Policy and purpose of regulation
- The State regulates the establishment of lending companies and places their operations on a sound, efficient and stable condition.
- Regulation is aimed to derive the optimum advantages from lending companies as an additional source of credit.
- The State acts to prevent and mitigate, as far as practicable, practices prejudicial to public interest.
- The Act lays down the minimum requirements and standards under which lending companies may be established and do business.
Definitions and regulated institutions
- A Lending Company is a corporation engaged in granting loans from its own capital funds or from funds sourced from not more than nineteen (19) persons, and it is synonymous with lending investors.
- A Lending Company does not include banking institutions, investment houses, savings and loan associations, financing companies, pawnshops, insurance companies, cooperatives, and other credit institutions already regulated by law.
- A Debtor is a borrower or a person granted a loan by the lending company.
- A Quasi-Bank is a non-bank financial institution authorized by the BSP to engage in quasi-baking functions and to borrow funds from more than nineteen (19) lenders through specified mechanisms for relending or purchasing receivables and other obligations, referencing Section 95 of Republic Act No. 7653.
- A Subsidiary is a corporation where more than fifty percent (50%) of the voting stock is owned by a bank or quasi-bank.
- An Affiliate is a corporation whose voting stock is owned by a bank or quasi-bank to the extent of fifty percent (50%) or less, and is related or linked through common stockholders or other factors determined by the Monetary Board of the BSP.
- SEC refers to the Securities and Exchange Commission.
- BSP refers to the Bangko Sentral ng Pilipinas.
Form, authorization, and permitted entity
- A lending company must be established only as a corporation.
- Existing lending investors organized as single proprietorships or partnerships are disallowed from engaging in the business of granting loans to the public one year after the date of effectivity of the Act.
- No lending company may conduct business unless it is granted an authority to operate by the SEC.
Capital and ownership limits
- For lending companies established after the Act’s effectivity, the minimum paid-in capital is One million pesos (P1,000,000.00).
- Lending companies already in operation at the Act’s effectivity must comply with the minimum capitalization within the time prescribed by the SEC, but in no case less than three years from the date of effectivity.
- The SEC may prescribe a higher minimum capitalization if warranted by circumstances.
- Upon effectivity, at least a majority of the voting capital stock must be owned by citizens of the Philippines.
- For lending companies existing prior to effectivity, if foreign-owned voting stock is in excess of forty-nine percent (49%), it shall not be increased, but may be reduced.
- Once reduced, the foreign-owned voting stock shall not be increased thereafter beyond forty-nine percent (49%) of the voting stock of the lending company.
- The percentage of foreign-owned voting stock is determined by the citizenship of individual stockholders.
- For corporations owning shares in a lending company, the citizenship of the individual owners of voting stock in such corporations governs the computation.
- No foreign national may own stock unless the country of which the foreign national is a national accords reciprocal rights to Filipinos.
Loan amounts, charges, and interest regulation
- A lending company may grant loans in amounts and with reasonable interest rates and charges agreed upon between the lending company and the debtor.
- The loan agreement must comply with Republic Act No. 3765 (Truth in Lending Act) and Republic Act No. 7394 (Consumer Act of the Philippines).
- The Monetary Board, in consultation with the SEC and the industry, may prescribe interest rates warranted by prevailing economic and social conditions.
Records, reporting, and transaction evidence
- Every lending company must maintain books of accounts and records required by the SEC and prescribed by the Bureau of Internal Revenue and other government agencies.
- If a lending company engages in other businesses, it must maintain separate books of accounts for those businesses.
- The Manual of Accounts prescribed by the BSP for lending investors continues to be adopted for uniform recording and reporting until the SEC prescribes a new Manual of Accounts.
- Lending companies must issue appropriate instruments and documents to evidence lending and borrowing transactions.
SEC powers and regulatory supervision
- The SEC is authorized to:
- Create a new division or bureau within its control to regulate and supervise lending company operations and activities.
- Issue rules and regulations to implement the Act.
- Issue rules and regulations on, among others: minimum capitalization, uses of funds received, method of marketing and distribution, maturity of funds received, and restrictions or outright prohibition of purchases or sales of receivables with or without recourse basis.
- Require lending companies to submit reports of condition and other reports necessary to determine compliance.
- Exercise visitorial powers whenever necessary.
- Impose administrative sanctions, including suspension or revocation of the lending company’s authority to operate and fines for violations of the Act and SEC regulations issued under it.
SEC vs. BSP authority for bank-linked lenders
- Lending companies are under the supervision and regulation of the SEC.
- Lending companies that are subsidiaries and affiliates of banks and quasi-banks are subject to BSP supervision and examination under Republic Act No. 7653.
- After the Monetary Board is satisfied there is reasonable ground to believe a lending company is being used as a conduit by a bank, quasi-bank, or their subsidiary/affiliate to circumvent or violate BSP rules, the Monetary Board may order the examination of the lending company’s books and accounts.
Penalties for unlicensed lending and related offenses
- A fine of not less than Ten thousand pesos (P10,000.00) and not more than Fifty thousand pesos (50,000.00) or imprisonment of not less than six months and not more than ten (10) years, or both, is imposed at the discretion of the court upon:
- Any person who engages in the business of a lending company without a validly subsisting authority to operate from the SEC.
- The president, treasurer, and other officers of the corporation, including the managing officer, who knowingly and willingly:
- Engage in the business without a validly subsisting authority to operate from the SEC;
- Hold themselves out to be a lending company through advertisement in any form (including stationery, commercial paper, or other document) or through other representations without authority;
- Use a trade or firm name containing the words “lending company” or “lending investor” or any other designation giving the public the impression that it is engaged in the business of a lending company as defined in the Act without authority; and/or
- Violate provisions of the Act.
- Any officer, employee, or agent who knowingly and willingly:
- Makes any false or misleading statement in any application, report, or document required to be filed under the Act with respect to any material fact; and/or
- Overvalues or aids in overvaluing any security for the purpose of influencing, in any way, the company’s action in any loan, or discounting line.
- Any officer, employee, or examiner of the SEC directly charged with implementing the Act or other government agencies who commits, connives, aids, or assists in the commission of the acts enumerated above.
Supplementary application and compliance
- Republic Act No. 3765 (Truth in Lending Act), Republic Act No. 7394 (Consumer Act of the Philippines), and other existing laws apply in matters not otherwise specifically provided in the Act, insofar as they are not in conflict with the Act.
Repeal, separability, and operative persistence
- All laws, executive orders, letters of instruction, rules and regulations, or provisions thereof inconsistent with the Act are repealed, amended, or modified accordingly.
- If any portion of the Act is held invalid or unconstitutional, the invalidity or unconstitutionality does not affect other provisions, which remain in full force and effect.
Authority to issue implementing rules
- Within three months after approval of the Act, the SEC must promulgate the rules and regulations implementing the Act.