It could be without exception that every professional, businessman or employee has had at one time or another borrowed money and in these loan transactions, the charging of interest is definitely the principal consideration for the lender to part with his money. Loan transactions at present are generally not subject to interest rate ceilings leading to the question on whether the Usury Law is still relevant, valid and enforceable.
The Usury Law is a very old law, being 105 years old, enacted in 1916 as Act No. 2655, in order “to protect those who, in financial desperation, would agree to pay exorbitant interest rates, and to punish unscrupulous creditors who take advantage of their plight”. It provided maximum interest of 12% per annum for secured loans, 14% for unsecured loans, and 6% in loans or judgments, or what is referred to as legal rate of interest, in the absence of contract as to such rate of interest. There came a time however, especially in the 1970’s, where these rates were no longer realistic and caused distortions in the credit market resulting in the amendment of this law granting the Monetary Board the authority to lift the interest rate ceilings. Pursuant to that authority, the Monetary Board in 1982 issued Circular No. 805 removing the interest rate ceilings. It meant that the parties to loan transactions are now free to stipulate on the interest rate charges. That has been the legal milieu up to the present on the charging of interest.
In a related move, the Monetary Board also increased the legal rate of interest from 6 to 12%. In 2013, however, the Monetary Board brought it back to 6% under its Circular No. 794. The present rate of legal interest under the Usury Law is therefore 6% per annum.
With this background, the conclusion is that the Usury Law is still effective because it is on the basis of this law that the Monetary Board was empowered to lift the interest rate ceilings. Without this law, the Monetary Board could not have issued its Circular No. 805. There is the view, to which I also previously subscribed, that Circular No. 805 merely suspended the effectivity of the 12% and 14% ceilings originally provided in the law. My view now it that Circular No. 805 did not merely suspend but in fact superseded these rates. The Circular did not refer to any suspension at all. Moreover, the Monetary Board is not precluded from prescribing interest rates in the future different and apart from the 12% and 14% rates, and such situation has actually happened.
In November 2020, the Monetary Board issued a Circular directing that interest on credit card use shall not exceed 2% a month or 24% in a year to be effective for 6 months and subject to review thereafter. This confirms the exercise again by the Monetary Board of its authority under the Usury Law. Violations of this Circular should therefore be subject to the criminal sanctions under the Usury Law providing for fine and/or imprisonment.
Given the foregoing, would creditors now have the untrammeled prerogative to charge any interest rate at will? Not really so. In the Macalinao case (600 SCRA 67), the Supreme Court held that the lifting of interest rates is not a carte blanche authority to fix the rate at any level since under the Civil Code the courts can reduce the same if iniquitous, exorbitant or unconscionable.
* * *The above comments are the personal views of the writer. His email address is [email protected]