Amendments to the Usury Law on Interest Rates

Purpose and policy

Presidential Decree No. 116 recognizes that interest rates, together with other monetary and credit instruments, are vital to mobilizing domestic savings and attracting capital into preferred investment areas.
The decree aims to amend the Usury Law to allow a more flexible interest rate ceiling responsive to changing economic conditions.
The decree links interest rate regulation to ensuring adequate capital resources as a decisive factor in accelerating the growth of the national economy.

Coverage and regulated conduct

The law governs loans and forbearance of money, goods, or credits, including interest rates allowed in the absence of express contract, and interest rates allowed in judgments.
The law applies to any person or corporation that takes, demands, charges, reserves, receives, or agrees to charge interest or other sums/value for loans or forbearance.
The law specifically regulates pawnbrokers and pawnbrokers’ agents, including limits on charges and conditions for being considered a pawnbroker for the Act’s benefits.
The law covers interest computations for obligations, promissory notes, and other instruments or contracts, including rules on compound interest and advance interest.
The law voids usurious or excessive interest stipulations in covered conveyances, mortgages, bonds, bills, notes, and other contracts or evidences of debts, including deposits of goods or other things.

Monetary Board powers and maximum rates

Section 1 sets the basic rule that interest for the loan or forbearance of any money, goods, or credits, and the rate allowed in judgments in the absence of express contract, is six per centum per annum or such rate as may be prescribed by the Monetary Board of the Central Bank of the Philippines.
Section 1-a authorizes the Monetary Board to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods, or credits.
The Monetary Board may change the maximum rate(s) whenever warranted by prevailing economic and social conditions, but changes may not be made oftener than once every twelve months.
Section 1-a allows the Monetary Board to prescribe higher maximum rates for consumer loans or renewals and for loans made by pawnshops, finance companies and other similar credit institutions, while requiring that rates for these institutions need not necessarily be uniform.
Section 4-a requires the Monetary Board, in fixing maximum rates, to be guided by: (1) existing economic conditions and general requirements of the national economy; (2) the supply of and demand for credit; (3) the rate of increase in the price levels; and (4) other relevant criteria adopted by the Monetary Board.

Ceiling limits: secured, unsecured, and pawn loans

Section 2 prohibits any person or corporation from directly or indirectly taking or receiving any higher rate or greater sum/value—including commissions, premiums, fines, and penalties—for loans or renewals or forbearance where the loan/renewal/forbearance is secured in whole or in part by a mortgage upon real estate with a duly registered title or by any document conveying such real estate or an interest therein, beyond twelve per centum per annum or the Monetary Board’s maximum rate in force at the time the loan/renewal/forbearance is granted.
Section 2 provides that the interest rule under Section 2 or the Monetary Board maximum rate may also apply to loans secured by other types of security specified by the Monetary Board.
Section 3 prohibits demanding, taking, receiving, or agreeing to charge a higher rate or greater sum/value for loans or forbearance not secured as in Section 2 beyond fourteen per centum per annum or the Monetary Board maximum rate in force at the time the loan/forbearance is granted.
Section 4 sets specific caps for pawnbrokers and pawnbrokers’ agents:
- 2½% per month when the sum lent is less than PHP 100;
- 2% per month when the sum lent is PHP 100 or more, but not exceeding PHP 500;
- 14% per annum when the sum lent is more than PHP 500.
Section 4 also prohibits pawnbrokers and pawnbrokers’ agents from charging more than the Monetary Board’s maximum rate in force at the time of the loan/forbearance.
Section 4 states a pawnbroker or pawnbroker’s agent is considered such for benefits of the Act only if duly licensed and having an establishment open to the public.
Section 4 forbids pawnbrokers and pawnbrokers’ agents from dividing the pawn into two or more fractions to collect greater interest than permitted.
Section 4 also forbids requiring the pawner to pay an additional charge as an insurance premium for the safekeeping and conservation of the article pawned.

Interest computation and advance rules

Section 5 provides that, when computing interest on any obligation, promissory note, or other instrument or contract, compound interest shall not be reckoned except by agreement.
Section 5 limits compound-interest agreements by requiring that the effective rate charged by the creditor shall not exceed the equivalent of the maximum rate prescribed by the Monetary Board.
When the debt is judicially claimed and there is a default situation described in Section 5, the obligation draws six per centum per annum interest or such rate as the Monetary Board prescribes.
Section 5 prohibits requiring interest to be paid in advance for more than one year.
Section 5 further requires that whenever interest is paid in advance, the effective rate charged shall not exceed the equivalent of the maximum rate prescribed by the Monetary Board.

Void stipulations and key savings

Section 7 declares that covenants and stipulations in covered instruments or contracts that stipulate, charge, demand, reserve, secure, take, or receive a higher rate or greater sum/value for loan/renewal/forbearance than allowed are void.
Section 7 provides that merely clerical errors in computation of interest made without intent to evade the Act’s provisions do not render a contract void.
Section 7 permits a special rule for future drawdown loans: parties may stipulate that the interest rate agreed upon at the time the loan agreement is entered into—not exceeding the maximum allowed by law—shall prevail notwithstanding subsequent changes in the maximum rates made by the Monetary Board.
Section 7 preserves rights involving negotiable mercantile paper: nothing in the section prevents the purchase by an innocent purchaser of negotiable mercantile paper, usurious or otherwise, for valuable consideration before maturity, if the purchaser had no intention to evade the Act and the purchase is not part of the original usurious transaction.
Section 7 grants the maker of the negotiable mercantile paper the right, in any case, to recover from the original holder: the whole interest paid thereon, and in litigation also costs and such attorney’s fees as may be allowed by the court.

Implementation rules and regulations

Section 9-a requires the Monetary Board to promulgate rules and regulations necessary to implement effectively the provisions of the Act as amended.

Criminal liability, penalties, and corporate responsibility

Section 10 provides that violation of the Act and the implementing rules and regulations promulgated by the Monetary Board is subject to criminal prosecution without prejudice to the proper civil action.
Section 10 requires that upon conviction the guilty person be sentenced to a fine of not less than PHP 50 nor more than PHP 500, or imprisonment for not less than 30 days nor more than 1 year, or both, at the discretion of the court.
Section 10 mandates that the convicted offender must also return the entire sum received as interest from the party aggrieved.
Section 10 states that in case of non-payment, the offender must suffer subsidiary imprisonment at the rate of 1 day for every PHP 2.
Section 10 provides corporate liability: in the case of corporations, associations, societies, or companies, the manager, administrator, or gerente, or the person in charge of management or administration, is criminally responsible for the violation.

Repeal and effect

Section 11 repeals all acts and parts of acts inconsistent with the provisions of the Decree.
Section 12 provides that the Decree takes effect immediately.