Hidden Loan Charges and the Truth in Lending Act

Section 2 states the policy: "to protect its citizens from a lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost". The idea is that a borrower should know the real cost of a loan, in pesos and as a yearly rate, before signing.

Credit. Section 3(2) defines credit broadly: "any loan, mortgage, deed of trust, advance, or discount", any conditional sales contract, any contract to sell or sale of property or services where part or all of the price is paid later, and any rental-purchase contract.

Creditor. Section 3(4) covers any person "engaged in the business of extending credit", including anyone who, as a regular business practice, makes loans or sells or rents property or services on a time, credit or installment basis and requires a finance charge.

Government lenders. The Act's penalties do not apply to the Philippine Government or its agencies and political subdivisions (Section 6(d)).

Section 4 says the creditor must give "a clear statement in writing", "prior to the consummation of the transaction", setting out, to the extent applicable:

1. the cash price or delivered price of the property or service;
2. the down payment or trade-in, if any;
3. the difference between items 1 and 2;
4. the charges, individually itemized, that are paid in connection with the transaction but are not incident to the extension of credit;
5. the total amount to be financed;
6. the finance charge, expressed in pesos and centavos; and
7. the percentage that the finance charge bears to the total amount financed, expressed as a simple annual rate on the outstanding unpaid balance.

Section 3(3) says the finance charge "includes interest, fees, service charges discounts, and such other charges incident to the extension of credit" as the Monetary Board may prescribe by regulation.

So a fee deducted from the loan because you are borrowing, such as a service charge, is part of the cost of credit that must be disclosed. The Monetary Board's detailed disclosure rules under the Act were not read for this page.

In New Sampaguita Builders Construction, Inc. v. PNB (2004), the Supreme Court held that "excessive interests, penalties and other charges not revealed in disclosure statements issued by banks, even if stipulated in the promissory notes, cannot be given effect under the Truth in Lending Act."

The Court ordered the bank to refund what it had overcollected, with interest. The interest rates the Court used in that case (6% and then 12%) were the rules applied in 2004 and are not presented here as today's legal interest. For interest rates in general, see Is 5% monthly interest legal?.

Yes. Section 6(b) says nothing in the Act "shall affect the validity or enforceability of any contract or transaction". A disclosure violation does not erase the debt. The main protections are that undisclosed charges cannot be given effect, as held in New Sampaguita, and the penalties below.

A final judgment in a criminal case finding that a lender willfully violated the Act is prima facie evidence against that lender in a case brought by another borrower under the Act (Section 6(e)).

No law repealing it was found. The Financial Products and Services Consumer Protection Act (Republic Act No. 11765) repealed Articles 131 to 147 of the Consumer Act on consumer credit (its Section 20); that section does not name RA 3765. Later amendments of the peso amounts were not found in the pages read.

These are made-up examples to show how the rules work. They are not advice for any real case.

Mylene borrows ₱20,000 from a lending company. Before she signs, the company must give her a written statement of the amount financed, the finance charge in pesos and the yearly rate (Section 4). A service charge deducted from the loan is part of the finance charge and must appear there (Section 3(3)).

A bank adds a 3% monthly penalty that appears only in the promissory note, not in the disclosure statement given before the release. Following New Sampaguita, a charge not revealed in the disclosure statement cannot be given effect.

Even though her lender broke the disclosure rule, Mylene still owes the principal (Section 6(b)). The civil penalty under Section 6(a) is small, at most ₱2,000, so the larger protection is not having to pay undisclosed charges.

If a lender's collectors harass you, see Online lending app harassment. For debts in general, see the debt and collection topic.

Talk to a lawyer if you were sued to collect a loan with charges you were never told about, if you want to recover overpayments, if the amounts involved are large, or if you plan to file a criminal complaint for a willful violation. A lawyer can check your loan documents against the disclosure statement.

If you cannot afford a lawyer, see Free legal help in the Philippines.