SEC: Safeguarding Filipinos From Predatory Lenders

Over the years, the country has seen a rising number of lending and financing companies, especially those operating online.

With a few easy steps and minimal requirements, apps readily available on the internet can now provide Filipinos with quick and easy options to finance their urgent needs.

​Alongside this technological innovation, however, came the increasing number of complaints on abusive lenders. Reports of harassment and unfair debt collection practices are widespread among borrowers who, in the end, fall into a grim cycle of acquiring debt to pay for earlier ones.

The Securities and Exchange Commission (SEC), as the national regulatory agency charged with the protection of the investing public and other financial consumers, is working toward striking a balance between supporting the growth of the country’s lending industry, while also promoting the protection of Filipino borrowers.

​Being a responsible borrower

Borrowing money from a lending or financing company carries with it certain rights and responsibilities. Once signed, a loan contract is binding among the parties involved. This means that the borrower is bound to pay the amount lent to them, despite violations made by the lender.

As such, one must carefully consider whether proceeds for the money they intend to borrow is reasonable or not. Distinguishing between wants and needs is a key factor before deciding to engage with a lending or financing company. Making sure that borrowing money for urgent needs, instead of luxurious wants, is the first step in avoiding the debt trap.

Once decided, the borrower must then ensure that the lending or financing company they intend to borrow from is legitimate. Pursuant to Republic Act No. 9474, or the Lending Company Regulation Act of 2007, and Republic Act No. 8556, or the Financing Company Act, a lending or financing company must be registered as a corporation.

Lending and financing companies must also secure a certificate of authority (CA) to act as a lending or financing company, in addition to their corporate registration.

The SEC further requires all lending and financing companies to report the online lending platforms they operate to the Commission, as per SEC Memorandum Circular No. 19, Series of 2019, or the Disclosure Requirements on Advertisements of Financing Companies and Lending Companies and Reporting of Online Lending Platforms.

The Commission regularly updates the list of OLPs found on its website, to ensure that the public can easily check if online lenders are registered or not.

When the borrower has ruled that the lending or financing company is legitimate, they must then check if they have the means to pay for the loan they plan to acquire. This includes budgeting their expenses for the near future with the payment for the loan in mind.

Conducting due diligence goes a long way in avoiding falling into a cycle of debt.

Protecting borrowers

The SEC, in turn, ensures that borrowers’ rights are duly protected.

With the increase of lenders using undignified means to collect debt from borrowers, the Commission issued SEC Memorandum Circular No. 18, Series of 2019, or the Prohibition on Unfair Debt Collection Practices of Financing Companies and Lending Companies.

The memorandum circular prohibits lenders from the use of threat or violence, the use of obscenities, insults, or profane language, and the use of any false representation or deceptive means, among others, in the collection of debt.

To address the proliferation of lending and financing companies charging sky-high interest rates on its lenders, the SEC has proposed to the Bangko Sentral ng Pilipinas (BSP) the imposition of interest rate limits on loans offered by such entities.

The Commission’s proposal was concretized in December 2021, with the central bank’s issuance of BSP Circular No. 1133, Series of 2021 on the Ceiling/s of Interest Rates and Other Fees Charged by Lending Companies, Financing Companies, and their Online Lending Platforms.

The BSP circular prescribes the maximum interest rates and other fees charged by lending and financing companies, and their OLPs.

The central bank fixed the maximum nominal interest rate 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, general-purpose loans that do not exceed the amount of P10,000 and with a loan tenor of up to four months.

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 non-payment.

Meanwhile, lending and financing companies may only charge penalties up to 5 percent per month for late payment or non-payment on outstanding scheduled amounts due.

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, will likewise be imposed.

The Commission subsequently issued SEC Memorandum Circular No. 3, Series of 2022, which implements the BSP Circular. The cap on interest rates and other fees apply to covered loans offered by lending and financing companies starting March 3, 2022.

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 offense, 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; the suspension of their financing and ending activities for 60 days; or the revocation of their CA.

All lending and financing companies must submit an Impact Evaluation Report on or before January 15 of each year starting 2023. Noncompliance will entail 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 CAs, respectively.

In addition to imposing limits on interest rates, the SEC has stepped up efforts to stop unregistered personal loan apps before they reach the public.

Since May 2019, the Commission has been working with tech giant Google to address the proliferation of illegal online lending apps in the country. Thanks to this collaboration, Google has started to submit a Personal Loan App declaration, effective May 11.

The personal loan app declaration should show that the developer is duly registered with and duly licensed by the SEC to operate an OLP or to perform lending-based crowdfunding activities, such as peer-to-peer lending, or to act as a crowdfunding intermediary. Developers shall also confirm that they are engaged in a lawful business activity and are undertaking the same in compliance with the applicable laws.

Personal loan apps operating in the Philippines without proper declaration and license attribution will be removed from the Play Store. In the event where the submitted license, registration or declaration is no longer valid under the applicable laws, the developers are required to promptly remove the app from Google Play Store.