be due only when it is expressly stipulated in writing.

Thus, in a string of cases involving the Philippine National Bank (PNB), the Supreme Court declared void the clause in its credit and housing loan agreements, which does not specify the applicable rates of interest.

Instead, this clause merely authorized the PNB to unilaterally determine and impose said rates and notify beforehand its borrowing clients of any increase.

According to the Supreme Court, this clause violates the principle of mutuality of contracts under the Civil Code. Pursuant to this principle, a contract must bind both contracting parties. Its validity or compliance cannot be left to the will of one of them.

This binding effect is premised on the following: that any obligation arising from a contract has the force of law between the parties; and that there must be mutuality between the parties based on their essential equality. Any contract, which appears to be heavily weighed in favor of the parties so as to lead to an unconscionable result, is void.

Meanwhile, as in the PNB cases, the borrower is not prevented from questioning the unilateral increase in the interest made by the lender despite repeatedly paying the imposed interest rates and renewing the loan several times.

In this regard, the Supreme Court declared that the borrower’s silence cannot be construed as an acceptance of the lender’s imposition of these rates.

If the borrower would pay interest when it was not stipulated, the provisions of the Civil Code on solutio indebiti or natural obligations shall apply. In this regard, the legal principle of solutio indebiti requires that if something was received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises. Moreover, the lender who accepts an undue payment in bad faith shall pay legal interest thereon and damages, if applicable.

Meanwhile, where the law on natural obligations applies, the borrower does not enjoy a right of action for reimbursement upon proof that he voluntarily paid the interest. Interest may be paid in money or in kind. If it was payable in kind, its value shall be appraised at the current price of the products or goods at the time and place of payment.

As a general rule, interest due and unpaid shall not earn interest. Nevertheless, the contracting parties may capitalize the interest due and unpaid as an added principal by stipulating that it shall earn new interest.

Moreover, interest due and unpaid shall earn legal interest from the time it is judicially demanded—that is, from the time a claim is being filed in court, even when the disputed contract fails to stipulate the same.

In this case, the legal rate of interest shall be 6 percent a year to be computed from either judicial or extrajudicial demand as defined under Article 1169 of the Civil Code.

In one case, the Supreme Court held that this rate is an affirmation of the contracting parties’ intent—that is, by their contract’s silence on a specific rate, then the prevailing legal rate of interest shall be the cost of borrowing money, and which shall not be susceptible to shifts in rate.