Regulation of Non-Stock Savings and Loan Associations

Policy and purpose

The State policy is to encourage industry, frugality, and the accumulation of savings, and judicious utilization of credit among members of non-stock savings and loan associations. (Section 2)
The State policy is to regulate and supervise non-stock savings and loan associations to place operations on a sound, stable, and efficient basis, enabling fair provision of additional savings and credit facilities, and to curtail or prevent acts or practices prejudicial to members’ interests. (Section 2)
The State policy is to lay down minimum requirements and standards for organization and operation. (Section 2)
The State policy is to maximize protection of members against misfeasance and malfeasance of trustees and officers. (Section 2)

Definitions and key terms

A non-stock savings and loan association is a non-stock, non-profit corporation that accumulates members’ savings and uses those accumulations for loans to members, serving household needs through long-term financing for home building and development and personal finance. (Section 3)
“Association” refers only to non-stock savings and loan associations organized under this Act and the Corporation Code of the Philippines. (Section 3)
The Monetary Board means the Monetary Board of the Bangko Sentral ng Pilipinas. (Section 3)
Bangko Sentral means the Bangko Sentral ng Pilipinas. (Section 3)

Who may form and who may join

An association may be formed by at least five (5) but not more than fifteen (15) members of a well-defined group. (Section 4)
Before transacting any business, the association must secure a license from the Monetary Board and register with the Securities and Exchange Commission (SEC). (Section 4)
The association must confine membership to a well-defined group and must not transact business with the general public. (Section 4)
A “well-defined group” is defined by the Monetary Board and includes, among others:
- employees, officers, and directors of one company, including member-retirees;
- government employees belonging to the same department/branch/office, including member-retirees; and
- immediate members of the families (up to second degree of consanguinity or affinity) of persons covered by the first two categories. (Section 4)
Associations whose articles and bylaws were approved and registered prior to the effectivity of the Act may continue allowing broader membership coverage unless the Monetary Board requires compliance. (Section 4)
The Monetary Board may require the listed associations to amend bylaws to comply with the concept of a “well-defined group.” (Section 4)
An association is prohibited from doing business as an association or using the term “Savings and Loan Association” or any other title tending to give the public the impression it is engaged in association operations unless authorized under this Act. (Section 4)

Licensing, incorporation, registration requirements

The application for a license must be signed by a majority of the incorporators and verified by one of the trustees. (Section 4)
The license application must include:
- proposed articles of incorporation and bylaws with names and addresses of incorporators, trustees and officers, and a statement of character, experience, and general fitness to engage in the business;
- an itemized statement of estimated receipts and expenditures for the first year;
- a filing fee in an amount determined by the Monetary Board; and
- such other information as the Monetary Board may require. (Section 4)
The SEC shall not register the articles of incorporation and bylaws of a proposed association unless the application is accompanied by a certificate of the Monetary Board approving the same. (Section 4)
The Monetary Board may deny an application if it finds the association is being organized for a purpose other than a legitimate non-stock savings and loan business, or if the Association’s financial program is unsound, or if proposed members are adequately served by one or more existing associations. (Section 4)
The total entrance fees shall not exceed one percent (1%) of the amount contributed or otherwise paid by the particular member; for new members, the entrance fee must be based on contribution computed in accordance with the revaluation of the association’s assets. (Section 4)

Core operations, lending, and investment limits

An association must accept deposits from and grant loans only to its members, subject to Monetary Board rules ensuring sound, stable, and efficient operation. (Section 7)
Deposits shall not be sourced or deducted from loans granted to a member without the member’s written consent. (Section 7)
Loans may not exceed:
- members’ deposits and contributions, plus twelve (12) months of regular salary the association may allow; or
- seventy percent (70%) of the fair market value of property acceptable as security on first mortgage. (Section 7)
The general rule is that no loan may have a maturity date of more than five (5) years. (Section 7)
Loans may be granted with maturities not exceeding twenty-five (25) years when secured by unencumbered real estate for home building and home development. (Section 7)
The association may grant medium and long-term loans to finance agricultural projects, subject to Monetary Board regulations. (Section 7)
The treasurer, cashier, or paymaster of the office employing a member must make deductions from salary, wage, income, or retirement pension under the loan terms and other authorized deductions, notwithstanding any existing law, rule, and regulation to the contrary, and must remit deductions to the concerned association; the office may collect a reasonable service fee authorized by Monetary Board rules. (Section 7)
For loan transactions, each loan must be supported by a written note or other obligation expressing an interest rate, executed by the borrower. (Section 16)

Lending authority, officer prohibitions, and criminal penalties

An association must not commit itself to make loans exceeding the sum of: (a) cash available for loan purposes; (b) cash readily realizable upon sale or redemption of permissible investments; and (c) credit available for loan purposes from government or private financing institutions. (Section 15)
An association must not directly or indirectly make loans to any trustee or officer of the association for the individual’s own account or as agent/partner of another without written approval of the majority of the trustees, excluding the trustee concerned. (Section 15)
Loans to trustees/officers at any one time may not exceed twenty percent (20%) of the association’s total capital contributions. (Section 15)
For trustee/officer credits, the written approval of the majority of trustees excluding the concerned trustee must be entered in the association’s records, and a copy of the entry must be transmitted forthwith to the Bangko Sentral. (Section 15)
Transactions between trustees/trustee-officers and the association must not be on terms more favorable than those for other members. (Section 15)
Any office of a trustee or trustee-officer who violates the subsection becomes immediately vacant. (Section 15)
A trustee or officer who violates the subsection is punishable by imprisonment of not less than one (1) year nor more than ten (10) years, and a fine of not less than PHP 5,000 nor more than PHP 50,000. (Section 15)
No association may make or purchase any loan or investment not authorized or permitted under this Act; any trustee, officer, or employee who knowingly makes or purchases or knowingly consents is personally liable to the association for the full amount of the unauthorized loan or investment. (Section 17)

Acceptable fees, borrowing, deposits, and other powers

An association may charge reasonable interest and collect necessary fees and charges incidental to granting loans. (Section 7)
An association may invest its funds in sound non-speculative enterprises and in bonds, securities, and other obligations issued by the Government of the Philippines or any political subdivisions, instrumentalities, or corporations, including government-owned or -controlled corporations, subject to Monetary Board rules and regulations. (Section 7)
An association may allow members to participate in the association’s profits. (Section 7)
An association may borrow money or incur obligations not exceeding twenty percent (20%) of its total assets; the Monetary Board may raise the ceiling in meritorious cases to not exceeding thirty percent (30%) of total assets. (Section 7)
An association organized by employees of an entity or corporation may borrow from that entity or corporation, but the arrangement does not allow borrowing from the association by the entity/corporation. (Section 7)
The number of the association’s creditors must not exceed nineteen (19) at any one time. (Section 7)
An association may maintain deposits with banks, but the deposit amount must be subject to the loan limit to a single borrower as prescribed herein or by other special laws or regulations. (Section 7)
The association must be provided adequate office space by the employer-entity or corporation. (Section 7)
An association may engage in a death benefit program meant exclusively for the mutual benefit of its members. (Section 7)

Restrictions on operations and advertising

An association must not have or carry upon its books for any person any demand, commercial, or checking account, or any credit withdrawable upon the presentation of any negotiable check or draft. (Section 8)
An association must not advertise or represent itself to the public as a bank. (Section 8)
An association must not issue, publish, or permit publication of advertisements that it is doing or permitted to do business prohibited for an association by law. (Section 8)

Service units, agents, and sales

An association must open, maintain, and operate service units necessary to deliver services to its members, subject to Monetary Board approval. (Section 9)
No person may act as an agent or sales representative of an association or operate an agency without obtaining a license from the Monetary Board. (Section 10)
A collector of an association does not require a license, but no person may hold himself out or act as collector unless authorized in writing by the association. (Section 10)

Merger, trustees, bonds, and compensation controls

Associations of the same company or department or office may merge or consolidate to achieve simplicity, economy, and efficiency upon Monetary Board approval. (Section 11)
Only members are eligible as trustees of an association. (Section 12)
During a Monetary Board-approved merger or consolidation, the Corporation Code limit on maximum number of trustees is not applied for a maximum period of three (3) years, allowing the new board to include up to the total number of trustees in the merging or consolidating associations’ articles of incorporation. (Section 12)
Officers and employees with access to money or negotiable securities must furnish a good and sufficient bond to the employing association before entering duties; the bond form and amount are prescribed by the Monetary Board and must provide indemnity for loss due to their dishonesty. (Section 13)
Trustees, officers, and employees must not receive, and the association must not pay, commissions, emoluments, gratuities, or rewards based on the volume or number of loans made, or based on interest or fees collected thereon. (Section 14)
Salaries of trustees, officers, and employees are allowed. (Section 14)
Commissions to agents are allowed whether or not based on volume/number of loans or interest/fees collected. (Section 14)
Bonuses to trustees, officers, or employees are allowed if based on performance rather than volume/number of loans or interest/fees collected. (Section 14)
Any increase in compensation of trustees and trustee-officers in any form in excess of ten percent (10%) per annum requires Bangko Sentral approval. (Section 14)

Investment, reserves, and withdrawals

Investments in bonds and securities must not exceed ten percent (10%) of total assets at any one time without prior written Monetary Board approval. (Section 18)
Investments in real property must not exceed five percent (5%) of total assets at any one time. (Section 18)
Investments in furniture, fixture, furnishings and equipment and leasehold improvements for offices must not exceed ten percent (10%) of the association’s total capital contribution at any one time. (Section 18)
Every association must create a withdrawable share reserve equal to two percent (2%) of total capital contributions of members, which the Monetary Board may increase to a maximum of three percent (3%) as warranted. (Section 19)
The association must not distribute any portion of net income if the withdrawable share reserve is below the minimum requirement, or if the distribution would reduce the reserve below the minimum requirement. (Section 19)
For withdrawing members, upon effectivity of the Act, an association must impute revalued surplus added to withdrawn capital, subject to Monetary Board rules allowing a reasonable period between withdrawal of capital and payment of the member’s share from the revalued surplus. (Section 20)

Confidentiality of deposits

All deposits of whatever nature with an association in the Philippines are absolutely confidential and may not be examined, inquired into, or looked into by any person or government official/bureau/office except:
- upon written permission of the depositor; or
- in cases of impeachment; or
- upon order of a competent court in cases of bribery or dereliction of duty of public officials; or
- where the deposited/invested money is the subject matter of litigation. (Section 6)
Disclosure by any official or employee of information about deposits is unlawful except for the permitted cases. (Section 6)
Violation by an official or employee is punished under Republic Act No. 1405, as amended. (Section 6)

Tax exemption and annual reporting

An association is exempt from payment of tax on the income it receives, including interest on its deposits with any bank. (Section 5)
Income derived from its properties (real or personal) or any profit activity is subject to corresponding internal revenue taxes under the National Internal Revenue Code. (Section 5)
Interest earnings on deposits of members with associations and members’ shares of the association’s net income are exempt from income tax. (Section 5)
Every association must, within one hundred twenty (120) calendar days after the close of its fiscal year, furnish the Monetary Board and post a copy of its financial statement showing the amount and character of assets and liabilities at the end of the preceding fiscal year in the form and detail required by the Monetary Board, posting via bulletin board or other conspicuous place. (Section 21)
The Monetary Board may require additional disclosure of other information it deems necessary for the protection of members. (Section 21)

Monetary Board regulatory powers and enforcement

The Monetary Board’s power to regulate associations continues and includes ensuring that capital, financing, direction and administration, and the integrity, responsibility, and ability of organizers, administrators, trustees, and officers reasonably assure the safety of members’ interests. (Section 22)
The Monetary Board may regulate association operations and activities by:
1. limiting maximum credit to individual borrowers;
2. determining loan repayment periods and loan procedures;
3. requiring a uniform accounting system and manner of keeping accounts and records;
4. conducting periodic surveys, audits, test checks of loans and lending procedures, and other transactions; and
5. conducting training courses for association personnel when necessary. (Section 22)
The Monetary Board may require accountable officers and employees to post bonds for faithful performance in reasonable sums with sureties it requires. (Section 22)
The Monetary Board may fix, by rules or by orders in specific cases after notice and hearing, limits of loanable funds, amounts for investment, reserves for withdrawals and other contingencies. (Section 22)
The Monetary Board may issue rules and regulations for proper implementation, effective administration, and advisory assistance to interested parties to carry out the Act’s intents and purposes. (Section 22)
The Monetary Board may conduct investigations, take remedial measures, and exercise powers under Republic Act No. 7653 as applicable for enforcement. (Section 22)
The Bangko Sentral must enforce laws, orders, instructions, rules, and regulations applicable to associations. (Section 22)
After due notice and hearing, the Monetary Board may revoke or suspend an association’s license for a period it determines necessary, particularly when solvency is imperiled by losses or irregularities, and/or when an association willfully violates this Act or rules/regulations issued under it. (Section 22)
The director and examiners of the Bangko Sentral department charged with regulating associations are authorized to administer oaths, compel presentation of books, documents, papers, or records needed to determine the true condition of an association or a loan, and to compel truthful testimony from trustees, officers, employees, or voluntary witnesses. (Section 22)

Penalties for violations and unlawful acts

Section 23 applies to various violations and cross-references Republic Act No. 7653:
- Section 34 of Republic Act No. 7653 applies to an association agent, manager, or officer-in-charge who willfully refuses any lawful examination. (Section 23)
- False or misleading material statements to the Monetary Board or its examiners are punished under Section 35 of Republic Act No. 7653. (Section 23)
- Willful violation of this Act or any order/instruction/rule/regulation by associations, persons, or entities is punished under Section 36 of Republic Act No. 7653. (Section 23)
An association officer, employee, or agent who accepts gifts, fees, commissions, or remuneration connected with loan approval, or who overvalues or aids in overvaluing security to influence loan action, is punishable by a fine of not more than PHP 10,000 or three times the loan amount involved, whichever is higher, or imprisonment of not more than one (1) year, at the court’s discretion. (Section 23)
A loan applicant or borrower who fraudulently overvalues security; furnishes false or willfully misrepresents material facts to obtain, renew, increase, or extend a loan; attempts to defraud the association in a court action to recover a loan; or offers association personnel any gift/fee/commission/compensation to influence loan approval is punishable by a fine of not more than PHP 5,000 or three times the loan amount involved, whichever is higher, or imprisonment of not more than one (1) year, at the court’s discretion. (Section 23)
An examiner, officer, or employee of the Bangko Sentral assigned to examine, assist, or render technical service to an association who overvalues or aids in overvaluing security to influence loan action, or who connives or aids in the commission of the same, is punishable by a fine of not more than PHP 10,000 or three times the loan amount involved, whichever is higher, or imprisonment of not more than one (1) year, at the court’s discretion. (Section 23)

Annual fees and implementation authority

An association organized under this Act may be required, under Monetary Board regulations and consistent with Section 28 of Republic Act No. 7653, to contribute to the Bangko Sentral an annual fee determined by the Monetary Board. (Section 24)
The Bangko Sentral is authorized to require the services and facilities of any government department or instrumentality or any officer or employee of such department or instrumentality to carry out the objectives of the Act. (Section 25)
The Monetary Board must submit to Congress a report at the end of each calendar year of all rules and regulations it promulgates under the Act, with explanations of its reasons. (Section 26)

Industry associations and applicability of other laws

Membership in an existing association of associations duly accredited and recognized by the Bangko Sentral is encouraged. (Section 27)
Republic Act No. 7653 and Republic Act No. 337, as amended, apply to associations organized under this Act insofar as applicable and not in conflict with the Act. (Section 28)

Repeals, separability, and conflict rules

Separability: If any provision or its application is held invalid, the rest of the Act remains effective. (Section 29)
The Act repeals Republic Act No. 3779, as amended. (Section 30)
Laws or parts of laws inconsistent with this Act are repealed. (Section 30)
For matters affecting the price stability of the peso, Republic Act No. 7653 prevails. (Section 30)