PALMONES, ELOISA C.

Credit Transactions

Usury Law

(Act 2655, as amended by Presidential Decree No. 116)

The Usury Law is Act 2655, as amended by Presidential Decree No. 116, which provides, among others,
that the legal rate of interest for the loan or forbearance of any 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, in the absence of express contract as to such rate of interest, shall be 12% per annum. Any amount of
interest paid or stipulated to be paid in excess of that fixed by law is considered usurious, therefore unlawful.

However, pursuant to Central Bank Circular No. 905, adopted on 22 December 1982, the Supreme Court
declared that the Usury law is now "legally inexistent".It should be clarified that CB Circular No. 905 did not
repeal nor in anyway amend the Usury Law but simply suspended the latter's effectivity. Usury has been legally
non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon.

Usury is defined as:

 Contracting for or receiving something in excess of the amount allowed by law for the forbearance of
money, goods or things in action.

 Any amount of interest paid or stipulated to be paid in excess of that fixed by law.

Background

 Taking of excessive interest for the loan of money has been regarded with abhorrence from the
earliest times – prohibited by the ancient laws of the Chinese and Hindus, the Mosaic Law of the
Jews, by the Koran, by the Athenians and by the Romans and has been frowned upon by
distinguished publicists throughout all the ages.

 The early American colonial usury acts were modeled after the English act, the rate of interest
allowed being usually higher. These early enactments adopted the penalty for usury fixed by the
statue of the mother country. The tendency of subsequent statutes has been steadily to mitigate the
punishment inflicted on the usurer.

 The illegality of usury is now wholly a creature of legislation. The Philippine statute on the subject is
Act No. 2655. It is a drastic law following in many respects the most advanced American Legislation.
Central Bank Circular No. 905 simply suspended the effectivity of the Usury Law, it did not repeal or
in any way suspend the Usury Law. Only a law can repeal another law.

Usury Law

 The Usury Law is Act 2655, as amended by Presidential Decree No. 116, which provides, among
others, that the legal rate of interest for the loan or forbearance of any 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, in the absence of express contract as to such rate of interest, shall be
12% per annum. Any amount of interest paid or stipulated to be paid in excess of that fixed by law is
considered usurious, therefore unlawful.

 Usury law has been enacted for the protection of the borrower from the imposition of unscrupulous
lenders who are ready to take undue advantage of the necessities of others. It forms a part of the
public policy of the state, and is intended to prevent excessive charges for the loan of money.

 It proceeds on the theory that a usurious loan is attributable to such inequality in the relation of the
lender and borrower that the borrower’s necessities deprive him of freedom in contracting and place
him at the mercy of the lender.

 Pursuant to Central Bank Circular No. 905, adopted on 22 December 1982, the Supreme Court
declared that the Usury law is now "legally inexistent". Under the authority.

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.

It should be clarified that CB Circular No. 905 did not repeal nor in anyway amend the Usury Law but simply
suspended the latter's effectivity. Usury has been legally non-existent in our jurisdiction. Interest can now be
charged as lender and borrower may agree upon.

Elements:

1. Loan or forbearance.
2. An understanding between the parties that the loan shall or may be returned.
3. Unlawful intent to take more than the legal rate for the use of money.
4. Taking or agreeing to take for the use of the loan of something in excess of what is allowed by law.

 To determine whether all of these elements is present, the court will disregard the form which the
transaction may take and look only upon its substance.

Interest Rates under the Usury Law:

 With the suspension of the Usury Law and the removal of interest ceilings, the parties are generally
free to stipulate the interest rates to be imposed on monetary obligations. As a rule, the interest rate
agreed by the creditor and the debtor is binding upon them. This rule, however, is not absolute. The
striking down of unconscionable interest is based on Article 1409 of the Civil Code, which considers
certain contracts as inexistent and void from the beginning, including: "Those whose cause, object or
purpose is contrary to law, morals, good customs, public order or public policy".

 In a recent case, the SC again dealt with the validity of interest agreed by the parties, stating that:
 Stipulated interest rates are illegal if they are unconscionable and the Court is allowed to temper
interest rates when necessary. In exercising this vested power to determine what is iniquitous and
unconscionable, the Court must consider the circumstances of each case. What may be iniquitous
and unconscionable in one case, may be just in another.

 In that case, the SC reduced the interest rate from 18% to 12% per annum, noting, among others, that
the amount involved has ballooned to an outrageous amount four times the principal debt. Indeed,
there is no hard and fast rule to determine the reasonableness of interest rates. Stipulated interest rates
of 21%, 23% and 24% per annum had been sustained in certain cases. On the other hand, there are
plenty of cases when the SC equitably reduced the stipulated interest rates; for instance, from 18% to
10% per annum. The SC also voided the stipulated interest of 5.5% per month (or 66% per annum),
for being “excessive, iniquitous, unconscionable and exorbitant, hence, contrary to morals (contra
bonos mores), if not against the law”. The same is true with cases involving 36% per annum, 6% per
month (or 72% per annum), and 10% and 8% per month. In these instances, the SC imposed the legal
interest of 12%.

 “legal interest” doesn’t mean that anything beyond 12% is “illegal”. It simply means that in a loan or
forbearance of money, the interest due should be that stipulated in writing, and in the absence thereof,
the rate shall be 12% per annum.

Interest Rate Ceiling

 The Usury Law had been rendered legally ineffective by Resolution No. 224 dated 3 December 1982
of the Monetary Board of the Central Bank, and later by Central Bank Circular No. 905 which took
effect on 1 January 1983. These circulars removed the ceiling on interest rates for secured and
unsecured loans regardless of maturity. The effect of these circulars is to allow the parties to agree on
any interest that may be charged on a loan. The virtual repeal of the Usury Law is within the range of
judicial notice which courts are bound to take into account. Although interest rates are no longer
subject to a ceiling, the lender still does not have an unbridled license to impose increased interest
rates. The lender and the borrower should agree on the imposed rate, and such imposed rate should
be in writing.

 Here, the stipulations on interest rate repricing are valid because (1) the parties mutually agreed on
said stipulations; (2) repricing takes effect only upon Solidbank’s written notice to Permanent of the
new interest rate; and (3) Permanent has the option to prepay its loan if Permanent and Solidbank do
not agree on the new interest rate. The phrases “irrevocably authorize,” “at any time” and
“adjustment of the interest rate shall be effective from the date indicated in the written notice sent to
us by the bank, or if no date is indicated, from the time the notice was sent,” emphasize that
Permanent should receive a written notice from Solidbank as a condition for the adjustment of the
interest rates. (Solidbank Corporation vs. Permanent Homes, Inc., G.R. No. 171925, July 23, 2010.)