Updated Rules on Truth in Lending Act

BSP Circular No. 730, s. 2011 is issued to update and implement the Truth in Lending Act framework through amendments to the MORB.
The revised disclosure format in Appendix 19, MORB remains consistent with Republic Act No. 3765.

The circular enhances loan transaction transparency by tightening how banks compute interest and by requiring clearer disclosure to borrowers.
The circular ensures that loan terms and finance-charge information are presented in a manner consistent with true cost concepts used for disclosure.

Section 1 adds Subsection X305.5 (Method of computing interest) to Section X305, MORB.
Banks may only charge interest based on the outstanding balance of a loan at the beginning of an interest period.
For loans with principal payable in installments, interest per installment period shall be calculated based on the outstanding balance at the beginning of each installment period.
All loan-related documents must show repayment schedules consistent with the outstanding-balance method.
Marketing materials and presentations must likewise be consistent with the outstanding-balance method.

Section 2 amends Items g and h of Subsection X307.1, MORB.
Finance charge includes interest, fees, service charges, discounts, and such other charges incident to the extension of credit.
Simple annual rate is defined as the uniform percentage representing the ratio between the finance charge and the amount to be financed under the assumption the loan is payable in one year with single payment upon maturity and there are no up-front deductions to principal.
For loans with terms different from the assumptions, banks must calculate and disclose the effective annual interest (EIR) rate as the relevant true cost of the loan comparable to the concept of simple annual rate.
If contractual interest rates are stated on a monthly basis, the effective interest rate may be expressed as a monthly rate.
For consistency with accounting standards, effective interest rate is the rate that exactly discounts estimated future cash flows through the life of the loan to the net amount of loan proceeds, using discounted cash flow models consistent with required prescribed methodology and standards.

Section 3 amends Subsection X307.2 (Information to be disclosed), MORB.
As a general rule, loan terms must be disclosed to all types of borrower.
For small business/retail/consumer credit, the disclosure must include these minimum items:
- the total amount to be financed;
- the finance charges expressed in terms of pesos and centavos;
- the net proceeds of the loan; and
- the percentage that the finance charge bears to the total amount to be financed expressed as a simple annual rate or an effective annual interest rate (EIR).
EIR must be disclosed as described in item h of Subsection X307.1.
EIR may also be quoted as a monthly rate in parallel with the quotation of the contractual rate.
Banks are required to furnish each borrower a copy of the disclosure statement prior to the consummation of the transaction.

Section 4 amends Subsection X307.4 (Posters), MORB.
Banks must post the disclosure information in conspicuous places in their principal place of business and branches.
The posted information must follow the revised format of disclosure statement (Appendix 19).
Posters must be further enhanced through a Memorandum to All Banks to be issued for the purpose.
The posters must include an explicit notification that the disclosure statement is a required attachment to the loan contract and that the customer has a right to demand a copy of such disclosure.

Section 5 revises Appendix 19, MORB to reflect present industry practices, targeted toward small business, retail and consumer loans, while remaining consistent with Republic Act No. 3765.
Section 5 provides that the circular takes effect on 1 July 2012.

The circular is adopted by the Monetary Board.
The circular is signed for the Monetary Board by AMANDO M. TETANGCO, JR., Governor.