Sunday, November 11, 2012

Consumer Protection Through Increased Lending Transparency


Author: Atty. Franchette M. Acosta (On Firm Ground)
Published in: Business Mirror (08 August 2012)

Consumer Protection Through Increased Lending Transparency

To avoid a situation where a borrower is later caught by surprise with hidden fees and charges tacked on by unscrupulous lenders, the Truth in Lending Act (TLA) was passed in 1963. The TLA requires any creditor to furnish the borrower, prior to the consummation of the transaction, a clear written statement of the following: the amount to be received by the borrower; down payment; individually itemized charges; the total amount to be financed; the finance charge (the amount of interest); and the percentage that the finance charge bears to the total amount to be financed. The TLA also provides for punishment for non-compliance ranging from fines or imprisonment for not less than 6 months but not more than 1 year.


Since the enactment of the TLA, government agencies have issued regulations to enhance lending transparency.  Enhanced lending transparency encourages borrowers to compare rates, resulting in healthy competition among credit providers.  

Through Circular No. 730, series of 2011, the Bangko Sentral ng Pilipinas (BSP) updated the rules and regulations implementing the TLA.  These rules were subsequently adopted by the Securities and Exchange Commission for lending and finance companies and by the Insurance Commission for insurance companies and mutual benefit associations. Among other requirements, these institutions are allowed to charge interest based only on the outstanding balance of a loan at the beginning of an interest period.  If a loan is payable in installments, interest per installment period shall be calculated based on the outstanding balance of the loan at the beginning of each installment period.

To clarify the computation of the Effective Annual Interest Rate (EIR) that may be charged by lenders, pursuant to Circular No. 730, the BSP has illustrated the computation for loans with various terms: fixed amortization, fixed principal amortization, equal amortization with grace period, periodic interest payment with balloon payment at maturity. EIR is defined as the rate that exactly discounts estimated future cash flows through the life of the loan to the net amount of loan proceeds, in accordance with the Philippine Accounting Standards.  However, the EIR shall be based on the actual features of the loan. 

To further expand the scope of lending transparency regulations, the BSP issued a circular covering all entities with credit granting facilities, including but not limited to real estate dealers, property developers, car and vehicle dealers and appliance stores.  Referred to as credit granting entities (CGEs), these entities extend credit through installment or deferred payment sale in the ordinary course of their business.  The BSP allows CGEs to register their lending of financing activity for the purpose of complying with the TLA. 

Under the circular, a registered CGE must satisfy regulations on computation of interest rates, disclosure of information, loan documents and use of marketing materials. By showing its commitment to transparency and accountability, registration of the CGE will build its reputation.   A borrower can check the BSP website of registered CGEs to find out if its counterparty is registered. A registered CGE may be subject to penalty in case it violates the requirements of the circular or the TLA.

Franchette M. Acosta is a partner at Villaraza Cruz Marcelo and Angangco (www.cvclaw.com). She heads the Capital Markets, Securities Regulation and Finance Practice Area of the Firm.

Disclaimer:

This article has been prepared for informational purposes only and should not be treated as legal advice.