Starting today, lending and financing firms, along with their online platforms, are obliged to keep their loan rates and fees below the ceiling imposed by the Securities and Exchange Commission (SEC) to curb “predatory” lending activities. The corporate watchdog has officially issued SEC Memorandum circular No. 3, Series of 2022 providing the guidelines on the implementation of Bangko Sentral ng Pilipinas (BSP)-sanctioned limits on interest rates and other fees charged by lending companies, financing companies and their online platforms.
This was as the SEC earlier found out that several lending and financing companies had been imposing exorbitant interest rates, fees and charges on their unsecured, short-term, small-value and high-cost consumer credit, causing some clients to fall into debt traps.
“Predatory lending has consequently propagated abusive, unethical and unfair means of collecting debts, as borrowers struggled to pay exorbitant charges on loans,” the SEC said, explaining the rationale for the issuance of the new circular.
The maximum nominal interest rate was now capped at 6 percent per month, or about 0.2 percent per day, and the effective interest rate (EIR) at 15 percent per month, or about 0.5 percent per day for covered loans which are unsecured. These rates cover general-purpose loans below P10,000 and with a loan tenor of up to four months.
True cost of borrowing
The EIR is expressed as the rate that exactly discounts estimated future cash flows throughout the life of the loan to the net amount of loan proceeds. It includes the nominal interest rate along with other applicable fees and charges, such as processing fees, service fees, notarial fees, handling fees and verification fees, among others. It excludes fees and penalties for late payment and nonpayment.
Meanwhile, lending and financing companies may only charge penalties of up to 5 percent per month for late payment or nonpayment on outstanding scheduled amounts due.
Also imposed was a total cost cap of 100 percent of the total amount borrowed, applying to all interest, other fees and charges, and penalties, regardless of time the loan has been outstanding.
Lending companies that fail to comply with the rate limits will be subject to penalties worth P25,000 and P50,000 for the first and second offenses, respectively, while financing companies will be penalized with P50,000 for the first offense and P100,000 for the second offense.
The penalty for the third offense for both lending and financing companies will amount to twice the amount imposed for the second offense up to P1 million, plus the suspension of their financing and lending activities for 60 days.
Regulatory requirements
The SEC may also revoke their certificates of authority to operate as financing or lending companies.
Furthermore, all lending and financing companies must submit an impact evaluation report on or before Jan. 15 of each year starting 2023. Noncompliance will trigger a penalty of P10,000 plus P200 daily for financing companies and P10,000 plus P100 daily for lending companies. The second and third offenses will lead to the suspension and revocation of their certificates of authority, respectively.
The SEC has also required all lending and financing companies, whether or not offering loans covered by the ceiling, to submit a business plan indicating their loan products and services, as well as applicable pricing parameters.
The new business plan must be submitted on or before May 5. Late submission of the business plan will trigger a penalty of P10,000 plus P200 daily, and P10,000 plus P100 daily for lending companies. Nonsubmission may result in the suspension or revocation of their certificates of authority.